UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED June 29, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 333-38951
GFSI HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 74-2810744
- ------------------------------ ----------------------
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification Number
9700 Commerce Parkway
Lenexa, KS 66219
(Address of Principal Executive Offices and Zip Code)
(913) 888-0445
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
The aggregate market value of the voting stock held by non-affiliates (as
defined in Rule 405) of the registrant as of September 1, 2002 was $0.
On September 1, 2002, there were 1,820 shares of the Registrant's common stock,
$.01 par value per share, issued and outstanding.
1
TABLE OF CONTENTS
PART I
PAGE
Item 1 - Business....................................................... 3
Item 2 - Properties..................................................... 7
Item 3 - Legal Proceedings.............................................. 7
Item 4 - Submission of Matters to a Vote of Security Holders............ 7
PART II
Item 5 - Market for the Registrant's Common Equity and
Related Stockholder Matters.................................... 7
Item 6 - Selected Financial Data........................................ 7
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 9
Item 7A - Quantitative and Qualitative Disclosures About Market Risks.... 13
Item 8 - Consolidated Financial Statements and Supplementary Data....... 14
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 38
PART III
Item 10 - Directors and Executive Officers............................... 38
Item 11 - Executive Compensation......................................... 40
Item 12 - Security Ownership of Certain Beneficial Owners and Management. 41
Item 13 - Certain Relationships and Related Transactions................. 42
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................................ 43
Signatures..................................................... 46
Officers Certification ........................................ 47
2
PART I
ITEM 1 - BUSINESS
GFSI Holdings, Inc. ("Holdings" ) was incorporated in the State of Delaware
on February 24, 1997. Holdings, and its wholly owned subsidiary GFSI, Inc.
("GFSI", or collectively with Holdings the "Company") were organized by
affiliates of The Jordan Company (TJC) and management to effect the acquisition
of Winning Ways, Inc. ("Winning Ways").
On February 27, 1997, Holdings acquired all of the issued and outstanding
capital stock of Winning Ways and immediately thereafter merged Winning Ways
with and into GFSI, with GFSI as the surviving entity. All of the capital stock
of Winning Ways acquired by Holdings in connection with the acquisition was
contributed to GFSI along with the balance of equity contributions.
The Company is a leading designer, manufacturer and marketer of high
quality, custom designed sportswear and activewear bearing names, logos and
insignia of resorts, corporations, national associations, colleges and
professional sports leagues and teams. The Company custom designs and decorates
an extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts,
woven shirts, sweaters, shorts, pants, headwear and sports luggage. The Company
markets its products through its well-established and diversified distribution
channels.
On January 29, 1998, the Company established a wholly owned subsidiary,
Event 1, Inc. ("Event 1") to provide a concessionaire outlet for the Company's
sportswear and activewear. Event 1 provides increasing sales for the Company's
products with the National Collegiate Athletic Association ("NCAA"), Big 10
Conference, Big 12 Conference, the Atlantic Coast Conference and Professional
Golf Association ("PGA") tournament events.
On June 25, 2001, the Company acquired 100% of the stock of Champion
Products, Inc., ("Champion") for approximately $9.5 million. In conjunction with
the acquisition of Champion, the Company entered into a 15 year licensing
agreement (the "Licensing Agreement") with the seller which permits the Company
to sell decorated Champion apparel in the college bookstore, military and resort
markets. Under the Licensing Agreement, the Company will pay a royalty to the
seller based upon net sales beginning in fiscal 2004.
On June 29, 2001, the Company sold its Tandem Marketing business for
approximately $2.7 million in cash, net of closing costs, and the buyer's
assumption of approximately $1.2 million in liabilities. The Company recognized
a $629,787 gain on the sale of Tandem Marketing.
The Company operates on a 52/53 week fiscal year which ends on the Saturday
nearest June 30. The twelve month periods ended July 2, 1999, June 30, 2000,
June 29, 2001 and June 29, 2002 each contain 52 weeks. The twelve month period
ended July 3, 1998 contains 53 weeks.
SALES DIVISIONS AND SUBSIDIARIES
The Company believes that it enjoys distinct competitive advantages in each
of its sales divisions and its subsidiaries because of its ability to quickly
deliver high quality, customized products and provide excellent customer
service. The Company operates state-of-the-art design, embroidery and screen
print manufacturing and distribution facilities which management believes have
set the standard in the sportswear and activewear industry for product quality
and response time to orders and re-orders. This allows the Company's customers
to carry less inventory, increase merchandise turnover and reduce the risk of
obsolete merchandise.
Resort Division. The Resort division is a leading marketer of custom logoed
sportwear and activewear to over 7,000 active customer accounts, including
destination resorts, family entertainment companies, hotel chains, golf courses,
cruise lines and casinos.
The Company distributes its Resort division products through its national
sales force of approximately 35 independent sales agents. The Company believes
that it is well known and respected in the resort and leisure industry because
of its quick turn around for new orders and re-orders, its product innovation,
its quality and its high level of service.
Corporate Division. The Corporate division is a leading marketer of
corporate identity sportswear and activewear for use by a diverse group of
corporations for incentive programs, employee pride and recognition initiatives,
corporate meetings and outings, company retail stores and catalog programs,
dealer incentive programs as well as office casual wear and uniforms.
3
The Company provides its corporate identity sportswear products to over
1,000 of the leading independent marketing companies, who in turn each employ a
sales staff to service a client base. The Company employs 23 regional sales
personnel who are exclusively dedicated to promoting Corporate division
products. The Company believes this marketing approach leverages the sales force
and marketing contacts of these independent marketing companies. Prior to fiscal
2001, the Corporate division utilized approximately 40 independent sales agents
to market directly to corporate customers.
Licensed Apparel Division. The Licensed Apparel Division includes the
college bookstore business, through both the GEAR FOR SPORTS(R) and CHAMPION(R)
college brands, sales under professional sports team, league and event licensing
agreements and sales to the military. The Company has over 3,300 active college
bookstore accounts, including nearly every major college and university in the
United States. The largest college bookstore accounts include the major college
bookstore lease operators as well as high volume, university managed bookstores.
The Company's professional sports team, league and event licensors include,
among others, the NBA, the NHL, NASCAR and Major League Baseball. The Company
targets the upscale adult sports enthusiast through the Company's existing
distribution channels as well as through new channels such as stadium stores and
team retail outlets. The Company has over 800 active professional sports related
customer accounts.
Event 1 Subsidiary. The Event 1 subsidiary was established in fiscal 1998
to provide concessionaire services that create additional outlets for the
Company's products. Since its inception, Event 1 has become the leading event
merchandiser in the collegiate championship industry. The subsidiary has renewed
and extended its agreements with the NCAA, Big 10 Conference, Big 12 Conference,
the Atlantic Coast Conference, the South Eastern Conference, PGA and various
other institutions and entities.
GFSI Canada Company. In June 2002 the Company formed GFSI Canada Company
("GFSI Canada"), a wholly owned subsidiary of GFSI, Inc. organized under the
Securities Act of Nova Scotia, Canada. The Company established GFSI Canada to
enable it to conduct business in Canada and reach similar markets with it's
existing product line. Certain of the Company's products had previously been
available in the Canadian market through an international licensing agreement
that expired in December 2001. In June 2002, GFSI Canada entered into a
Management Agreement with Fletcher Leisure Group Inc. ("Fletcher"), a Canadian
corporation headquartered in Quebec, Canada to provide certain services. GFSI
Canada had no assets or liabilities at June 29, 2002 and had no results from
operations in fiscal 2002.
PRODUCTS
The Company's extensive product offerings include: fleecewear, outerwear,
polo shirts, woven shirt, sweaters, T- shirts and bottoms, women's and other
apparel items and accessories. These products are currently offered in over
1,000 combinations of style and color. While its products are generally
characterized by a low fashion risk, the Company attempts to incorporate the
latest trends in style, color and fabrics with a heavy emphasis on innovative
graphics to create leading-edge fashion looks. The Company believes that the
quality and breadth of its product lines and its innovative logo designs
represent significant competitive advantages in its markets.
