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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 July 3, 2004
[ ] 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 January 2,
2004, the last business day of the registrant's most recently completed second
fiscal quarter, was $0.
On September 1, 2004, there was 1 share of the Registrant's common stock, $.01
par value per share, issued and outstanding.
TABLE OF CONTENTS
Page
PART I .....................................................................1
Item 1 - Business........................................................1
Item 2 - Properties......................................................6
Item 3 - Legal Proceedings...............................................6
Item 4 - Submission of Matters to a Vote of Security Holders.............6
PART II.......................................................................7
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....................................................14
Item 8 - Consolidated Financial Statements and Supplementary Data.......15
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................37
Item 9A - Controls and Procedures........................................37
Item 9B - Other Information..............................................37
PART III.....................................................................38
Item 10 - Directors and Executive Officers...............................38
Item 11 - Executive Compensation.........................................40
Item 12 - Security Ownership and Certain Beneficial Owners
and Management.................................................42
Item 13 - Certain Relationships and Related Transactions.................44
PART IV......................................................................47
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................47
-i-
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 and the Atlantic Coast
Conference tournament events.
On June 25, 2001, the Company acquired 100% of the stock of Champion
Products, Inc., ("Champion"). In conjunction with the acquisition of Champion,
the Company entered into a 15 year licensing agreement (the "Licensing
Agreement") with the seller, the Sara Lee Corporation ("Sara Lee") which
permits the Company to sell decorated Champion apparel in the college
bookstore, military and resort markets. Under the Licensing Agreement, the
Company pays a royalty to Sara Lee based upon net sales.
The Company operates on a 52/53 week fiscal year which ends on the
Saturday nearest June 30. The fiscal year ended June 30, 2000, June 29, 2001,
June 29, 2002, and June 28, 2003 each contain 52 weeks. The fiscal year ended
July 3, 2004 contains 53 weeks.
Sales Divisions and Subsidiaries
The Company believes that it enjoys competitive advantages in 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 and Golf Divisions. The Resort and Golf divisions are leading
marketers of custom logoed sportwear and activewear to over 6,500 active
customer accounts, including destination resorts, family entertainment
companies, hotel chains, golf courses, cruise lines and casinos.
The Company distributes its Resort and Golf divisions products
through its national sales force of approximately 65 independent sales agents.
The Company believes that it is well known and respected in the resort, golf
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 markets 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.
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 22 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.
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 3,400 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 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 500 active professional sports
related customer accounts.
Event 1 Subsidiary. The Event 1 subsidiary was established 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, 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 its existing product line. 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 competitive advantages in its markets.
2
The following illustrates the attributes of the Company's current
product lines:
Fleecewear. The Company's fleecewear products represented
approximately 29% of net sales for fiscal 2004. 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 16% of net sales for fiscal 2004. The Company's
products are designed to address consumer needs for comfort, fit and function
while providing innovative logo designs. The Company offers a full line of
T-shirts, shorts and pants in a variety of styles, fabrics and colors.
Outerwear. The Company's outerwear products represented approximately
9% of net sales for fiscal 2004. 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 2004. 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 18%
of net sales for fiscal 2004. 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 17% of net sales for fiscal 2004.
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 75 in-house
artists and graphic designers who work closely with each customer to create
the product offering and customization that fulfills the account's needs. The
design group is responsible for presenting new ideas to each account in order
to continually generate new products. This design function is a key element in
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
3
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. Most of the Company's blanks are contract manufactured in
various off-shore plants. The Company's imported items are currently
manufactured in Canada, Cambodia, China, Colombia, Guatemala, Honduras, Hong
Kong, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Singapore,
Taiwan, Thailand and Vietnam. No foreign country has a manufacturing
concentration above 20%. The Company has established contractual relationships
with its independent buying agents who assist the Company in its efforts to
control garment quality and delivery.
Competition
The Company's primary competitors vary within each of its divisions
and subsidiaries. In the resort and golf divisions, 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 three competitors have traditionally held greater than
50% of the market.
The following table sets forth the Company's primary competitors in
each of its markets:
Market Primary Competitors
- --------------- --------------------------------------------------------
Resort and Golf Ashworth, Callaway, Cutter & Buck and local and regional
competitors
Corporate Cutter & Buck, Ashworth, Callaway, Land's End
Licensed Apparel Jansport (VF Corp.), Cotton Exchange, Russell Athletic,
Nike, Majestic, Addidas and M.V. Sports
Competition in each of the Company's markets generally is based on
product design and decoration, customer service, overall product quality and
price. The Company believes that it has been able to compete successfully
because of its ability to create diverse and innovative designs, provide
excellent customer service, leverage its GEAR For Sports(R) and Champion(R)
brand names and differentiate its products on the basis of quality.
Employees
The Company employs approximately 731 people at its two facilities in
Lenexa, Kansas, of which approximately 100 are members of management, 234 are
involved in either product design, customer service, sales support or
administration and 497 are involved in manufacturing. The Company employs
approximately 77 people in its Bedford, Iowa embroidery facility and 165 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.
4
Trademarks and Licenses
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.
The Company markets its products, in part, under licensing
agreements. In fiscal 2004, net sales under the Company's 491 active licensing
agreements totaled $88.8 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 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 pays 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.
On August 10, 2004 the Company entered into a five year license
agreement with Fletcher Leisure Group, Inc. ("Fletcher") for the exclusive use
of the Sunice(R) logo in the United States of America. Sunice is a brand of
high performance outerwear with technical characteristics designed to be worn
in inclement weather conditions. Under the agreement Fletcher will design and
source the product line and the Company will pay Fletcher a royalty of 6.5% of
net sales beginning in fiscal 2005. The Company plans to introduce the Sunice
brand in the golf market in the spring of fiscal 2005.
5
Item 2 - Properties
The Company owns three properties: its 250,000 square foot
headquarters and manufacturing facility in Lenexa, Kansas, 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 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.
The Company leases its 300,000 square foot Lenexa, Kansas
distribution facility which was completed in 2004 under a ten year operating
lease. 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 July 3, 2004.
6
PART II
Item 5 - Market for the Registrant's Common Equity and Related
Stockholder Matters
(a) At July 3, 2004, all common stock of the Company was held by
Holdings.
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).
There were no sales of unregistered securities covered by this
report.
(b) Not applicable.
(c) None.
Item 6 - Selected Financial Data
The following table presents: (i) historical operating and other data
of the Company for fiscal years ended June 30, 2000, June 29, 2001, June 29,
2002, June 28, 2003, and July 3, 2004; and (ii) balance sheet data as of June
30, 2000, June 29, 2001, June 29, 2002, June 28, 2003, and July 3, 2004. The
historical financial statements for the Company for fiscal 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, 2003 and 2004
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 June 30, 2000, June 29, 2001, and June
29, 2002 to conform to the July 3, 2004 presentation.
Fiscal Years Ended (3)
---------------------------------------------------------------
(Dollars in thousands)
June 30, June 29, June 29, June 28, July 4,
2000 2001 2002 2003 2004
---------- ---------- ---------- ---------- ----------
Statements of Operations Data:
Net sales....................................... $ 205,500 $ 185,305 $ 197,250 $ 209,273 $ 192,784
Gross profit.................................... 79,326 70,726 73,627 78,155 77,090
Operating expenses (1).......................... 48,093 49,998 50,933 53,940 52,227
---------- ---------- ---------- ---------- ---------
Operating income................................ 31,233 20,728 22,694 24,215 24,863
Other, principally interest..................... (17,450) (16,247) (15,725) (14,848) (15,100)
Gain on sale of property, plant and equipment (2) -- -- -- -- 937
Loss on early extinguishment of debt............ -- -- (994) -- --
---------- ---------- ---------- ---------- ---------
Income before taxes............................. 13,783 4,481 5,975 9,367 10,700
Income tax expense.............................. (5,177) (1,630) (2,331) (3,653) (4,170)
---------- ---------- ---------- ---------- ---------
Net income...................................... $ 8,606 $ 2,851 $ 3,644 $ 5,714 $ 6,530
========== ========== ========== ========== ==========
Balance Sheet Data (as of period end):
Cash and cash equivalents....................... $ 1,446 $ 5,309 $ 313 $ 1,387 $ 911
Total assets.................................... 99,179 93,567 105,336 113,784 107,287
Long-term debt (including current portion)...... 167,309 152,341 156,309 158,963 160,819
Total stockholders' equity (deficiency)......... (86,809) (83,137) (79,645) (74,073) (89,936)
Other Data:
Cash flows from operating activities............ $ 3,555 $ 21,547 $ (3,711) $ 11,891 $ 14,869
Cash flows from investing activities............ (1,937) (8,412) (4,189) (3,325) (4,663)
Cash flows from financing activities............ (10,436) (9,272) 2,904 (7,674) (10,712)
Depreciation and amortization................... 3,235 3,046 4,095 4,137 2,799
Capital expenditures............................ 1,998 1,787 4,203 3,369 7,466
(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.