The following illustrates the attributes of the Company's current product
lines:
Fleecewear. The Company's fleecewear products represented approximately 27%
of net sales for fiscal 2002. Current styles offered by the Company include
classic crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops,
vests, and bottoms. Products are constructed of a wide range of quality fabrics
including combed cotton, textured fleece ribbed knit cotton and inside out
fleece. This product line offers customers a variety of styles ranging from
relaxed, functional looks to more sophisticated, casual looks.
T-Shirts and Bottoms. The Company's T-shirt and bottoms products
represented approximately 15% of net sales for fiscal 2002. 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 13%
of net sales for fiscal 2002. These products are designed to offer consumers
contemporary styling, functional features and quality apparel. Product offerings
include a variety of weights and styles, including heavy nylon parkas, denim
jackets, corduroy hooded pullovers, nylon windshirts and water-resistant poplin
jackets. The Company's products also provide a number of functional features
such as adjustable cuffs, windflaps, vented backs, drawstring bottoms and
heavyweight fleece lining.
4
Polo Shirts, Woven Shirts and Sweaters. The Company's polo shirt, woven
shirt and sweater products represented approximately 13% of net sales for fiscal
2002. 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 9% of net
sales for fiscal 2002. 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 23% of net sales for fiscal 2002.
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 more than 75 in-house artists and
graphic designers who work closely with each customer to create the product
offering and customization that fulfills the account's needs. The design group
is responsible for presenting new ideas to each account in order to continually
generate new products. This design function is a key element in the Company's
ability to provide value-added services and maintain superior relations with its
customers. Once the design and logo specifications have been determined, the
Company's manufacturing process begins. This manufacturing process consists of
embroidery and/or screen printing applications to Company-designed non-
decorated apparel ("blanks"). Most of the screen printing and the embroidery
operations are performed by the Company in its Lenexa, Kansas, Chillicothe,
Missouri and Bedford, Iowa facilities. In addition, the Company outsources
screen printing and embroidery work to independent contractors when necessary.
All of the Company's blanks are sourced and manufactured to the Company's
specifications by third party vendors. The Company closely monitors each of its
vendors in order to ensure that its specifications and quality standards are
met. A significant portion of the Company's blanks are contract manufactured in
various off-shore plants. The Company's imported items are currently
manufactured in China, Taiwan, Korea, Malaysia, Hong Kong, Singapore, Indonesia,
Vietnam, Guatemala, Honduras, Philippines, Thailand and Mexico. No foreign
country has a manufacturing concentration above 20%. The Company has
long-standing contractual relationships with its independent buying agents who
assist the Company in its efforts to control garment quality and delivery. None
of these agents represent the Company on an exclusive basis. The Company has
independent buying agents in each foreign country where it purchases blanks.
COMPETITION
The Company's primary competitors vary within each of its divisions and
subsidiaries. In the resort division, there are few national competitors and
even fewer that operate in all of the varied segments in which the Company
operates. In the corporate identity market, there are several large
manufacturers of corporate identity products. The Company believes it is one of
the few manufacturers and marketers of corporate identity products that
specializes in the activewear product segment. In the Licensed Apparel
division's college bookstore market, the GEAR FOR SPORTS(R) and CHAMPION(R)
brands and their closest two competitors have traditionally held greater than
60% of the market.
The following table sets forth the Company's primary competitors in each of
its markets:
MARKET PRIMARY COMPETITORS
- ---------------- ------------------------------------------------------------
Resort Cutter & Buck and local and regional competitors
Corporate Cutter & Buck, Ashworth, Land's End
Licensed Apparel Jansport (VF Corp.), Cotton Exchange, Russell Athletic,
M.V. Sports
Competition in each of the Company's markets generally is based on product
design and decoration, customer service, overall product quality and price. The
Company believes that it has been able to compete successfully because of its
ability to create diverse and innovative designs, provide excellent customer
service, leverage its GEAR FOR SPORTS(R) and CHAMPION(R) brand names and
differentiate its products on the basis of quality.
5
EMPLOYEES
The Company employs approximately 877 people at its two facilities in
Lenexa, Kansas, of which approximately 111 are members of management, 317 are
involved in either product design, customer service, sales support or
administration and 449 are involved in manufacturing. The Company employs
approximately 85 people in its Bedford, Iowa embroidery facility and 120 at its
Chillicothe, Missouri screen print facility, all of which are involved in
manufacturing. None of the Company's employees is covered by a collective
bargaining agreement. The Company believes that the dedication of its employees
is critical to its success, and that its relations with its employees are
excellent.
TRADEMARKS
The Company markets its products primarily under the GEAR FOR SPORTS(R) and
CHAMPION(R) brand names. In addition, the Company markets its products under,
among others, the Pro GEAR(R), Big Cotton(R), Winning Ways(R) and Yikes!(R)
trademarks. Generally, the Company's trademarks will remain in effect as long as
the trademark is used by the Company and the required renewals are obtained.
The Company licenses its GEAR FOR SPORTS(R) trademark in specified
international markets including Japan and the European Union. These license
agreements provide 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 in these international markets. The agreements
provide for royalties as a percentage of net sales, contain annual royalty
minimums, and give the Company final control over product design and quality.
The Company believes these licensing arrangements enable it to broaden its
geographic distribution and extend the GEAR FOR SPORTS(R) brand name in a cost-
effective manner.
In connection with its acquisition of Champion, the Company entered into a
license agreement with Sara Lee Corporation (the "Champion License Agreement").
Pursuant to the Champion License Agreement, the Company is granted the exclusive
right to use the CHAMPION(R) name and C(R) logo and related trademarks on
certain products sold in the collegiate, military and resort markets in the
United States. The Champion License Agreement is scheduled to expire on June 30,
2016. In consideration for the license grant, the Company pays Sara Lee a
quarterly royalty based on a percentage of net sales of products bearing the
licensed marks beginning in fiscal 2004.
LICENSES
The Company markets its products, in part, under licensing agreements. In
fiscal 2002, net sales under the Company's 433 active licensing agreements
totaled $74.4 million, or approximately 37% 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 MLB, the NBA, NASCAR and
the NHL 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.
6
ITEM 2 - PROPERTIES
The Company owns each of its four properties: its 250,000 square foot
headquarters and manufacturing facility in Lenexa, Kansas, its 100,000 square
foot distribution facility located approximately two miles from its
headquarters, its 23,000 square foot embroidery facility located in Bedford,
Iowa, and its 50,000 square foot screen print decoration facility located in
Chillicothe, Missouri. Approximately 200,000 square feet of the
headquarters/manufacturing facility, the distribution facility in Lenexa, the
embroidery facility in Bedford and the Chillicothe screen print facility are
devoted to the design and manufacture of the Company's products and to customer
service. The Chillicothe facility was completed and began production in fiscal
2002.
From time to time, the Company leases additional warehouse space under
short term agreements to meet short term seasonal needs.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding the resolution
of which, the management of the Company believes, would have a material adverse
effect on the Company's results of operations, cash flows, or financial
condition, nor to any other pending legal proceedings other than ordinary,
routine litigation incidental to its business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 29, 2002.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The only authorized, issued and outstanding class of capital stock of
Holdings is common stock which is held by an aggregate of 31 holders. There is
no established public trading market for Holdings' common stock.
Holdings has not declared nor paid any cash dividends on its common stock
since its formation in February 1997. Holdings' financing agreements contain
restrictions on its ability to declare or pay dividends on its common stock.
ITEM 6 - SELECTED FINANCIAL DATA
Holdings is structured as a holding company whose only significant asset is
the capital stock of GFSI. The following table presents: (i) historical
operating and other data of the Company for fiscal years ended July 3, 1998,
July 2, 1999, June 30, 2000, June 29, 2001, and June 29, 2002; and (ii) balance
sheet data as of July 3, 1998, July 2, 1999, June 30, 2000, June 29, 2001, and
June 29, 2002. The historical financial statements for the Company for fiscal
1998, 1999 and 2000 have been audited by Deloitte & Touche LLP. The historical
financial statements for the Company for fiscal 2001 have been audited by
PricewaterhouseCoopers LLP. The historical financial statements for the Company
for fiscal 2002 have been audited by KPMG LLP. The selected financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and the historical
consolidated financial statements of the Company and the related notes thereto
included elsewhere in this annual report. Certain reclassifications have been
made to the financial data for the years ended July 3, 1998, July 2, 1999, June
30, 2000 and June 29, 2001 to conform to the June 29, 2002 presentation.