7
(2) In fiscal 2004 the Company sold its 100,000 square foot distribution
facility located in Lenexa, Kansas, for approximately $2,800. The
Company recorded a pre-tax gain on the sale of approximately $900 in
fiscal 2004.
(3) The Company's fiscal year ends on the Saturday closest to June 30,
which results in a 53 week year from time to time. Fiscal years 2000,
2001, 2002 and 2003 were comprised of 52 week periods. Fiscal year
2004 was a 53 week period.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's results of
operations and its liquidity and capital resources should be read in
conjunction with the consolidated financial statements and the related notes
thereto appearing elsewhere in this annual report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and
results of operations and other sections of this annual report contain
forward-looking statements relating to future results of the Company. Such
forward-looking statements are identified by use of forward-looking words such
as "anticipates", "believes", "plans", "estimates", "expects", and "intends"
or words or phrases of similar expression. These forward-looking statements
are subject to various assumptions, risks and uncertainties, including but not
limited to, changes in political and economic conditions, demand for the
Company's products, acceptance of new products and developments affecting the
Company's products. Accordingly, actual results could differ materially from
those contemplated by the forward-looking statements.
Critical accounting policies
The following discussion and analysis of financial condition, results
of operations, liquidity and capital resources is based upon the Company's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to bad debts,
inventories, intangible assets, long-lived assets, deferred income taxes,
accrued expenses, contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that it
believes are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
materially from these estimates under different assumptions or conditions.
The Company's management believes that some of its significant
accounting policies involve a higher degree of judgment or complexity than
other accounting policies. Identified below are the policies deemed critical
to its business and the understanding of its results of operations.
Revenue recognition. The Company recognizes revenues when goods are
shipped, title has passed, the sales price is fixed and collectibility is
reasonably assured. Returns, discounts and sales allowance estimates are based
on projected sales trends, historical data and other known factors. If actual
returns, discounts and sales allowances are not consistent with the historical
data used to calculate these estimates, net sales could either be understated
or overstated.
Accounts receivable. Accounts receivable consist of amounts due from
customers and business partners. The Company maintains an allowance for
doubtful accounts to reflect expected credit losses and generally 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
8
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
2004, 2003 and 2002:
Fiscal Year Ended
----------------------------
July 3, June 28, June 29,
2004 2003 2002
------- ------- --------
Net sales.................................. 100.0% 100.0% 100.0%
Gross profit............................... 40.0 37.3 37.3
Operating income........................... 12.9 11.6 11.5
Fiscal Period. The Company's fiscal year ends on the Saturday nearest
June 30, which results in a 53 week year from time to time. The fiscal year
ended July 3, 2004 was a 53 week period. Management believes the effect of the
additional week of operations was not significant.
Fiscal year ended July 3, 2004 compared to fiscal year ended June 28, 2003
Net Sales. Net sales in fiscal 2004 decreased 8% to $192.8 million
from $209.3 million in fiscal 2003. The $16.5 million decrease in net sales
was due to reduced sales of Gear for Sports(R) ("Gear") branded products while
sales of Champion Custom Products ("CCP") continued to grow. The sales
decrease related to Gear branded products was broad based. Sales to the
college bookstores and corporate customers decreased the most. These two
businesses declined by 22% or $14.2 million in comparison to last year.
Management believes that Gear's bookstore customers have shifted their
purchases to lower priced apparel with less expensive decoration which has
reduced sales of higher priced Gear products. Reductions in corporate
discretionary spending on marketing and employee incentive programs by
customers have negatively affected Gear's Corporate Division. Net sales of CCP
licensed products increased 11% over fiscal 2003 to $67.2 million. CCP
licensed products are more moderately priced as compared to Gear's products.
Management has lowered pricing and changed suppliers for the Gear fiscal 2005
product offerings to address this trend in consumer behavior.
9
Gross Profit. Gross profit for fiscal 2004 decreased 1% to $77.0
million from $78.2 million last year. Lower net sales created the decrease in
gross profit from last year. Gross profit as a percentage of fiscal 2004 net
sales was 40.0% compared to 37.3% last year. The benefits of changing
suppliers to obtain a lower cost of product and improved efficiencies in
garment decoration created the increase in gross profit as a percentage of net
sales.
Operating Expenses. Operating expenses for fiscal 2004 decreased 3.2%
to $52.2 million from $53.9 million last year. Beginning in fiscal 2004, the
Company paid a 3% royalty on the net sales of Champion branded apparel under
its license agreement with Sara Lee Corporation ("Sara Lee"). Lower direct
sales expenses and spending controls over general and administrative costs
offset the additional cost of the Sara Lee royalty. Operating expenses as a
percentage of net sales were 27.1% compared to 25.8% last year. Operating
expenses when divided by lower sales created the increase in operating
expenses as a percentage of net sales in comparison to last year. The royalty
payable to Sara Lee on Champion branded apparel increases to 4% beginning in
fiscal 2005 and ranges from 5% to 6% from fiscal 2006 through fiscal 2017.
Operating Income. Operating income increased 3% to $24.9 million in
fiscal 2004 from $24.2 million in fiscal 2003. Operating income as a
percentage of net sales increased to 12.9% in fiscal 2004 from 11.6% in fiscal
2003. The increase in operating income as a percentage of sales over fiscal
2003 resulted from higher gross profit on a lower sales volume.
Interest Expense. Interest expense in fiscal 2004 was $15.1 million,
$228,000 more than the comparable period last year. The increase in interest
expense was principally due to fiscal 2004 consisting of 53 weeks of interest
costs compared to 52 weeks in fiscal 2003.
Gain on sale of property, plant and equipment. During fiscal 2004,
the Company sold its 100,000 square foot distribution facility located in
Lenexa, Kansas, for approximately $2.8 million and recorded a pre-tax gain of
approximately $900,000 in other income. The facility was sold as part of a
warehouse consolidation and automation initiative which combined distribution
operations into a larger, renovated facility and eliminated several smaller
warehouses.
Net Income. Net income for fiscal 2004 was $6.5 million, compared to
$5.7 million in fiscal 2003. Higher operating income and the gain on the sale
of the distribution facility combined to create the increase in net income
over last year.
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 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 in fiscal 2002. Gross profit as a percentage of
fiscal 2003 net sales was 37.3%, approximately the same as fiscal 2002.
10
Operating Expenses. Operating expenses for fiscal 2003 increased 6%
to $53.9 million from $50.9 million fiscal 2002. 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.
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 fiscal 2002. The decrease in interest expense was due to
lower interest rates in comparison to fiscal 2002.
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 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 fiscal 2002.
Liquidity and Capital Resources
On September 8, 2003, the Company amended its existing revolving bank
credit agreement ("RBCA"). Under the terms of amendment, the RBCA lenders
consented to the series of transactions described below (the
"Recapitalization") and extended the term of the RBCA by one year to January
15, 2006.
In September 2003, Company management formed a Delaware limited
liability company named Gearcap LLC ("Gearcap") to affect the Recapitalization
of Holdings. Gearcap purchased 11.375% Senior Discount Notes of Holdings
("11.375% Notes") with an aggregate principal amount at maturity of
approximately $30.5 million (the "Contributed Notes") for approximately $12.3
million in cash. Gearcap and Holdings subsequently entered into an Exchange
Agreement under which they exchanged 8,250 shares of newly authorized Holdings
Class C common stock and 11,490 shares of newly authorized Series E 10%
Cumulative Preferred Stock for the Contributed Notes. The Company and Holdings
entered into a Contribution Agreement under which Holdings contributed the
Contributed Notes it received from Gearcap to the Company as a capital
contribution. The Company subsequently pledged the 11.375% Notes as collateral
under the RBCA.
In September 2003, the Company purchased 11.375% Notes with an
aggregate principal amount at maturity of approximately $29.5 million for
approximately $12.2 million. The Company subsequently pledged the Notes as
collateral under the RBCA.
When combined with the 11.375% Notes previously acquired by the
Company in fiscal 2003, the Company had acquired 11.375% Notes with an
aggregate maturity value of $84 million representing 78% of the issued 11.375%
Notes and elected to record its investment in the 11.375% Notes as a reduction
of stockholders' equity at the acquisition cost of the Notes.
11
During fiscal 2004 the Company declared a dividend to Holdings in the
form of 11.375% Notes and distributed those 11.375% Notes with a cost of $9.5
million and a value at maturity of $21.8 million. At a future date the Company
intends to distribute to Holdings the remaining 11.375% Notes it holds to
permit Holdings to formally retire these notes. The Company is currently
restricted under its various long-term debt agreements from making a full
distribution of the remaining 11.375% Notes.
The Company's and Gearcap's purchase of the 11.375% Notes has reduced
the Company's future cash dividend obligations to Holdings to enable it to
retire the Notes from $108 million to $24 million. Additionally, the purchases
of the 11.375% Notes has reduced the Company's future cash dividend obligation
to Holdings to enable it to pay interest on the 11.375% Notes (commencing in
March 2005) from $12.3 million to $2.7 million annually.
Cash provided by (used in) operating activities in fiscal 2004, 2003
and 2002 was $14.9 million, $11.9 million, and ($3.7) million, respectively.
Higher net income and accounts payable related to inventory purchases created
the increase in cash provided by operating activities between fiscal 2004 and
fiscal 2003. Higher net income and reduced inventories created the change in
cash provided (used in) operating activities between fiscal 2003 and fiscal
2002.
Cash used in investing activities for fiscal 2004, 2003 and 2002 was
$4.7 million, $3.3 million, and $4.2 million, respectively. The $2.8 million
in proceeds from the sale of the Lenexa distribution facility in fiscal 2004
partially offset the $7.5 million in capital expenditures which were primarily
related to the warehouse automation and consolidation and information
technology projects in fiscal 2004. 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. Capital expenditures in fiscal 2005 are expected to be
about $3.5 million.
Cash provided by (used in) financing activities for fiscal 2004, 2003
and 2002 was $(10.7) million, $(7.7) million, and $2.9 million, respectively.
The $10.7 million used in financing activites in fiscal 2004 was principally
used to repurchase parent company 11.375% Notes. The $7.7 million used in
financing activities in fiscal 2003 was principally used to reduce borrowings
under the Revolving Bank Credit Agreement. In December 2002 the Company
completed the private placement of $9.9 million of unregistered 9.625% senior
subordinated notes in exchange for $24.0 million aggregate principal amount at
maturity of Holdings 11.375% Senior Discount Notes ("11.375% Notes"). 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 to support increased working capital and equipment needs related to
the acquisition of the Champion Custom Products business.
The Company anticipates paying dividends to Holdings to enable
Holdings to pay corporate income taxes, pursuant to a Tax Sharing Agreement,
interest on the 11.375% Notes, fees payable under management agreements, fees
payable under a non-competition agreement, and certain other ordinary course
expenses. Holdings is dependent upon the cash flows of the Company to provide
funds to service the 11.375% Notes. At July 3, 2004, Holdings' debt to third
parties, excluding the debt of its subsidiaries, totaled approximately $23.9
million. The 11.375% Notes annual cash flow requirements commence in March
2005 with semi-annual cash installments of approximately $1.4 million on March
15 and September 15 of each year. Additionally, Holdings' cumulative non-cash
preferred stock ("Holdings Preferred Stock") dividends total approximately
$1.5 million annually. Dividends on the Holdings Preferred Stock have been
accumulating and not paid in cash. Mandatory redemption of the Holdings
Preferred Stock is required in fiscal 2009 and fiscal 2017.
12
A summary of the Company's contractual cash obligations by maturity
date as of July 3, 2004 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) $ 160,819 $ 190 $ 160,214 $ 163 $ 252
Inventory on open purchase orders (generally
for delivery within 90 days) 25,062 25,062 -- -- --
Guaranteed minimum royalties and operating
lease obligations 10,848 2,741 2,064 1,860 4,183
Consulting and employment agreements 2,235 325 710 240 960
--------- -------- --------- -------- --------
Total direct contractual cash obligations 198,964 28,318 162,988 2,263 5,395
Indirect cash obligations:
GFSI Holdings, Inc. 73,391 1,742 6,267 36,916 28,466
--------- -------- --------- -------- --------
Total direct and indirect cash obligations $ 272,355 $ 30,060 $ 169,255 $ 39,179 $ 33,861
========= ======== ========= ======== ========
Under the Champion product license, the Company has guaranteed the
payment of $1 million as minimum royalty payments in 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.
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 2006. 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 July 3, 2004 was 3.9%. In addition, the RBCA provides
for the issuance of letters of credit on behalf of the Company. At July 3, 2004
and June 28, 2003 the Company had $1.0 million and $4.5 million in letters of
credit outstanding and $31.4 million and $32.9 million in unused borrowing
availability under the RBCA, respectively. The Company believes that cash flows
from operating activities and borrowings under the Revolving Bank Credit
Agreement will be adequate to meet short-term and future liquidity requirements
prior to the maturity of the Revolving Bank Credit Agreement in fiscal 2006
although no assurance can be given in this regard.
The RBCA is secured by substantially all of the Company's assets and is
guaranteed by the Company's wholly-owned subsidiaries and Holdings. Borrowings
under the RBCA are subject to certain restrictions and covenants. The Company is
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 July 3, 2004, Holdings was in compliance with the restrictions and
covenants of the RBCA.
Indirect cash obligations include the contractual obligations of
Holdings which the Company anticipates funding, to the extent that it can,
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 Holdings to pay interest and principal on its subordinated
discount notes, fees under non-competition and management agreements and cash
dividends, if any, on Holdings Preferred Stock.
13
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 2004, net sales of the Company
during the first half and second half of the fiscal year were approximately
54% and 46%, respectively. The seasonality of sales is primarily due to higher
college bookstore sales volume during the first two fiscal quarters. Sales at
the Company's Resort, Golf 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.
The Company's indirect contractual obligations to Holdings are not
exposed to possible fluctuations in interest rates.
14
Item 8 - Consolidated Financial Statements and Supplementary Data
Page
Report of Independent Registered Public Accounting Firm.....................16
Consolidated Balance Sheets - July 3, 2004 and June 28, 2003................17
Consolidated Statements of Income - Years Ended July 3, 2004,
June 28, 2003 and June 29, 2002...........................................18
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Years Ended July 3, 2004, June 28, 2003 and
June 29, 2002.............................................................19
Consolidated Statements of Cash Flows - Years Ended July 3, 2004,
June 28, 2003 and June 29, 2002...........................................20
Notes to Consolidated Financial Statements..................................21
15
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
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 July 3, 2004 and June 28, 2003, and the related consolidated statements
of income, changes in stockholders' equity (deficiency) and cash flows for
each of the years in the three-year period ended July 3, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 July 3, 2004 and June 28, 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 3, 2004, in conformity with U.S. generally accepted
accounting principles.