7
FISCAL YEARS ENDED
----------------------------------------------------------------
(Dollars in thousands)
JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 29,
1998 (5) 1999 2000 2001 2002
--------- -------- --------- --------- ----------
STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 214,894 $ 208,025 $ 205,500 $ 185,305 $ 197,250
Gross profit.................................. 86,068 83,236 79,326 70,726 73,627
Operating expenses (1)........................ 48,401 52,424 48,103 50,008 50,933
---------- ---------- ---------- ---------- ----------
Operating income.............................. 37,667 30,812 31,223 20,718 22,694
Other expense................................. (24,259) (24,774) (24,610) (24,241) (24,653)
---------- ---------- ---------- ---------- ----------
Income (loss) before taxes and
extraordinary item...................... 13,408 6,038 6,613 (3,523) (1,959)
Income tax (expense) benefit.................. (5,257) (2,165) (2,614) 1,483 764
Extraordinary item, net of tax benefit (2).... (203) -- -- -- (606)
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ 7,948 $ 3,873 $ 3,999 $ (2,040) $ (1,801)
========= ========== ========== ========== ==========
BALANCE SHEET DATA (AS OF PERIOD END):
Cash and cash equivalents.................... $ 41,361 $ 10,278 $ 1,461 $ 5,324 $ 328
Total assets................................. 106,532 105,680 99,436 95,488 105,825
Long-term debt (including current portion)
and redeemable preferred stock......... 250,245 246,407 240,334 233,574 246,702
Total stockholders' equity (deficiency)...... (166,815) (163,368) (159,792) (162,249) (164,462)
OTHER DATA:
Cash flows from operating activities........ $ 3,893 $ 21,039 $ 7,216 $ 22,546 $ (3,710)
Cash flows from investing activities........ (2,648) (2,041) (1,937) (8,412) (4,189)
Cash flows from financing activities........ (1,001) (10,080) (14,097) (10,272) 2,904
EBITDA (3).................................. 40,605 33,894 34,459 23,764 26,789
Depreciation and amortization............... 2,938 3,083 3,235 3,046 4,095
Capital expenditures........................ 2,972 2,291 1,998 1,788 4,203
EBITDA margin (4)........................... 18.9% 16.3% 16.8% 12.8% 13.6%
__________
(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.
(2) The statement of operations data for fiscal 1998 includes an extraordinary
loss related to the write-off of deferred financing costs incurred in
connection with the issuance of the Holdings Subordinated Notes in the
amount of $338 ($203 on an after-tax basis). The statement of operations
data for fiscal 2002 includes an extraordinary loss of $993 ($606 on an
after tax basis) related to the write-off of deferred financing costs
incurred in connection with the Company's previous bank Credit Agreement.
(3) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with GAAP, it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain
investors find EBITDA to be a useful tool for measuring the ability of the
Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs.
(4) EBITDA margin represents EBITDA as a percentage of net sales.
(5) The Company's fiscal year ends on the last Saturday in June, which results
in a 53 week year from time to time. A 53 week period is included in the
fiscal year ended July 3, 1998. The remaining years are comprised of 52
week periods.
8
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, restructuring reserves, contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that it believes are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ materially from these estimates under different assumptions or
conditions.
The Company's management believes that some of its significant
accounting policies involve a higher degree of judgment or complexity than other
accounting policies. Identified below are the policies deemed critical to its
business and the understanding of its results of operations.
Revenue recognition. The Company recognizes revenues when goods are
shipped, title has passed, the sales price is fixed and collectibility is
reasonably assured. Returns, discounts and sales allowance estimates are based
on projected sales trends, historical data and other known factors. If actual
returns, discounts and sales allowances are not consistent with the historical
data used to calculate these estimates, net sales could either be understated or
overstated.
Accounts receivable. Accounts receivable consist of amounts due from
customers and business partners. The Company maintains an allowance for doubtful
accounts to reflect expected credit losses and provides for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
Furthermore, these judgments must be continually evaluated and updated. If the
historic data used to evaluate credit risk does not reflect future collections,
or, if the financial condition of the Company's customers were to deteriorate
causing an impairment of their ability to make payments, additional provisions
for bad debts may be required in future periods.
Inventories. Inventories are carried at the lower of cost or market
determined under the First-In, First-Out (FIFO) method. The Company writes down
obsolete and unmarketable inventories to their estimated market value based
upon, among other things, assumptions about future demand and market conditions.
If actual market conditions are less favorable than projected, additional
inventory write-downs may be required. The Company also records changes in
valuation allowances due to changes in its operating strategy, such as the
discontinuances of certain product lines and other merchandising decisions
related to changes in demand. It is possible that further changes in required
inventory allowances may be necessary in the future as a result of market
conditions and competitive pressures.
9
RESULTS OF OPERATIONS
The following table sets forth certain historical financial information of
the Company, expressed as a percentage of net sales, for fiscal 2002, 2001 and
2000:
FISCAL YEAR ENDED
---------------------------------
June 29, June 29, June 30,
2002 2001 2000
-------- -------- --------
Net sales................................ 100.0% 100.0% 100.0%
Gross profit............................. 37.3 38.2 38.6
EBITDA................................... 13.6 12.8 16.8
Operating income......................... 11.5 11.2 15.2
EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating activities, which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Consolidated Statements of Cash Flows of the
Company and the related Notes to the Consolidated Financial Statements included
herein for further information.
FISCAL YEAR ENDED JUNE 29, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 29, 2001
Net Sales. Net sales increased 6.4% in fiscal 2002 to $197.2 million from
$185.3 million in fiscal 2001. The increase was primarily attributable to the
addition of Champion Custom Products ("CCP") college bookstore net sales of
$43.4 million. The net sales increase from CCP was partially offset by declines
in Corporate and Resort division sales. The terrorist attacks of September 11,
2001 and the resulting political and economic uncertainties created in the
aftermath, directly affected the travel plans and the marketing and employee
incentive programs of the customers of these two sales divisions. In addition,
the Tandem Marketing ("Tandem") business was sold in June 2001. Tandem
contributed $11.6 million in sales in fiscal 2001.
Gross Profit. Gross profit for fiscal 2002 increased 4.1% to $73.6 million
from $70.7 million in fiscal 2001 due to the increase in net sales. Gross profit
as a percentage of net sales decreased to 37.3% from 38.2% last year. The
decrease in gross profit as a percentage of sales was the result of lower
Corporate division sales, which generally provide a higher gross profit than
sales from the CCP college bookstore sales. Fiscal 2002 gross profit was also
adversely affected by both (i) increased loss on sales of close-out and
discontinued merchandise and (ii) the start-up production costs at the new
Chillicothe, Missouri facility.
Operating Expenses. Operating expenses increased $.9 million or 1.8%, to
$50.9 million in fiscal 2002 from $50.0 million in fiscal 2001. Operating
expenses as a percentage of net sales decreased in fiscal 2002 to 25.8% from
27.0% in fiscal 2001. Operating expenses in fiscal 2001 included costs incurred
from the following non-recurring activities: $1.1 million of integration costs
associated with the acquisition of CCP and $0.8 million in costs associated with
severance and employee termination benefits related to the execution of a
restructuring plan; which were partially offset by $0.6 million in gain related
to the sale of Tandem. If costs from these non-recurring activities are
excluded, operating expenses as a percentage of sales would have decreased in
fiscal 2002 to 25.8% from 26.3% in fiscal 2001. Cost control measures created
the decrease in operating expenses.
EBITDA. EBITDA for fiscal 2002 increased $3.0 million to $26.8 million from
$23.8 million in fiscal 2001. EBITDA as a percentage of net sales increased to
13.6% in fiscal 2002 from 12.8% in fiscal 2001. The 12.7% increase in EBITDA was
the result of higher sales and lower operating expenses.
Operating Income. Operating income for fiscal 2002 increased $2.0 million
to $22.7 million in fiscal 2002 from $20.7 million in fiscal 2001. Operating
income as a percentage of net sales increased to 11.5% in fiscal 2002 from 11.2%
in fiscal 2001. The increase in operating income was the result of the increase
in sales and lower operating expenses.