KPMG LLP
Kansas City, Missouri
August 31, 2004
16
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
July 3, June 28,
ASSETS 2004 2003
----------- -----------
Current assets:
Cash and cash equivalents................................................. $ 911 $ 1,387
Accounts receivable, net of allowance for doubtful accounts of
$637 and $906 at July 3, 2004 and June 28, 2003....................... 32,831 34,357
Inventories, net.......................................................... 45,616 42,663
Prepaid expenses and other current assets................................. 1,667 1,323
Deferred income taxes..................................................... 1,077 1,303
----------- -----------
Total current assets.................................................. 82,102 81,033
Property, plant and equipment, net.......................................... 22,990 19,883
Other assets:
Deferred financing costs, net of accumulated amortization of $5,432
and $4,540 at July 3, 2004 and June 28, 2003.......................... 2,073 2,959
Investment in parent company bonds........................................ -- 9,900
Other..................................................................... 122 9
----------- -----------
2,195 12,868
----------- -----------
Total assets.......................................................... $ 107,287 $ 113,784
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.......................................................... $ 12,304 $ 7,843
Accrued interest expense.................................................. 4,424 4,365
Accrued expenses.......................................................... 7,245 6,151
Income taxes payable...................................................... 10,478 8,850
Current portion of long-term debt......................................... 190 324
----------- -----------
Total current liabilities............................................. 34,641 27,533
Deferred income taxes........................................................ 1,501 1,194
Long-term debt, less current portion......................................... 160,629 158,639
Other long-term obligations.................................................. 452 491
Commitments and contingencies................................................
Stockholders' equity (deficiency):
Common Stock, $.01 par value, 10,000 shares authorized, one share
issued at July 3, 2004 and June 28, 2003.............................. -- --
Additional paid-in capital................................................ 71,442 59,127
Parent company bonds acquired............................................. (24,995) --
Accumulated deficiency.................................................... (136,383) (133,200)
---------- ----------
Total stockholders' equity (deficiency)............................... (89,936) (74,073)
---------- -----------
Total liabilities and stockholders' equity (deficiency).......... $ 107,287 $ 113,784
========== ===========
See notes to consolidated financial statements.
17
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
Years Ended
-------------------------------------
July 3, June 28, June 29,
2004 2003 2002
----------- ----------- -----------
Net sales.................................................. $ 192,784 $ 209,273 $ 197,250
Cost of sales.............................................. 115,694 131,118 123,623
----------- ----------- -----------
Gross profit......................................... 77,090 78,155 73,627
Operating expenses:
Selling................................................. 26,850 27,185 24,583
General and administrative.............................. 25,377 26,755 26,350
----------- ----------- -----------
52,227 53,940 50,933
----------- ----------- -----------
Operating income..................................... 24,863 24,215 22,694
Other income (expense):
Interest expense........................................ (15,100) (14,872) (15,747)
Loss on early extinguishment of debt.................... -- -- (994)
Gain on sale of property, plant and equipment........... 937 24 22
----------- ----------- -----------
(14,163) (14,848) (16,719)
----------- ----------- -----------
Income before income taxes................................. 10,700 9,367 5,975
Income tax expense......................................... (4,170) (3,653) (2,331)
----------- ----------- -----------
Net income................................................. $ 6,530 $ 5,714 $ 3,644
=========== =========== ===========
See notes to consolidated financial statements.
18
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years Ended July 3, 2004, June 28, 2003, and June 29, 2002
(dollars in thousands)
Parent Total
Common Stock Additional Company Stockholders'
----------------- Paid-In Bonds Accumulated Equity
Share Amounts Capital Acquired Deficiency (Deficiency)
------- --------- ----------- ---------- ----------- ------------
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)
Net income....................... 6,530 6,530
Reclassification of investment
in parent company bonds....... (9,900) (9,900)
Purchase of parent company bonds (24,580) (24,580)
Bonds contributed from
parent company................ 12,315 12,315
Dividend of bonds to
parent company................ 9,485 (9,485) --
Distributions to
GFSI Holdings, Inc............ (258) (258)
Foreign currency translation gain 30 30
------- -------- ---------- --------- ----------- -----------
Balance, July 3, 2004 1 $ -- $ 71,442 $(24,995) $ (136,383) $ ( 89,936)
======= ======== ========== ========= =========== ===========
See notes to consolidated financial statements.
19
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended
-----------------------------------------------
July 3, 2004 June 28, 2003 June 29, 2002
------------ ------------- --------------
Cash flows from operating activities:
Net income.................................................. $ 6,530 $ 5,714 $ 3,644
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................. 2,799 3,137 3,095
Amortization of deferred financing costs................. 892 983 1,152
Amortization of other intangibles........................ -- 1,000 1,000
Gain on sale or disposal of property, plant and
equipment............................................. (937) (24) (2)
Deferred income taxes.................................... 533 37 (424)
Loss on early extinguishment of debt..................... -- -- 994
Changes in operating assets and liabilities:
Accounts receivable, net................................. 1,526 (1,731) (9,932)
Inventories, net......................................... (2,953) 3,066 (7,993)
Prepaid expenses, other current assets and other assets.. (457) (54) (129)
Income taxes payable.................................. 1,628 3,763 4,888
Accounts payable, accrued expenses and other long-term
obligations........................................... 5,308 (4,000) (4)
------------ ------------ -----------
Net cash provided by (used in) operating activities 14,869 11,891 (3,711)
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment........ 2,803 44 14
Purchases of property, plant and equipment.................. (7,466) (3,369) (4,203)
------------ ------------ -----------
Net cash used in investing activities.............. (4,663) (3,325) (4,189)
------------ ------------ -----------
Cash flows from financing activities:
Net changes to revolving credit agreement borrowing......... 2,155 (7,535) 30,527
Issuance of long-term debt.................................. 82 450 300
Payments on long-term debt.................................. (420) (196) (26,859)
Purchase of parent company bonds............................ (12,265) -- --
Distributions to GFSI Holdings, Inc......................... (258) (324) (152)
Cash paid for financing costs............................... (6) (69) (912)
------------ ------------ -----------
Net cash provided by (used in) financing activities (10,712) (7,674) 2,904
------------ ------------ -----------
Effect of foreign exchange rate changes on cash................ 30 182 --
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents (476) 1,074 (4,996)
Cash and cash equivalents,
Beginning of period......................................... 1,387 313 5,309
------------ ------------ -----------
End of period............................................... $ 911 $ 1,387 $ 313
============ ============ ===========
Supplemental cash flow information:
Interest paid...................................... $ 14,147 $ 13,888 $ 14,005
============ ============ ===========
Income taxes paid (refunded)....................... $ 1,999 $ (147) $ (2,391)
============ ============ ===========
Non-cash investing and financing activities:
Investment in parent company bonds.......................... $ -- $ (9,900) $ --
============ ============ ===========
Issuance of debt to purchase parent company bonds........... $ -- $ 9,900 $ --
============ ============ ===========
Dividend of bonds to parent company......................... $ 9,485 $ -- $ --
============ ============ ===========
Bonds contributed from parent company....................... $ 12,315 $ -- $ --
============ ============ ===========
See notes to consolidated financial statements.
20
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 3, 2004, JUNE 28, 2003 AND JUNE 29, 2002
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.
("Holdings", or "parent company").
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 fiscal year ended July 3, 2004 was a 53
week period while the fiscal years ended June 28, 2003 and June 29, 2002, 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.
21
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 generally 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. Provisions for bad debt expense were $136,000,
$694,000 and $547,000 in fiscal 2004, fiscal 2003 and fiscal 2002,
respectively.
Inventories--Inventories are carried at the lower of cost or market
determined under the First-In, First-Out (FIFO) method. The Company writes
down obsolete and unmarketable inventories to their estimated market value
based upon, among other things, assumptions about future demand and market
conditions. If actual market conditions are less favorable than projected,
additional inventory write-downs may be required. The Company also records
changes in valuation allowances due to changes in its operating strategy, such
as the discontinuances of certain product lines and other merchandising
decisions related to changes in demand. It is possible that further changes in
required inventory allowances may be necessary in the future as a result of
market conditions and competitive pressures. Inventories consist primarily of
non-decorated apparel ("blanks").