Other Income (Expense). Other expense in fiscal 2002 increased $.4 million
to $24.6 million from $24.2 million in fiscal 2001. Increased interest expense
on the Holdings Discount Notes off-set the favorable affects of lower interest
rates which created the increase in fiscal 2002.
10
Net Income (Loss) before extraordinary item. The Company had a net loss
before extraordinary item of $1.2 million in fiscal 2002 compared to a net loss
of $2.0 million in fiscal 2001. The $800,000 improvement in net income was
primarily the result of the increase in operating income.
Extraordinary item, net of tax benefit. In March 2002, the Company entered
into a $65 million Revolving Bank Credit facility and repaid its existing bank
credit facility ahead of its scheduled expiration. A $.6 million extraordinary
loss, net of related tax benefits, was recorded in the third quarter of fiscal
2002 to write off deferred debt origination costs related to the previous bank
credit facility.
Net Income (Loss). The Company had a net loss of $1.8 million in fiscal
2002 compared to a net loss of $2.0 million in fiscal 2001. The increase in
fiscal 2002 operating income created the improvement over fiscal 2001.
FISCAL YEAR ENDED JUNE 29, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
Net Sales. Net sales declined 9.8% in fiscal 2001 to $185.3 million from
$205.5 million in fiscal 2000. The decrease was principally attributable to
decreases in the Company's Licensed Apparel and Corporate divisions. The
decrease in net sales at the Company's Licensed Apparel Division was due to
college bookstore customers' reducing individual location inventories. Corporate
sales declined in fiscal 2001 due to a curtailment of purchasing, marketing and
employee relations incentive items by many corporations.
Gross Profit. Gross profit for fiscal 2001 decreased 10.8% to $70.7 million
from $79.3 million in fiscal 2000, due primarily to the decline in sales noted
above. Gross profit as a percentage of net sales declined slightly in fiscal
2001 to 38.2% from 38.6% in fiscal 2000.
Operating Expenses. Operating expenses increased $1.9 million or 4.0%, to
$50.0 million in fiscal 2001 from $48.1 million in fiscal 2000. Operating
expenses as a percentage of net sales increased in fiscal 2001 to 27.0% from
23.4% in fiscal 2000. The increases in operating expenses were primarily
attributable to the following non-recurring activities in fiscal 2001: $1.1
million of integration costs associated with the acquisition of Champion and
$0.8 million in costs associated with severance and employee termination
benefits related to the execution of a restructuring plan; which were partially
offset by $0.6 million in gain related to the sale of Tandem. In addition, the
Company incurred costs associated with the change in its Corporate division's
sales strategy to replace independent sales representatives by focusing employee
representatives on selling through advertising incentive distributors who, in
turn, fulfill corporate incentive programs.
EBITDA. EBITDA for fiscal 2001 decreased $10.7 million to $23.8 million
from $34.5 million in fiscal 2000. EBITDA as a percentage of net sales decreased
to 12.8% in fiscal 2001 from 16.8% in fiscal 2000. The decrease in EBITDA was
the result of the decline in sales and the increase in operating expenses.
Operating Income. Operating income for fiscal 2001 decreased $10.5 million
to $20.7 million in fiscal 2001 from $31.2 million in fiscal 2000. Operating
income as a percentage of net sales decreased to 11.2% in fiscal 2001 from 15.2%
in fiscal 2000. The decrease in operating income was the result of the decline
in sales and the increase in operating expenses.
Other Income (Expense). Other expense in fiscal 2001 decreased $.4 million
to $24.2 million from $24.6 million in fiscal 2000 due to declining balances on
the GFSI's long-term debt outstanding and declining interest rates thereon which
was partially offset by increasing interest expense on the Holdings Discount
Notes.
Net Income (Loss). The Company had a net loss of $2.0 million in fiscal
2001 compared to $4.0 million in net income in fiscal 2000. The decrease in net
income was the result of the decline in sales and the increase in operating
expenses.
LIQUIDITY AND CAPITAL RESOURCES
During 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 $65 million revolving line of credit which
matures in January 2005. At June 29, 2002, $23.2 million was available for
future borrowing under the RBCA. The Company believes that cash flows from
operating activities and borrowings under the RBCA will be adequate to meet the
Company's short-term and future liquidity requirements prior to the maturity of
its RBCA in fiscal 2005 although no assurance can be given in this regard.
Cash provided by (used in) operating activities in fiscal 2002, 2001 and
2000 was ($3.7) million, $22.5 million and $7.2 million, respectively. Increases
in accounts receivable and inventory to support the acquired CCP college
bookstore business created the change in cash provided by (used in) operating
activities between fiscal 2002 and fiscal 2001. Reductions in inventory and
accounts receivable and increases in payables contributed to the increase in
cash provided by operating activities in fiscal 2001 compared to fiscal 2000.
11
Cash used in investing activities for fiscal 2002, 2001 and 2000 was $4.2
million, $8.4 million and $1.9 million, respectively. Cash used in investing
activities in fiscal 2002 was principally related to capital expenditures
associated with the construction of a new garment decoration facility in
Chillicothe, Missouri. The cash used in investing activities in fiscal 2001 was
related to the purchase of CCP and capital expenditures, partially offset by
$2.7 million in proceeds from the sale of Tandem. In fiscal 2000 cash used in
investing activities represented capital expenditures.
Cash provided by (used in) financing activities for fiscal 2002, 2001 and
2000 was $2.9 million, ($10.3) million and ($14.1) million, respectively. The
net $2.9 million provided from financing activities in fiscal 2002 was created
by borrowings under the new RBCA to replace existing bank loans and support
increased working capital and equipment needs related to the acquisition of the
CCP business. The cash used in financing activities in fiscal 2001 and fiscal
2000 was primarily related to long-term debt repayments of which $8.5 million
and $7.8 million were debt prepayments in fiscal 2001 and fiscal 2000,
respectively.
GFSI, Inc. anticipates paying dividends to Holdings to enable Holdings to
pay corporate income taxes, interest on subordinated discount notes issued by
Holdings (the "Holdings Discount Notes"), fees payable under a consulting
agreement and certain other ordinary course expenses incurred on behalf of the
Company. Holdings is dependent upon the cash flows of GFSI, Inc. to provide
funds to service the Holdings Discount Notes. Holdings Discount Notes do not
have an annual cash flow requirement until fiscal 2005 as they accrue interest
at 11.375% per annum, compounded semi-annually to an aggregate principal amount
of $108.5 million at September 15, 2004. Thereafter, the Holdings Discount Notes
will accrue interest at the rate of 11.375% per annum, payable semi-annually, in
cash on March 15 and September 15 of each year, commencing on March 15, 2005.
Additionally, Holdings' cumulative non-cash preferred stock ("Holdings Preferred
Stock") dividends total approximately $407,000 annually. Holdings Preferred
Stock may be redeemed at stated value (approximately $3.4 million) plus accrued
dividends with mandatory redemption in fiscal 2009.
A summary of the Company's contractual cash obligations by maturity date as of
June 29, 2002 is as follows:
AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1 YEARS 2-3 YEARS 4-5 YEARS
- ----------------------- ----- ------ --------- --------- -------
Long-term debt $240,989,090 $ 72,018 $ 30,711,346 $125,057,197 $ 85,148,529
Capital lease obligations 308,207 105,069 193,292 9,846 --
Operating leases 1,462,482 734,856 689,871 37,755 --
Redeemable preferred stock 8,067,666 -- -- -- 8,067,666
------------ ----------- ------------ ------------ ------------
Total Contractual Cash Obligations $250,827,445 $ 911,943 $ 31,594,509 $125,104,798 $ 93,216,195
============ =========== ============ ============ ============
It is anticipated that leases that expire will be renewed or replaced, and
future lease commitments are not expected to aggregate less than the amount
shown in year 1.
NEW ACCOUNTING STANDARDS
The FASB's Emerging Issues Task Force ("EITF") released its consensus No.
00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future" and consensus No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products".
The consensus' concluded that consideration from a vendor to a reseller of the
vendor's products is generally presumed to be an adjustment to the selling
prices of the vendor's products and, therefore, should be classified as a
reduction of revenue.