The following is a summary of inventories at July 3, 2004 and June 28, 2003:
(in thousands)
July 3, June 28,
2004 2003
-------- ---------
Undecorated apparel ("blanks") and supplies......... $ 42,857 $ 37,924
Work in process..................................... 314 609
Finished goods...................................... 3,340 4,887
-------- ---------
46,511 43,420
Markdown allowances................................. (895) (757)
-------- ---------
$ 45,616 $ 42,663
======== =========
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. The
Company capitalizes significant costs incurred in the acquisition or
development of software for internal use, including the costs of the software,
materials and consultants. Costs incurred prior to the final selection of
software and employee training costs are charged to expense.
Depreciation and amortization are provided for on the straight-line
method over the following estimated useful lives:
Buildings and improvements.................................. 40 years
Software.................................................... 3 years
Furniture and fixtures...................................... 5-10 years
22
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 circumstances indicate that the carrying amount
of its assets might not be recoverable. The Company has concluded no such
impairment adjustment is required at July 3, 2004 and June 28, 2003.
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, $2.0 million and $1.5 million for the years ended July 3, 2004,
June 28, 2003 and June 29, 2002, 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 and income taxes payable include amounts due to the parent
company under the tax sharing agreement.
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-- The Company operates in one segment.
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. Sales to one customer represented
approximately 13% and 12% of consolidated net sales during fiscal 2004 and
fiscal 2003, respectively. No single customer represented 10% or more of
consolidated net sales in fiscal 2002.
23
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 FINANCING AND RECAPITALIZATION
In December 2002 the Company completed the private placement of $9.9
million of unregistered 9.625% senior subordinated notes in exchange for $24.0
million aggregate principal amount at maturity of Holdings 11.375% Senior
Discount Notes ("11.375% Notes"). As a result of the private placement, the
Company's consolidated financial statements at June 28, 2003 included
long-term debt of $9.9 million and a corresponding non-current investment in
parent company bonds.
On September 8, 2003, the Company amended its existing revolving bank
credit agreement ("RBCA"). Under the terms of amendment, the RBCA lenders
consented to the series of transactions described below (the
"Recapitalization") and extended the term of the RBCA by one year to January
15, 2006.
In September 2003, Company management formed a Delaware limited
liability company named Gearcap LLC ("Gearcap") to affect the Recapitalization
of Holdings. Gearcap purchased 11.375% Notes with an aggregate principal
amount at maturity of approximately $30.5 million (the "Contributed Notes")
for approximately $12.3 million in cash. Gearcap and Holdings subsequently
entered into an Exchange Agreement under which they exchanged 8,250 shares of
newly authorized Holdings Class C common stock and 11,490 shares of newly
authorized Series E 10% Cumulative Preferred Stock for the Contributed Notes.
The Company and Holdings entered into a Contribution Agreement under which
Holdings contributed the Contributed Notes it received from Gearcap to the
Company as a capital contribution. The Company subsequently pledged the
11.375% Notes as collateral under the RBCA.
In September 2003, the Company purchased 11.375% Notes with an
aggregate principal amount at maturity of approximately $29.5 million for
approximately $12.2 million. The Company subsequently pledged the 11.375%
Notes as collateral under the RBCA.
When combined with the 11.375% Notes acquired in December 2002, the
Company had acquired 11.375% Notes with an aggregate maturity value of $84
million representing 78% of the issued 11.375% Notes of Holdings and elected
to record its investment in the 11.375% Notes as a reduction of stockholders'
equity at the acquisition cost of the 11.375% Notes.
During fiscal 2004 the Company declared a dividend to Holdings in the
form of 11.375% Notes and distributed those 11.375% Notes with a cost of $9.5
million and a value at maturity of $21.8 million. At a future date the Company
intends to distribute to Holdings the remaining 11.375% Notes it holds to
permit the parent company to formally retire these notes. The Company is
currently restricted under its various long-term debt agreements from making a
full distribution of the remaining 11.375% Notes it holds. At July 3, 2004,
stockholders' equity (deficiency) included a reduction of $25.0 million
representing the acquisition cost of the 11.375% Notes held by the Company.
The Company's and Gearcap's purchases of the 11.375% Notes has
reduced the Company's future cash dividend obligations to Holdings to enable
it to retire the 11.375% Notes in 2009 from $108 million to $24 million.
Additionally, the purchases of the 11.375% Notes has reduced the Company's
future cash dividend obligations to Holdings to enable it to pay interest on
the 11.375% Notes (commencing in March 2005) from $12.3 million to $2.7
million annually.
24
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying financial statements of the Company do not reflect the
impact of any push down accounting since following the Recapitalization, as
described above, a substantial minority interest in Holdings common stock and
the Company's existing publicly registered debt remain outstanding.
3. PROPERTY, PLANT AND EQUIPMENT
(in thousands)
July 3, 2004 June 28, 2003
------------ -------------
Land............................................ $ 2,290 $ 2,540
Buildings and improvements...................... 20,623 23,739
Furniture and fixtures.......................... 25,842 21,344
---------- ----------
48,755 47,623
Less: accumulated depreciation.................. 27,278 28,469
---------- ----------
21,477 19,154
Construction in progress........................ 1,513 729
---------- ----------
$ 22,990 $ 19,883
========== ==========
In August 2003, the Company sold its 100,000 square foot distribution
facility located in Lenexa, Kansas, for approximately $2.8 million. The
Company recorded a pre-tax gain on the sale of approximately $900,000 in
fiscal 2004. The facility was sold as part of a warehouse consolidation and
automation initiative which combined the distribution operations from this
facility and several other smaller leased warehouses. In August 2003, the
Company entered into an operating lease for approximately 300,000 square feet
of space in an existing industrial building near its Lenexa headquarters to
support the distribution automation initiative.
4. LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of:
(in thousands)
July 3, 2004 June 28, 2003
------------ -------------
Senior Subordinated Notes, 9.625%
interest rate, due 2007..................... $ 134,900 $ 134,900
Revolving Bank Credit Agreement,
variable interest rate, due 2006............ 25,147 22,992
Other......................................... 772 1,071
--------- ---------
160,819 158,963
Less current portion.......................... 190 324
--------- ---------
$ 160,629 $ 158,639
========= =========
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 "11.375% Notes") with an accreted
book value of $19.9 million.
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 and subsequently publicly registered under an indenture with
substantially identical terms as the indenture governing the 9.625% Senior
Subordinated Notes. The Exchange Notes were guaranteed by each of the
Company's wholly-owned subsidiaries.
25
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2006. 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 July 3, 2004 was 3.9%. In
addition, the RBCA provides for the issuance of letters of credit on behalf of
the Company. At July 3, 2004 and June 28, 2003 the Company had $1.0 million
and $4.5 million in letters of credit outstanding and $31.4 million and $32.9
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.
The Company incurred fees and expenses totaling approximately $900,000 in
fiscal 2002 to close the RBCA.
The RBCA is secured by substantially all of the Company's assets and
is guaranteed by the Company's wholly-owned subsidiaries and Holdings.
Borrowings under the RBCA are subject to certain restrictions and covenants.
The Company is 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 July 3, 2004, Holdings was in compliance with the
restrictions and covenants of the RBCA.
On February 27, 1997, the Company issued 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 par commencing March 1, 2005.
The Senior Subordinated Notes are senior unsecured obligations of the
Company and effectively are subordinated to 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 July 3, 2004, the Company was in
compliance with all such covenants.
The Senior Subordinated Notes are publicly traded over the counter. At
July 3, 2004, the quoted market price for the Senior Subordinated Notes was
96/100. At July 3, 2004, the Senior Subordinated Notes estimated fair value
approximated $129.5 million.
26
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate maturities of the Companys' long-term debt as of July 3,
2004 are as follows:
(in thousands)
Year
----
2005.......................................... $ 190
2006.......................................... 25,235
2007.......................................... 134,979
2008.......................................... 81
2009.......................................... 82
Thereafter.................................... 252
----------
Total $ 160,819
==========
5. COMMITMENTS AND CONTINGENCIES
In August 2003, the Company entered into an operating lease for an
existing 300,000 square foot industrial building near its Lenexa headquarters
to support the distribution automation initiative. Annual rent under the ten
year operating lease is approximately $924,000 and the lease provides for one
ten year extension.
Rental expense for all operating leases aggregated approximately $1.2
million, $1.2 million and $727,000 in fiscal years 2004, 2003 and 2002,
respectively. It is anticipated that short-term and month to month leases that
expire will be renewed or replaced.
Future lease commitments are as follows:
Year
2005....................................... $ 1,144
2006....................................... 966
2007....................................... 930
2008....................................... 930
2009....................................... 930
Thereafter................................. 4,183
----------
Total $ 9,083
==========
Under the Champion product license, which expires in 2017, the Company
has guaranteed the payment of $1 million as minimum royalty payments in fiscal
2005. There are no guaranteed minimum royalty payments thereafter. The royalty
rate ranges from 4% to 6% of net sales from fiscal 2005 through fiscal 2017.
In addition, the Company has numerous other licenses with various collegiate
and professional sports organizations, some of which include guaranteed
royalty payments. The Company's future minimum royalty obligations total $1.6
million, $123,000, and $45,000 in fiscal years 2005, 2006 and 2007,
respectively.
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.
27
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 totaled $569,000, $576,000 and
$528,000 for the fiscal years ended July 3, 2004, June 28, 2003 and June 29,
2002, respectively.
28
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
The provisions for income taxes for the years ended July 3, 2004, June 28, 2003 and June 29,
2002 consist of the following:
July 3, June 28, June 29,
2004 2003 2002
---------- ---------- ----------
Current income tax provision.......................... $ 3,637 $ 3,616 $ 2,755
Deferred income tax provision (benefit)............... 533 37 (424)
---------- ---------- ----------
Total income tax provision............................ $ 4,170 $ 3,653 $ 2,331
========== ========== ==========
The income tax provisions differ from amounts computed at the statutory federal year ended income tax rate as follows:
July 3, 2004 June 28, 2003 June 29, 2002
-------------------- -------------------- --------------------
Amount % Amount % Amount %
---------- -------- ---------- -------- ---------- --------
Income tax provision at the statutory rate. $ 3,745 35.0% $ 3,278 35.0% $ 2,091 35.0%
Effect of state income taxes, net of
federal benefit......................... 417 3.9 365 3.9 233 3.9
Other...................................... 8 0.1 10 0.1 7 0.1
--------- ------- --------- ------- --------- --------
$ 4,170 39.0% $ 3,653 39.0% $ 2,331 39.0%
========= ======= ========= ======= ========= ========
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 July 3, 2004 and June 28, 2003, along with the income tax effect of
each, were as follows:
July 3, 2004 June 28, 2003
Deferred Income Tax Deferred Income Tax
Assets Liabilities Assets Liabilities
Allowance for doubtful accounts....................... $ 248 $ -- $ 352 $ --
Property, plant, and equipment........................ -- 1,620 -- 1,549
Accrued expenses...................................... 374 -- 392 --
Other assets, non current............................. 624 -- 676 --
Other................................................. 158 208 390 152
--------- --------- --------- ---------
Total................................................. $ 1,404 $ 1,828 $ 1,810 $ 1,701
========= ========= ========= =========
29
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, requires that the Company 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)
July 3, 2004 June 28, 2003
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- ------------
Assets and liabilities:
Cash and cash equivalents............ $ 911 $ 911 $ 1,387 $ 1,387
Accounts receivable.................. 32,831 32,831 34,357 34,357
Accounts payable..................... 12,304 12,304 7,843 7,843
Long-term debt....................... 160,819 155,423 158,963 134,682
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.
30
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS
In September 2003 Holdings entered into a management agreement (the
"2003 Management Agreement") with Gearcap under which Gearcap began providing
certain services to Holdings and its affiliates. Under the agreement, Larry D.
Graveel, Michael H. Gary and J. Craig Peterson (each one a director and
officer of the Company and Holdings and a beneficial stockholder of Holdings)
ceased to be employed by the Company and became employed by Gearcap. Gearcap
incurs salary expenses and life insurance costs on the executives and certain
financing costs related to the purchase of the 11.375% Notes. The 2003
Management Agreement has a 10 year term. The agreement provides for monthly
payment of fees and contains a provision for an annual adjustment in fees each
September 1 based upon planned services. Annual payments to Gearcap cannot
exceed $3 million without the consent of The Jordan Company Management
Corporation. Payments to Gearcap under the 2003 Management Agreement totaled
approximately $1.3 million in fiscal 2004.
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. In September 2003
the agreement was amended to reduce the fees payable under the agreement to
$100,000 annually. The Company incurred consulting fees totaling $200,000,
$500,000 and $500,000 for the fiscal years ended July 3, 2004, June 28, 2003
and June 29, 2002, respectively.
The Company has employment agreements with Robert M. Wolff, Chairman
and Chief Executive Officer, a Director and a stockholder of Holdings. 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 $232,000, $212,000, and $195,000, and use of a Company
vehicle for the years ended July 3, 2004, June 28, 2003 and June 29, 2002,
respectively.
Holdings has a non-competition agreement with Mr. Wolff. In exchange
for the covenant not to compete, Mr. Wolff is paid $250,000 per annum for a
period of ten years. For each of the years ended, July 3, 2004, June 28, 2003
and June 29, 2002, $250,000 of expense related to this agreement was included
in general and administrative expenses.
The Company, as permitted by its debt agreements, anticipates paying
dividends to Holdings to enable Holdings to pay corporate income taxes,
pursuant to a Tax Sharing Agreement, interest on the 11.375% Notes, fees
payable under management agreements, fees payable under a non-competition
agreement, and certain other ordinary course expenses. Holdings is dependent
upon the cash flows of the Company to provide funds to service the 11.375%
Notes. At July 3, 2004, Holdings' debt to third parties, excluding the debt of
its subsidiaries, totaled approximately $23.9 million. The 11.375% Notes
annual cash flow requirements commence in March 2005 with semi-annual cash
installments of approximately $1.4 million on March 15 and September 15 of
each year. Additionally, Holdings' cumulative non-cash preferred stock
("Holdings Preferred Stock") dividends total approximately $1.5 million
annually. Dividends on the Holdings Preferred Stock have been accumulating and
not paid in cash. Mandatory redemption of the Holdings Preferred Stock is
required in fiscal 2009 and fiscal 2017.
31
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 the Company.
The subsidiary guarantees of the Company's debts are full and unconditional and joint and several.