The Company implemented both of these pronouncements during fiscal 2002,
and as a result, decreased net sales by $.9 million and $1.2 million for fiscal
2001 and 2000, respectively, to reclassify certain customer incentive programs
and volume rebates that had previously been recorded as operating expenses.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets", in fiscal 2002. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001, and contains certain transition
provisions, that apply to purchase method business combinations with an
acquisition date before July 1, 2001. SFAS No. 142 addresses the financial
accounting and reporting for goodwill and other intangible assets acquired in a
business combination after they have been initially recognized in the financial
statements, eliminates amortization of goodwill, and requires that goodwill be
tested for impairment at least annually. The adoption of SFAS No. 141 and SFAS
No. 142 did not have an impact on the Company's consolidated financial
statements.
12
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145 "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". The new standard eliminates the
requirement to classify all gains and losses related to debt extinguishments as
extraordinary items. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in Accounting Principles Board ("APB") Opinion No. 30 for
classification as an extraordinary item shall be reclassified. Applying the
provisions of APB No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual or infrequent or that
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The Company will adopt
SFAS No. 145 in the first quarter of fiscal 2003, and will reclassify the 2002
extraordinary loss on extinguishment of debt as other income (expense) in
accordance with the transition provisions of SFAS No. 145. It is anticipatd that
net income, shareholders equity or cash flows will not be impacted by this new
standard.
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 2002, 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 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 RISKS
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. The Company uses a balanced mix of debt
maturities along with both fixed rate and variable rate debt to manage its
exposure to interest rate changes. The fixed 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 10 percent change
in interest rates would not have a material effect on the Company's results of
operations over the next fiscal year, although there can be no assurances that
interest rates will not significantly change.
13
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report............................................. 15
Report of Independent Accountants........................................ 16
Independent Auditors' Report............................................. 17
Consolidated Balance Sheets - June 29, 2002 and June 29, 2001........... 18
Consolidated Statements of Operations - Years Ended June 29, 2002,
June 29, 2001 and June 30, 2000..................................... 19
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Years Ended June 29, 2002, June 29, 2001
and June 30, 2000.................................................... 20
Consolidated Statements of Cash Flows - Years Ended June 29, 2002,
June 29, 2001 and June 30, 2000..................................... 21
Notes to Consolidated Financial Statements............................... 22
Schedule I - GFSI Holdings, Inc. Parent Company
Only Financial Statements........................................... 35
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GFSI Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of GFSI Holdings,
Inc. and subsidiaries (Holdings) as of June 29, 2002, and the related
consolidated statement of operations, changes in stockholders' equity
(deficiency) and cash flows for the year then ended. These consolidated
financial statements are the responsibility of Holdings' management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GFSI Holdings, Inc.
and subsidiaries as of June 29, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Kansas City, Missouri
August 23, 2002
15
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
GFSI Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity
(deficiency) and of cash flows present fairly, in all material respects, the
financial position of GFSI Holdings, Inc. and its subsidiaries at June 29, 2001,
and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
September 12, 2001
16
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI Holdings, Inc. and subsidiary
Lenexa, Kansas
We have audited the accompanying consolidated balance sheet (not
presented herein) of GFSI Holdings, Inc. and subsidiaries ("Holdings") as of
June 30, 2000 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of Holdings'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with auditing standards general
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Holdings as of June 30, 2002
and the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 8, 2000
17
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 29, JUNE 29,
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 328,330 $ 5,323,536
Accounts receivable, net of allowance for doubtful accounts of
$766,557 and $696,988 at June 29, 2002 and June 29, 2001...... 32,626,431 22,694,322
Inventories, net................................................. 45,728,918 37,735,617
Income tax receivable............................................ 284,183 1,690,907
Deferred income taxes............................................ 844,513 910,828
Prepaid expenses and other current assets........................ 1,268,478 1,143,310
-------------- --------------
Total current assets.......................................... 81,080,853 69,498,520
Property, plant and equipment, net.................................... 19,670,864 18,574,473
Other assets:
Deferred financing costs, net of accumulated amortization of
$3,683,770 and $5,141,940 at June 29, 2002 and June 29, 2001.. 4,062,548 5,409,083
Other............................................................. 1,010,268 2,006,082
-------------- --------------
5,072,816 7,415,165
-------------- --------------
Total assets.................................................. $ 105,824,533 $ 95,488,158
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.................................................. $ 12,010,292 $ 12,777,790
Accrued interest expense.......................................... 4,364,497 3,774,778
Accrued expenses.................................................. 5,983,235 5,895,123
Current portion of long-term debt................................. 177,087 6,699,631
-------------- --------------
Total current liabilities.................................... 22,535,111 29,147,322
Deferred income taxes.................................................. 699,338 1,189,369
Long-term debt, less current portion .................................. 241,120,210 221,728,746
Other long-term obligations............................................ 526,804 526,804
Redeemable preferred stock............................................. 5,405,391 5,145,212
Commitments and contingencies (note 2 and 5)...........................
Stockholders' equity (Deficiency):
Series A common stock, $.01 par value, 1,105 shares authorized,
1,000 shares issued at June 29, 2002 and June 29, 2001....... 10 10
Series B common stock, $.01 par value, 1,000 shares authorized,
1,000 shares issued at June 29, 2002 and June 29, 2001....... 10 10
Additional paid-in capital....................................... 199,980 199,980
Accumulated deficiency........................................... (164,651,069) (162,442,293)
Treasury stock, at cost (152.5 and 100 Series A shares at
June 29, 2002 and June 29, 2001, respectively)............... (11,252) (7,002)
-------------- --------------
Total stockholders' equity (deficiency)...................... (164,462,321) (162,249,295)
-------------- --------------
Total liabilities and stockholders' equity (deficiency) $ 105,824,533 $ 95,488,158
============== ==============
See Notes to Consolidated Financial Statements.
18
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
-------------------------------------------------------
JUNE 29, JUNE 29, JUNE 30,
2002 2001 2000
-------- -------- --------
Net sales.................................................... $ 197,249,505 $ 185,304,630 $ 205,500,222
Cost of sales................................................ 123,622,656 114,578,443 126,173,741
---------------- --------------- --------------
Gross profit....................................... 73,626,849 70,726,187 79,326,481
Operating expenses:
Selling ................................................ 24,582,462 22,303,126 23,293,887
General and administrative.............................. 26,350,017 26,387,951 24,808,927
Restructuring costs..................................... -- 836,291 --
Acquisition of business................................. -- 1,110,331 --
Gain on disposition of business......................... -- (629,787) --
---------------- --------------- --------------
50,932,479 50,007,912 48,102,814
---------------- --------------- --------------
Operating income................................... 22,694,370 20,718,275 31,223,667
Other income (expense):
Interest expense........................................ (24,674,443) (24,655,958) (24,821,625)
Other ................................................ 20,877 414,320 211,279
---------------- --------------- --------------
(24,653,566) (24,241,638) (24,610,346)
---------------- --------------- --------------
Income (loss) before income taxes............................ (1,959,196) (3,523,363) 6,613,321
Income tax (expense) benefit................................. 764,135 1,482,981 (2,614,146)
---------------- --------------- --------------
Net income (loss) before extraordinary item.................. (1,195,061) (2,040,382) 3,999,175
Extraordinary item, net of tax benefit....................... (606,298) -- --
---------------- --------------- --------------
Net income (loss)....................................... (1,801,359) (2,040,382) 3,999,175
Preferred stock dividends.................................... (407,417) (412,299) (421,353)
---------------- --------------- --------------
Net income (loss) attributable to
common shareholders...................................... $ (2,208,776) $ (2,452,681) $ 3,577,822
================ =============== ==============
See notes to consolidated financial statements.