As of July 3, 2004 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------------ ------------ --------------- -------------
Assets:
Current assets:
Cash and cash equivalents $ 870 $ 41 $ -- $ 911
Accounts receivable, net 18,978 27,338 (13,485) 32,831
Inventories, net 42,724 2,892 -- 45,616
Prepaid expenses and other current assets 1,453 214 -- 1,667
Deferred income taxes 1,077 -- -- 1,077
------------ ----------- ------------ -----------
Total current assets 65,102 30,485 (13,485) 82,102
Investment in equity of subsidiaries 27,791 -- (27,791) --
Property, plant and equipment, net 22,799 191 -- 22,990
Other assets 2,842 (647) -- 2,195
------------ ----------- ------------ -----------
Total assets $ 118,534 $ 30,029 $ (41,276) $ 107,287
============ =========== ============ ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 25,261 $ 528 $ (13,485) $ 12,304
Accrued interest expense 4,424 -- -- 4,424
Accrued expenses 5,414 1,831 -- 7,245
Income taxes payable 10,599 (121) -- 10,478
Current portion of long-term debt 190 -- -- 190
------------ ----------- ------------ -----------
Total current liabilities 45,888 2,238 (13,485) 34,641
Deferred income taxes 1,501 -- -- 1,501
Other long-term obligations 452 -- -- 452
Long-term debt, less current portion 160,629 -- -- 160,629
Stockholders' equity (deficiency) (89,936) 27,791 (27,791) (89,936)
------------ ----------- ------------ -----------
Total liabilities and stockholders' equity (deficiency) $ 118,534 $ 30,029 $ (41,276) $ 107,287
============ =========== ============ ===========
32
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended July 3, 2004 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------------ ----------- ------------- -------------
Net sales $ 115,818 $ 81,596 $ (4,630) $ 192,784
Cost of sales 73,206 47,118 (4,630) 115,694
Selling expenses 13,746 13,104 -- 26,850
General and administrative expense 21,104 4,273 -- 25,377
------------ ---------- ------------ ------------
Total costs and expenses 108,056 64,495 (4,630) 167,921
------------ ---------- ------------ ------------
Operating income 7,762 17,101 -- 24,863
Equity in net earnings of subsidiaries 10,428 -- (10,428) --
Interest expense (15,094) (9) 3 (15,100)
Other, net 942 (2) (3) 937
------------ ---------- ------------ ------------
Income before income taxes 4,038 17,090 (10,428) 10,700
Income tax (expense) benefit 2,492 (6,662) -- (4,170)
------------ ---------- ------------ ------------
Net income $ 6,530 $ 10,428 $ (10,428) $ 6,530
============ ========== ============ ============
Year ended July 3, 2004 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------------ ----------- ------------- -------------
Net cash flows provided by (used in) operating activities $ 14,573 $ 296 $ -- $ 14,869
Cash flows from investing activities:
Intercompany loan 338 -- (338) --
Purchases of property, plant and equipment (4,652) (11) -- (4,663)
------------ ----------- ------------- -------------
Net cash flows used in investing activities (4,314) (11) (338) (4,663)
------------ ----------- ------------- -------------
Cash flows from financing activities:
Net changes to revolving credit agreement borrowing 2,155 -- -- 2,155
Purchase of parent company bonds (12,265) -- -- (12,265)
Payments on long-term debt (420) -- -- (420)
Intercompany loan -- (338) 338 --
Cash paid for financing costs (6) -- -- (6)
Issuance of long-term debt 82 -- -- 82
Distributions to GFSI Holdings, Inc. (258) -- -- (258)
------------ ----------- ------------- -------------
Net cash provided by (used in) financing activities (10,712) (338) 338 (10,712)
------------ ----------- ------------- -------------
Effect of foreign exchange rate changes on cash -- 30 -- 30
------------ ----------- ------------- -------------
Net change in cash and cash equivalents: (453) (23) -- (476)
Cash and cash equivalents at beginning of period 1,323 64 -- 1,387
------------ ----------- ------------- -------------
Cash and cash equivalents end of period $ 870 $ 41 $ -- $ 911
============ =========== ============= =============
33
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
============ ============ ============ ============
34
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 loan -- 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 foreign 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
=========== =========== ============ ===========
35
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 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, net 23 (1) -- 22
---------- ----------- ---------- ------------
Income before income taxes 2,256 9,532 (5,813) 5,975
Income tax expense (benefit) (1,388) 3,719 -- 2,331
---------- ----------- ---------- ------------
Net income $ 3,644 $ 5,813 $ (5,813) $ 3,644
========== =========== ========== ============
Year ended June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------------ ----------- ------------- -------------
Net cash flows 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
=========== ========== =========== ============
36
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 July 3, 2004. Based on that evaluation, the Company's Chief Executive
Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There have been no
significant changes in the Company's internal controls over financial
reporting identified in connection with the evaluation referred to above that
occurred during the Company's fourth fiscal quarter that has materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 9B - Other Information
None.
37
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 69 Chief Executive Officer and Chairman of
the Board
Larry D. Graveel 55 President, Chief Operating Officer and
Director
J. Craig Peterson 52 Senior Vice President, Chief Financial
Officer and Director
Michael H. Gary 52 Executive Vice President, Sales
Administration and Director
James R. Malseed 40 Director, President Campus Division
Jerry M. Socol 62 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.
James R. Malseed has served as a director of the Company since
October 2003. Mr. Malseed was recently promoted to President of the Company's
Campus Division. Prior to that Mr. Malseed was President of Champion Custom
Products, Inc. and has held several management positions in sales and
operations with the Company since 2001. Prior to 2001 Mr. Malseed worked for
the Sara Lee Corporation where he was General Manager of their Campus Division
(1999 - 2001) and held several management positions with Sara Lee since 1991.
Jerry M. Socol joined the Company as a director in August 2004. Mr.
Socol is presently a consultant for Building 19 (2001-present), a retail
chain, and previously held several senior management positions with
Brandstamp, Inc., Fun Designs Corporation, J. Baker & Co., May Department
Stores, Federated Department Stores and Marshal Field &Co. Mr. Socal is also a
director of Genesis Fund.
38
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. Outside directors of the Company receive
$25,000 and director/officers of the Company receive $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.
Code of Ethics
The Company has adopted a code of ethics that applies to its
principal executive officer, principal financial officer and principal
accounting officer. A copy of the code of ethics is filed as
Exhibit 14.1 to this Form 10-K.
39
Item 11 - Executive Compensation
The following table sets forth information concerning the aggregate
compensation paid and accrued to the Company's executive officers for services
rendered to the Company during each of the three most recent fiscal years.
Board of
Fiscal Directors
Position Year Salary Bonus Fees (3) Other
- -------- ---- ---------- --------- ----------- ---------
Robert M. Wolff (2) 2004 $ 251,667 $ -- $ 20,000 $ 257,018
Chairman and Chief Executive Officer 2003 250,416 -- 20,000 253,810
2002 195,354 -- 20,000 257,014
Larry D. Graveel 2004 (5) 175,266 -- 20,000 18,056
President 2003 350,523 -- 20,000 15,513
Chief Operating Officer 2002 350,727 -- 20,000 4,718
J. Craig Peterson (1) 2004 (5) 140,266 -- 20,000 17,510
Senior Vice President and 2003 260,519 10,000 20,000 14,657
Chief Financial Officer 2002 250,666 -- 20,000 4,043
Michael H. Gary 2004 (5) 162,753 -- 20,000 17,861
Executive Vice President 2003 325,519 -- 20,000 14,760
2002 325,669 -- 20,000 9,531
James R. Malseed (4) 2004 208,839 75,000 10,000 6,442
President Campus Division 2003 190,515 58,639 -- 17,103
2002 180,726 36,616 -- 11,125
40
(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 $2,194, $16,780 and $14,630 in
compensation expense during fiscal 2004, 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, Mr. Gary and Mr. Malseed each
received compensation as members of the Board of Directors of GFSI Holdings,
Inc. and GFSI, Inc.
(4) During fiscal 2004 and 2003, the Company granted Jim Malseed options to
purchase 25 shares of Holdings' Class A Common Stock and 44.4 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 $35,798 and $32,410
in compensation expense during fiscal 2004 and 2003, respectively.
(5) During fiscal 2004 Mr. Graveel, Mr. Peterson and Mr. Gary ceased to be
employed by the Company and became employees of Gearcap LLC. Accordingly,
fiscal 2004 salary for Mr. Graveel, Mr Peterson and Mr. Gary includes
approximately six months of compensation for the period they were directly
employed by the Company. The Company compensates Gearcap LLC for the services
of these three executives under the 2003 Management Agreement more fully
described in Item 13.
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
2002, fiscal 2003 and fiscal 2004.