19
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 29, 2002, JUNE 29, 2001, AND JUNE 30, 2000
SERIES A SERIES B ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED TREASURY
STOCK STOCK CAPITAL DEFICIENCY STOCK TOTAL
-------- -------- ---------- ----------- -------- -----
Balance, July 2 1999 $ 10 $ 10 $199,980 $(163,567,434) $ (501) $(163,367,935)
Net income................ 3,999,175 3,999,175
Accrued dividends on
redeemable preferred
stock..................... (421,353) (421,353)
Treasury stock purchase... (1,701) (1,701)
------- -------- -------- -------------- --------- --------------
Balance, June 30, 2000...... 10 10 199,980 (159,989,612) (2,202) (159,791,814)
Net loss.................. (2,040,382) (2,040,382)
Accrued dividends on
redeemable preferred
stock..................... (412,299) (412,299)
Treasury stock purchase... (4,800) (4,800)
------- -------- -------- -------------- ---------- --------------
Balance, June 29, 2001...... 10 10 199,980 (162,442,293) (7,002) (162,249,295)
Net loss.................. (1,801,359) (1,801,359)
Accrued dividends on
redeemable preferred
stock..................... (407,417) (407,417)
Treasury stock purchase... (4,250) (4,250)
------- -------- -------- -------------- ---------- --------------
Balance, June 29, 2002...... $ 10 $ 10 $199,980 $(164,651,069) $ (11,252) $(164,462,321)
======= ======= ======== ============== ========== ==============
See notes to consolidated financial statements.
20
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
------------------------------------------------
JUNE 29, 2002 JUNE 29, 2001 JUNE 30, 2000
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss)........................................................ $ (1,801,359) $ (2,040,382) $ 3,999,175
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation........................................................... 3,094,579 3,045,912 3,235,324
Amortization of deferred financing costs............................... 1,178,892 1,215,214 1,181,977
Amortization of other intangibles...................................... 1,000,000 -- --
Gain on disposition of business........................................ -- (629,787) --
(Gain) loss on sale or disposal of property, plant and equipment....... (1,561) (99,015) 56,545
Deferred income taxes.................................................. (423,716) 156,388 534,079
Accretion of discount on long-term debt................................ 8,901,013 7,968,787 7,134,194
Extraordinary loss on early extinguishment of debt..................... 993,899 -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................................... (9,932,110) 5,109,405 (1,420,388)
Inventories, net....................................................... (7,993,301) 8,498,301 (3,816,043)
Prepaid expenses, other current assets and other assets................ (129,353) (113,918) (76,255)
Income tax receivable.................................................. 1,406,724 (1,998,823) 307,915
Accounts payable, accrued expenses and other long-term obligations..... (3,949) 1,434,463 (3,920,224)
-------------- ------------ ------------
Net cash provided by (used in) operating activities.............. (3,710,242) 22,546,545 7,216,299
-------------- ------------ ------------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment.................. 13,600 202,919 61,489
Purchases of property, plant and equipment............................ (4,203,011) (1,787,532) (1,998,240)
Proceeds from disposition of business................................. -- 2,672,458 --
Acquisition of business............................................... -- (9,500,000) --
-------------- ------------ ------------
Net cash used in investing activities............................ (4,189,411) (8,412,155) (1,936,751)
-------------- ------------ ------------
Cash flows from financing activities:
Net changes to revolving credit agreement borrowings.................. 30,527,000 -- --
Issuance of long-term debt........................................... 300,000 -- --
Payments on long-term debt............................................ (26,859,092) (15,061,032) (14,035,648)
Cash paid for financing costs......................................... (911,973) (189,922) --
Redemption of preferred stock......................................... (799,616) (173,987) (59,703)
Seller financing for acquisition of business.......................... -- 5,158,000 --
Proceeds from sale of stock........................................... 652,378 -- --
Treasury stock purchase............................................... (4,250) (4,800) (1,701)
-------------- ------------ ------------
Net cash provided by (used in) financing activities 2,904,447 (10,271,741) (14,097,052)
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents (4,995,206) 3,862,649 (8,817,504)
Cash and cash equivalents
Beginning of period................................................... 5,323,536 1,460,887 10,278,391
-------------- ------------ ------------
End of period......................................................... $ 328,330 $ 5,323,536 $ 1,460,887
============== ============ ============
Supplemental cash flow information:
Interest paid.................................................... $ 14,004,814 $15,697,623 $16,329,449
============== ============ ============
Income taxes paid (refunded)..................................... $ (2,391,366) $ 359,451 $ 1,530,298
============== ============ ============
Supplemental schedule of non-cash investing and financing activities:
Accrual of preferred stock dividends................................... $ 407,417 $ 412,299 $ 421,353
============== ============ ============
Equipment purchased under capital lease................................ $ -- $ 93,920 $ 468,338
============== ============ ============
See notes to consolidated financial statements.
21
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 29, 2002, JUNE 29, 2001 AND JUNE 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--GFSI Holdings, Inc. ("Holdings" or the "Company")
through its wholly-owned subsidiary, GFSI, Inc. ("GFSI") is a leading designer,
manufacturer and marketer of high quality, custom designed sportswear and
activewear bearing names, logos and insignia of resorts, corporations, colleges
and professional sports organizations. The Company's customer base is spread
throughout the United States.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Holdings and its wholly-owned subsidiary, GFSI. All significant
intercompany accounts and transactions have been eliminated.
FISCAL YEAR--The Company utilizes a 52/53 week fiscal year which ends on
the Saturday nearest June 30. The twelve month periods ended June 29, 2002, June
29, 2001 and June 30, 2000, 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.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE--Accounts receivable consist of amounts due from
customers and business partners. The Company maintains an allowance for doubtful
accounts to reflect expected credit losses and provides for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
Furthermore, these judgments must be continually evaluated and updated. If the
historic data used to evaluate credit risk does not reflect future collections,
or, if the financial condition of the Company's customers were to deteriorate
causing an impairment of their ability to make payments, additional provisions
for bad debts may be required in future periods.
INVENTORIES--Inventories are carried at the lower of cost or market
determined under the First-In, First-Out (FIFO) method. The Company writes down
obsolete and unmarketable inventories to their estimated market value based
upon, among other things, assumptions about future demand and market conditions.
If actual market conditions are less favorable than projected, additional
inventory write-downs may be required. The Company also records changes in
valuation allowances due to changes in its operating strategy, such as the
discontinuances of certain product lines and other merchandising decisions
related to changes in demand. It is possible that further changes in required
inventory allowances may be necessary in the future as a result of market
conditions and competitive pressures. Inventories consist primarily of
non-decorated apparel ("blanks"). Included in inventories are markdown
allowances of $507,000 and $1,174,000 at June 29, 2002 and June 29, 2001
respectively.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are recorded
at cost. Major renewals and betterments that extend the life of the asset are
capitalized; other repairs and maintenance are expensed when incurred.
Depreciation and amortization are provided for on the straight-line method
over the following estimated useful lives:
Buildings and improvements............................ 40 years
Furniture and fixtures................................ 3-10 years
LONG-LIVED ASSETS-- The Company, using its best estimates based on
reasonable and supportable assumptions and projections, reviews for impairment
its long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstance indicate that the carrying amount of
its assets might not be recoverable. The Company has concluded no financial
statement adjustment is required.
DEFERRED FINANCING COSTS--Deferred financing costs are amortized using the
straight-line method over the shorter of the terms of the related loans or the
period such loans are expected to be outstanding. Amortization of deferred
financing costs is included in interest expense.
22
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING COSTS-- All costs related to advertising the Company's products
are expensed in the period incurred. Advertising expenses totaled $1,537,768,
$1,811,190 and $1,676,842 for the years ended June 29, 2002, June 29, 2001 and
June 30, 2000, respectively.
INCOME TAXES-- 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.
USE OF ESTIMATES--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
SEGMENT INFORMATION-- No single customer represents ten percent or more of
consolidated net sales. In addition, substantially all of 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.
NEW ACCOUNTING STANDARDS--The FASB's Emerging Issues Task Force ("EITF")
released its consensus No. 00-22, "Accounting for 'Points' and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to be Delivered in the Future" and consensus No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products". The consensus' concluded that consideration from a vendor to
a reseller of the vendor's products is generally presumed to be an adjustment to
the selling prices of the vendor's products and, therefore, should be classified
as a reduction of revenue.
The Company implemented both of these pronouncements during fiscal 2002,
and as a result, decreased net sales by $.9 million and $1.2 million for fiscal
2001 and 2000, respectively, to reclassify certain customer incentive programs
and volume rebates that had previously been recorded as operating expenses.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets", in fiscal 2002. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001, and contains certain transition
provisions, that apply to purchase method business combinations with an
acquisition date before July 1, 2001. SFAS No. 142 addresses the financial
accounting and reporting for goodwill and other intangible assets acquired in a
business combination after they have been initially recognized in the financial
statements, eliminates amortization of goodwill, and requires that goodwill be
tested for impairment at least annually. The adoption of SFAS No. 141 and SFAS
No. 142 did not have an impact on the Company's consolidated financial
statements.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145 "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". The new standard eliminates the
requirement to classify all gains and losses related to debt extinguishments as
extraordinary items. Any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented that does not
meet the criteria in Accounting Principles Board ("APB") Opinion No. 30 for
classification as an extraordinary item shall be reclassified. Applying the
provisions of APB No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual or infrequent or that
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The Company will adopt
SFAS No. 145 in the first quarter of fiscal 2003, and will reclassify the 2002
extraordinary loss on extinguishment of debt as other income (expense) in
accordance with the transition provisions of SFAS No. 145. It is anticipated
that net income, shareholders equity or cash flows will not be impacted by this
new standard.
RECLASSIFICATIONS-- Certain reclassifications have been made to the fiscal
2001 and 2000 consolidated financial statements to conform to the fiscal 2002
presentation.
23
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RESTRUCTURING, ACQUISITION AND DISPOSITION
During fiscal 2001, the Company recorded $836,291 in severance and employee
termination benefits related to the execution of a restructuring plan that
eliminated approximately 50 positions.
On April 20, 2001, the Company signed a Stock Purchase Agreement to
purchase 100% of the issued and outstanding stock of Champion Products, Inc.
("CPI" or "Champion") through a wholly-owned subsidiary, CC Products, Inc.
("CCP"), and on June 25, 2001 the transaction closed. The Company paid
approximately $9.5 million for the common stock of CPI and a non-competition
agreement which was payable in four installments through October 1, 2001. In
addition, the Company entered into a 15 year License Agreement (the "License
Agreement") with Sara Lee Corporation (the former parent company of CPI) for the
exclusive use of the Champion logo and related trademarks on certain products
sold beginning July 1, 2001. Under the License Agreement, the Company will pay a
royalty to Sara Lee Corporation based upon net sales beginning in fiscal 2004.
The royalty rate ranges from 3% to 6% of net sales from years 3 to 15 of the
License Agreement. The License Agreement provides for guaranteed minimum
royalties of $1 million per year in years 3 and 4 of the License Agreement. CCP
was designated a restricted subsidiary under the Senior Subordinated Notes and
executed a guaranty for that debt instrument in June 2001.
The Company used the purchase method of accounting to record this
transaction as follows:
Inventory $ 7,250,000
Other long-term asset acquired 500,000
Non-competition agreement 2,000,000
Deferred tax liability (195,000)
------------
$ 9,555,000
During fiscal 2002 CCP had sales of $43.4 million and produced an operating
contribution of $7.7 million. CCP had no sales and incurred $1,110,331 of
preparatory and integration costs in fiscal 2001.
Unaudited pro-forma consolidated results of operations for the years ended
June 30, 2000 and June 29, 2001, as if the Company had acquired Champion as of
the beginning of each year, follow. The pro-forma results include estimates and
assumptions which management believes are reasonable and exclude the $1,110,331
of non-recurring preparatory and integration costs incurred in fiscal 2001
related to the acquisition. However, pro-forma results are not necessarily
indicative of the results which would have occurred if the acquisition had
occurred as of the beginning of the periods indicated.
24
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRO-FORMA SUPPLEMENTAL DATA
(UNAUDITED)
YEARS ENDED
-------------------------------
JUNE 29, 2001 JUNE 30, 2000
------------- -------------
Net sales....................................... $226,959,327 $249,589,000
Operating income................................ 24,414,606 32,323,667
Net income (loss)............................... (30,481) 4,505,475
Net income (loss) attributable to common
shareholders............................... (442,780) 4,084,122
On June 29, 2001, the Company sold the assets related to its Tandem
Marketing business for approximately $2.7 million in cash, net of closing costs,
and the buyer's assumption of $1.2 million in Tandem related liabilities. The
Company recognized a $629,787 gain on the sale of Tandem Marketing. Tandem
Marketing had revenues of $11.7 million and $13.5 million for the fiscal years
ended June 29, 2001, and June 30, 2000, respectively. Tandem Marketing had
operating income of $.5 million and $1.9 million for the fiscal years ended June
29, 2001, and June 30, 2000, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
JUNE 29, 2002 JUNE 29, 2001
------------- -------------
Land........................................................... $ 2,455,373 $ 2,455,373
Buildings and Improvements..................................... 21,648,710 21,004,636
Furniture and Fixtures......................................... 19,461,891 18,285,124
------------ -------------
43,565,974 41,745,133
Less: accumulated depreciation................................. 25,928,438 23,202,103
------------ -------------
17,637,536 18,543,030
Construction in progress....................................... 2,033,328 31,443
------------ -------------
$ 19,670,864 $ 18,574,473
============ =============
Assets under capital leases were summarized as follows:
JUNE 29, 2002 JUNE 29, 2001
-------------- -------------
Furniture and fixtures ........................................ $ 571,264 $ 565,777
Less: accumulated amortization................................. 255,426 143,383
------------- -------------
Net assets under capital lease................................. $ 315,838 $ 422,394
============= =============
25
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the minimum lease payments that will be made in each of the
years indicated based on capital and operating leases in effect as of June 29,
2002:
Fiscal Year:
CAPITAL OPERATING
------- ---------
2003........................................ $ 105,069 $ 734,856
2004........................................ 97,765 562,039
2005........................................ 95,527 127,832
2006........................................ 9,846 37,755
2007........................................ -- --
---------- -----------
Total minimum lease payments................ 308,207 $ 1,462,482
===========
Amount representing interest................ (39,881)
----------
Present value of minimum lease payments..... $ 268,326
==========
Rental expense for all operating leases aggregated $726,516, $598,349 and
$659,338 in fiscal years 2002, 2001 and 2000, respectively. It is anticipated
that leases that expire will be renewed or replaced, and future lease
commitments are not expected to aggregate less than the amount shown in fiscal
2003.
4. LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of:
JUNE 29, JUNE 29,
2002 2001
------------- -------------
Senior Subordinated Notes, 9.625% interest rate, due 2007....................... $ 125,000,000 $ 125,000,000
Revolving Bank Credit Agreement, variable interest rate, due 2005............... 30,527,000 --
Term Loan A, variable interest rate, 7.5%
at June 29, 2001, due 2002.................................................. -- 11,053,395
Term Loan B, variable interest rate, 8.0%
at June 29, 2001, due 2004.................................................. -- 15,604,794
Subordinated Discount Notes, 11.375% interest rate, due 2009.................... 84,987,957 76,086,944
Mortgage payable to the City of Bedford, Iowa, 7.60% interest rate.............. 219,293 275,957
Capital lease obligations....................................................... 268,326 407,287
Other........................................................................... 294,721 --
------------- -------------
241,297,297 228,428,377
Less current portion............................................................ 177,087 6,699,631
------------- -------------
$ 241,120,210 $ 221,728,746
============= =============
During the third quarter of fiscal 2002 the Company replaced its existing
bank Credit Agreement by entering into a Revolving Bank Credit Agreement
("RBCA") with a group of financial institutions to provide a revolving line of
credit which matures in January 2005. Proceeds from borrowings under the
replacement RBCA were used to retire the Company's existing bank debt which was
comprised of both term loans and revolving debt. The Company incurred fees and
expenses totaling approximately $906,000 to close the credit facility. The RBCA
provides for borrowings on a revolving basis of up to $65 million at an interest
rate based upon LIBOR or prime. The weighted average interest rate in effect at
June 29, 2002 was 4.7%. In addition, the RBCA provides for the issuance of
letters of credit on behalf of the Company. At June 29, 2002 the Company had
$8.8 million in letters of credit outstanding and $23.2 million in unused
borrowing availability under the RBCA. At June 29, 2001 the Company had $26.7
million in borrowings and $8.2 million in letters of credit outstanding under
the previous bank Credit Agreement.