41
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 four 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 the Company as a group and (iii) each person known by the Company
to own beneficially more than 5% of Holdings 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 0.6% 106.4 0.7%
Larry D. Graveel (2)(4) 225.0 2.3 399.1 2.7
Michael H. Gary (2)(5) 225.0 2.3 399.1 2.7
J. Craig Peterson (2)(6) 100.0 1.0 177.4 1.2
James R. Malseed (7) 60.0 0.4 2.9 0.5
All directors and executive officers
as a group (6 persons) 670.0 6.7 1,185.3 7.9
Other Principal Stockholders:
Gearcap LLC (8) 8,250.0 82.7 11,490.0 79.0
JZ Equity Partners PLC (9) 500.0 5.0 1,445.4 9.9
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under
Rule 13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days
after September 1, 2004 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, 2004, there
were 9,970 shares of common stock of Holdings issued and outstanding.
(2) The address of each of Messrs. Wolff, Peterson, Graveel, Gary and
Malseed 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) 40 shares are held Mr. Malseed and 20 shares issuable upon exercise of
stock options.
42
(8) The principal address of Gearcap LLC is 9700 Commerce Parkway,
Lenexa, KS 66219.
(9) The principal address of JZ Equity Partners PLC is c/o Jordan Zalaznick
Capital Company, 767 Fifth Avenue, New York, NY 10153.
GFSI Holdings, Inc. is 82.7% owned by Gearcap LLC ("Gearcap"). The
table below sets forth certain information regarding beneficial ownership of
the common and preferred units of Gearcap held by (i) each of the Company's
directors and executive officers who own units of Gearcap, (ii) all directors
and executive officers of the Company as a group and (iii) each person known
by the Company to own beneficially more than 5% of Gearcap common and/or
preferred units.
Amount of Beneficial Ownership(1)
---------------------------------
Common Units Preferred Units
------------ ---------------
Number of Percentage Number of Percentage
Executive Officers and Directors: Units Owned Units Owned
--------------------------------- ----------- ------------ ----------- ------------
Larry D. Graveel (2) 3,777 50.2% 3,500 12.7%
Michael H. Gary (2) 1,942 25.8 1,800 12.7
J. Craig Peterson (2) 998 13.3 25 5.5
James R. Malseed 200 2.7 0 0.0
All directors and executive officers
as a group (6 persons) 6,917 92.0 5,325 37.1
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under
Rule 13d-3(d), units not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days
after September 1, 2004 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, 2004, Gearcap
had 7,519 common units issued and outstanding.
(2) Mr. Graveel, Mr. Gary and Mr. Peterson are each on the board of
managers of Gearcap LLC.
43
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,
44
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.
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, were at the time
directors of GFSI and 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 does not exceed $1 million. In
addition, the TJC Agreement provides for payment to The Jordan Company
Management Corporation of (i) an investment banking and sponsorship fee of up
to 2% of the purchase price of certain acquisitions 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. In September 2003 the TJC agreement
was amended to reduce the fees payable under the agreement to $100,000
annually.
45
2003 Management Agreement. In September 2003, Holdings entered into a
management agreement (the "2003 Management Agreement") with Gearcap LLC
("Gearcap") under which Gearcap began providing certain services to Holdings
and its affiliates. Under the agreement, Larry D. Graveel, Michael H. Gary and
J. Craig Peterson (each one a director and officer of the Company and Holdings
and a beneficial stockholder of Holdings) ceased to be employed by the Company
and became employed by Gearcap. Gearcap incurs salary expenses and life
insurance costs on the executives and certain financing costs related to the
purchase of the 11.375% Notes. The 2003 Management Agreement has a 10 year
term. The agreement provides for monthly payment of fees and contains a
provision for an annual adjustment in fees each September 1 based upon planned
services. Annual payments to Gearcap cannot exceed $3 million without the
consent of The Jordan Company Management Corporation. Payments to Gearcap
under the 2003 Management Agreement totaled approximately $1.3 million in
fiscal 2004.
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 July
3, 2004, June 28, 2003 and June 29, 2002 payments (refunds) under this
agreement aggregated approximately $1,999,000, ($147,000) and ($2,391,000),
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.
46
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.
47
Exhibit
Number Description Page
4.8 Global Series A Senior Discount Note. **
4.9 Form Global Series B Senior Discount Note. **
4.10 Registration Rights Agreement, dated September 17, 1997, by and among GFSI Holdings, Inc. **
and Donaldson, Lufkin & Jenrette Securities Corporation.
4.11 Indenture, dated as of December 31, 2002, between GFSI, Inc. and State Street Bank and @@@
Trust Company.
4.12 9-5/8% Series A Senior Subordinated Note due 2007. @@@
10.1(a) Credit Agreement, dated February 27, 1997, by and among GFSI, Inc., the lenders listed *
thereto and The First National Bank of Chicago, as Agent.
10.1(b) Amendment No. 1 to Credit Agreement dated September 17, 1997 by and among GFSI, Inc., the **
lenders listed thereto and the First National Bank of Chicago, as agent.
10.2 Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National *
Bank of Chicago, as Agent.
10.3 Trademark Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First *
National Bank of Chicago, as Agent.
10.4 Mortgage, Security Agreement, Financing Statement and Assignment of Rents and Leases, *
dated February 27, 1997, by GFSI, Inc. in favor of The First National Bank of Chicago.
10.5 (a) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Boatmen's *
National Bank.
10.5 (b) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Hillcrest *
Bank.
10.6 Tax Sharing Agreement, dated February 27, 1997, between GFSI, Inc. and GFSI Holdings, Inc. *
10.7 Management Consulting Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and *
TJC Management Corporation.
10.8 Employment Agreement, dated February 27, 1997, between GFSI, Inc. and Robert M. Wolff. *
10.9 Noncompetition Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and Robert *
M. Wolff.
10.10 Form of Indemnification Agreement, dated February 27, 1997, between GFSI Holdings. Inc. *
and its director and executive officers.
10.11 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Impact Design, Inc. *
10.12 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Kansas Custom *
Embroidery.
10.13 Form of Promissory Note, dated February 27, 1997, between GFSI Holdings, Inc. and the *
Management Investors.
10.14 License Agreement, dated April 1, 1994, by and between Winning Ways, Inc. and Softwear *
Athletics, Inc.
10.15 License Agreement, dated October 27, 1998, by and between GFSI, Inc. and Bonmax Co., Ltd. *
10.16 License Agreement, dated January 1, 1999, by and between GFSI, Inc. and Gear For Sports *
Ltd.
48
Exhibit
Number Description Page
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.
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.
10.28 Third Consent and Amendment, dated as of September 8, 2003, to the Credit Agreement dated @@@@
as of March 28, 2002.
10.29 Contribution Agreement, dated as of September 26, 2003, between GFSI Holdings, Inc. and @@@@
GFSI, Inc.
10.30 Amendment to Management Consulting Agreement, dated as of September 26, 2003, between @@@@
GFSI Holdings, Inc. and TJC Management Corporation.
10.31 Management Agreement, dated as of October 1, 2003, between Gearcap LLC and GFSI Holdings, @@@@
Inc.
10.32 First Amendment to Third Consent and Amendment, dated as of September 30, 2003. @@@@
10.33 First Amendment to the Second Consent and Amendment, dated June 21, 2004.
14.1 Code of Ethics
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).
49
@ 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).
@@@@ Incorporated by reference to the exhibits filed on Form 10-Q of GFSI, Inc., filed with the
Securities and Exchange Commission on November 6, 2003 (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, 2003 (Commission File No. 333-24189).
(b) Reports on Form 8-K.
None.
50
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 29,
2004.
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 29, 2004.
Signatures Title
---------- -----
/s/ LARRY D. GRAVEEL President, Chief Operating Officer and a Director
- -------------------------
LARRY D. GRAVEEL
/s/ J. CRAIG PETERSON Senior Vice President, Chief Financial Officer
- ------------------------- and a Director (Principal Financial and
J. CRAIG PETERSON Accounting Officer)
/s/ MICHAEL H. GARY Executive Vice President and a Director
- -------------------------
MICHAEL H. GARY
/s/ JAMES R. MALSEED President, Campus Division and a Director
- -------------------------
JAMES R. MALSEED
/s/ JERRY M. SOCOL Director
- -------------------------
JERRY M. SOCOL
51