26
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The RBCA is secured by substantially all of GFSI's assets and is
guaranteed by GFSI's wholly-owned subsidiaries and Holdings. Borrowings under
the RBCA are subject to certain restrictions and covenants. GFSI is limited with
respect to paying dividends and distributions (except certain permitted
distributions to Holdings), the incurrence of certain debt, the incurrence of
certain liens, and restricted regarding certain consolidations, mergers and
business combinations, asset acquisitions and dispositions. The RBCA requires
the Company, among other things, to maintain a minimum fixed charge coverage
ratio as defined in the RBCA. At the most restrictive level, the Company must
maintain a fixed charge coverage ratio of 1.15 to 1.0. As of June 29, 2002, the
Company was in compliance with the restrictions and covenants of the RBCA.
On February 27, 1997, GFSI issued the 9.625% Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes") in the aggregate principal amount of
$125,000,000. Interest on the Senior Subordinated Notes is payable semi-annually
in cash in arrears on September 1 and March 1 each year. The Senior Subordinated
Notes mature on March 1, 2007 and are redeemable, in whole or in part, at the
option of the Company at any time on or after March 1, 2002 at the redemption
prices listed below:
YEAR PERCENTAGE
---- ----------
2002............................................. 104.813%
2003............................................. 103.208
2004............................................. 101.604
2005 and thereafter.............................. 100.000
Upon the occurrence of a change of control, GFSI will be required, subject
to certain conditions, to make an offer to purchase the Senior Subordinated
Notes at a price equal to 101% of the principal amount plus accrued and unpaid
interest to the date of purchase. The Senior Subordinated Notes are publicly
traded over the counter. At June 29, 2002, the quoted market price for the
Senior Subordinated Notes was 85/100. At June 29, 2002, the Senior Subordinated
Notes estimated fair value approximated $106,250,000.
The Senior Subordinated Notes are senior unsecured obligations of GFSI and
pursuant to the terms of the Senior Subordinated Notes indenture, rank pari
passu in right of payment to any future subordinated indebtedness of GFSI, and
effectively rank junior to secured indebtedness of GFSI, including borrowings
under the RBCA. The Senior Subordinated Notes Indenture includes covenants that,
among other things, limit payments of dividends and other restricted payments
and the incurrence of additional indebtedness. As of June 29, 2002, the Company
was in compliance with all such covenants.
The Subordinated Discount Notes were issued in 1997 to repay $25.0 million
of Holdings' Subordinated Notes and $25.0 million of Holdings' Preferred Stock
and accrued dividends. The Subordinated Discount Notes accrue interest at a rate
of 11.375% compounded semi-annually to an aggregate principal amount of $108.5
million at September 15, 2004. Thereafter, the Subordinated Discount Notes
accrue interest at the rate of 11.375% per annum, payable semi-annually, in cash
on March 15 and September 15 of each year, commencing on March 15, 2005.
Holdings will be dependent on GFSI to provide funds to service the indebtedness.
27
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest on the Subordinated Discount Notes is an unsecured obligation of
Holdings and pursuant to the terms of the Subordinated Discount Notes,
effectively rank junior to the unsecured debt of GFSI, including the Senior
Subordinated Notes, and the secured indebtedness of GFSI, including borrowings
under the RBCA. The Subordinated Discount Notes include certain affirmative and
negative covenants. As of June 29, 2002, the Company was in compliance with all
such covenants. The Subordinated Discount Notes are publicly traded over the
counter. At June 29, 2002, the quoted market price for the Subordinated Discount
Notes was 35/100. At June 29, 2002, the Subordinated Discount Notes estimated
fair value approximated $29,746,000.
On June 1, 1998, GFSI purchased a building and land in Bedford, Iowa for
approximately $428,000 in the form of a mortgage note payable at $6,325 per
month from July 1998 through June 2004 with a lump sum payment of $97,600 in
June 2004. The note payable to the City of Bedford, Iowa is secured by the
property mortgaged.
Aggregate maturities of the Holdings' long-term debt as of June 29, 2002
are as follows:
YEAR
----
2003....................................... $ 177,087
2004....................................... 261,528
2005....................................... 30,643,110
2006....................................... 37,663
2007....................................... 125,029,380
Thereafter................................. 85,148,529
------------
Total $241,297,297
============
5. COMMITMENTS AND CONTINGENCIES
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.
Various state and local taxing authorities have examined, or are in the
process of examining the Company's sales and use tax returns. The Company has
reviewed the status and the results of such examinations, including the methods
used by certain state taxing authorities in calculating the sales tax
assessments and believes that it has accrued an amount adequate to cover the
assessments.
6. REDEEMABLE PREFERRED STOCK
The holders of Preferred Stock are entitled to annual dividends of $120 per
share. The dividend has been accrued annually and the annual payment deferred
since 1997. Mandatory redemption of Preferred Stock at $1,000 per share plus
accrued and unpaid dividends is to occur on March 1, 2009.
28
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Redeemable preferred stock consists of the following:
JUNE 29, JUNE 29,
2002 2001
----------- -----------
Series A 12% Cumulative Preferred Stock, $0.1 par value
1,503 and 1,597 shares outstanding at June 29, 2002
and June 29, 2001, respectively.................................. $ 2,479,604 $ 2,437,697
Series B 12% Cumulative Preferred Stock, $0.1 par value,
1,445 shares outstanding at June 29, 2002
and June 29, 2001................................................ 2,383,975 2,206,120
Series C 12% Cumulative Preferred Stock, $0.1 par value,
329 shares outstanding at June 29, 2002
and June 29, 2001. .............................................. 541,812 501,395
----------- -----------
$ 5,405,391 $ 5,145,212
=========== ===========
7. PROFIT SHARING AND 401(K) PLAN
The Company has a defined contribution (401k) plan which includes employee
directed contributions with an annual Company matching contribution of 50% on up
to 4% of a participant's annual compensation. In addition, the Company may make
additional profit sharing contributions at the discretion of the Board of
Directors. Participants exercise control over the assets of their account and
choose from a broad range of investment alternatives. Contributions made by the
Company to the plan related to the 401(k) match and profit sharing portions
totaled $528,313, $616,756 and $716,624 for the years ended June 29, 2002, June
29, 2001 and June 30, 2000, respectively.
8. INCOME TAXES
The provisions for income taxes for the years ended June 29, 2002, June 29,
2001 and June 30, 2000 consist of the following:
JUNE 29, JUNE 29, JUNE 30,
2002 2001 2000
-------------- ------------- ------------
Current income tax provision (benefit)...................... $ (1,115,619) $ (1,639,369) $ 2,080,067
Deferred income tax provision (benefit)..................... (36,116) 156,388 534,079
-------------- ------------- -----------
Total income tax provision (benefit)................... $ (1,151,735) $ (1,482,981) $ 2,614,146
============== ============= ===========
Allocated to:
Operating activities...................................... $ (764,135) $ (1,482,981) $ 2,614,146
Extraordinary loss........................................ (387,600) -- --
-------------- ------------- -----------
Total income tax provision............................... $ (1,151,735) $ (1,482,981) $ 2,614,146
============== ============= ===========
The income tax provisions from operating activities differ from amounts computed
at the statutory federal year ended income tax rate as follows:
JUNE 29, 2002 JUNE 29, 2001 JUNE 30, 2000
-------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
---------- ------- ------------ ------ ---------- -----
Income tax provision (benefit) at the statutory rate... $(685,719) (35.0)% $(1,233,177) (35.0)% $2,248,529 34.0%
Effect of state income taxes, net of federal benefit... (70,696) (3.6) (163,183) (4.6) 342,044 5.2
Other.................................................. (7,720) (.4) (86,621) (2.5) 23,573 .3
---------- ------- ------------ ------- ---------- -----
$(764,135) (39.0)% $(1,482,981) (42.1)% $2,614,146 39.5%
========== ======= ============ ======= ========== =====
29
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The sources of the differences that give rise to the
deferred income tax assets and liabilities as of June 29, 2002 and June 29,
2001, along with the income tax effect of each, were as follows:
JUNE 29, 2002 JUNE 29, 2001
------------- -------------
DEFERRED INCOME TAX DEFERRED INCOME TAX
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
Allowance for doubtful accounts ............................... $ 298,957 $ -- $ 271,825 $ --
Property, plant, and equipment................................. -- 1,037,903 -- 1,031,191
Accrued exp