Back to GetFilings.com
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 JULY 3, 1998
[ ] 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, 1998 was $0.
On September 1, 1998, there were 2,000 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........................................... 8
Item 3 - Legal Proceedings.................................... 8
Item 4 - Submission of Matters to a Vote of Security Holders.. 8
PART II
Item 5 - Market for the Registrant's Common Equity and
Related Stockholder Matters.......................... 8
Item 6 - Selected Financial Data.............................. 8
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
Item 7A - Quantative and Qualitative Disclosures About
Market Risks........................................ 15
Item 8 - Consolidated Financial Statements and Supplementary
Data................................................. 16
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
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. See Note 1 - Recapitalization Transaction, included in the
Holdings Notes to Consolidated Financial Statements, for further information.
The Company is a leading designer, manufacturer and marketer of high
quality, custom designed sportswear and activewear bearing names, logos and
insignia of resorts, corporations, colleges and professional sports leagues and
teams. The Company, which was founded in 1974, custom designs and decorates an
extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven
shirts, sweaters, shorts, headwear and sports luggage. The Company markets its
products to over 25,000 active customer accounts through its well-established
and diversified distribution channels, rather than through the price sensitive
mass merchandise, discount and department store distribution channels.
On January 29, 1998, the Company established a wholly owned
subsidiary, Event 1, Inc. ("Event 1") to provide a retail outlet for the
Company's sportswear and activewear. Event 1 is anticipated to provide
increasing sales for the Company's products at higher margins. Operating
expenses are also anticipated to increase due to site fees and royalties
included in the concessionaire agreement with the National Collegiate Athletic
Association and various other conferences in the NCAA including the Big 10, Big
12 and the Atlantic Coast Conference.
During fiscal 1997, the Company converted its fiscal year to a 52/53
week fiscal year which ends on the Friday nearest June 30. Previously, the
Company's year ended June 30. The twelve month periods ended June 30, 1996 and
June 27, 1997 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 subsidiary because of its ability to quickly
deliver high quality, customized products and provide excellent customer
service. The Company operates state-of-the-art design, embroidery and
screenprint manufacturing and distribution facilities which management believes
have set the standard in the sportswear and activewear industry for product
quality and response time to orders and re-orders. Most orders for new product
designs can be filled in four weeks and re-orders rarely take longer than two
weeks. This allows the Company's retail customers to carry less inventory,
increase merchandise turnover and reduce the risk of obsolete merchandise.
Resort Division. The Resort division is a leading marketer of custom
logoed sportwear and activewear to over 5,000 active customer accounts,
including destination resorts, family entertainment companies, hotel chains,
golf clubs, cruise lines, casinos and United States military bases. The
division's customers include widely recognized names such as The Walt Disney
Company, Universal Studios, The Ritz Carlton, Pebble Beach, Princess Cruise
Lines and The Mirage.
The Resort division, with fiscal 1998 net sales of $66.4 million,
accounted for 31.4% of total net sales. The Resort division's net sales have
decreased from $66.9 million in fiscal 1997 to $66.4 million in fiscal 1998.
The division's net sales have remained relatively constant as a percentage of
total net sales, decreasing slightly from 36.5% in fiscal 1997 to 31.4% in
fiscal 1998.
The Company distributes its Resort division products through its
national sales force of approximately 30 independent sales agents. There are no
contracts with any of the independent sales agents who represent the Company.
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
along with its product innovation and quality and high level of service.
3
Corporate Division. The Corporate division is a leading marketer of
corporate identity sportswear and activewear for use by a diverse group of
corporations in incentive and promotional programs as well as for office casual
wear and uniforms. The division services over 4,300 active customer accounts,
including Toyota, Hershey, Dr. Pepper/7Up, Anheuser-Busch, MCI and Exxon. In
addition, the division includes Tandem Marketing, which develops and administers
corporate fulfillment programs on behalf of its major corporate customers. The
Company's corporate fulfillment programs involve providing its customers with a
complete line of branded merchandise which is marketed to the customer's clients
and employees. For example, Toyota may engage the Company to provide
embroidered leisurewear which is then sold or otherwise provided to Toyota's
customers and prospective customers.
The Corporate division, with fiscal 1998 net sales of $72.9 million,
accounted for 34.5% of total net sales. The Corporate division's net sales have
grown from $56.2 million in fiscal 1997 to $72.9 million in fiscal 1998. The
division's net sales as a percentage of total net sales have increased from
30.6% in fiscal 1997 to $34.5% in fiscal 1998, primarily as a result of the
increased penetration of the corporate identity market and increased sales by
Tandem Marketing.
The Company believes that it has an advantage over its competitors
because it is one of the few brand name suppliers of sportswear and activewear
focused on the corporate market. The Corporate division markets its products to
various segments within the corporate market. Products are sold by the
Company's national sales force of over 40 independent sales agents, directly to
corporate customers in connection with corporate incentive programs, employee
pride and recognition initiatives, corporate meetings and outings, company
retail stores and catalogue programs and dealer incentive programs. There are
no contracts with any of the independent sales agents. In fiscal 1998,
approximately 89% of the division's sales were directly to corporations and the
remaining 11% were to jobbers, who then resold the Company's products to
corporations. Jobbers are people who buy goods in quantity from manufacturers
and sell them directly to dealers.
The Company, through Tandem Marketing, leverages its existing
corporate customer base to market a full line of products, including articles of
merchandise imprinted or otherwise customized with the corporation's name, logo
or message. These products include sportswear and activewear designed and
manufactured by the Company, as well as other premium merchandise such as
glassware and stationary items. Currently, Tandem Marketing has active
catalogue programs with Lexus, Visa, Pirelli Tire, State Farm, Principal
Financial and Shelter Insurance. In fiscal 1998, Tandem Marketing accounted for
approximately $10.1 million, or 13.9%, of the Corporate division's net sales, of
which approximately 57% were derived from products designed and manufactured by
the Company.
College Bookstore Division. The College Bookstore division is a
leading marketer of custom designed, embroidered and silk-screened sportswear
and activewear products to over 2,100 active customer accounts, including nearly
every major college and university in the United States. The division's largest
accounts include each of the major college bookstore lease operators, such as
Barnes & Noble College Bookstores, Inc., as well as high volume, university
managed bookstores, such as the University of Notre Dame, the University of
Southern California, Yale University, the University of Michigan and the United
States Air Force and Naval academies. The National Association of College
Stores has selected the Company as "Vendor of the Year" three times, an honor no
other supplier has won more than once.
The College Bookstore division, with fiscal 1998 net sales of $42.7
million, accounted for 20.2% of total net sales. The College Bookstore
division's net sales have grown from $38.1 million in fiscal 1997 to $42.7
million in fiscal 1998. As the Company has expanded into other markets, the
College Bookstore divisions' net sales as a percent of total net sales has
decreased from 20.8% in fiscal 1997 to 20.2% in fiscal 1998.
Sports Specialty Division. The Sports Specialty division, with fiscal
1998 net sales of $13.1 million, accounted for 6.2% of total net sales.
Established in 1994, the division has entered into licensing agreements to
design, manufacture and market sportswear and activewear bearing the names,
logos and insignia of professional sports leagues
4
and teams as well as major sporting events. The Company's licensors include,
among others, MB, the NBA, the NHL, NASCAR and the Breeder's Cup. The division
targets the upscale adult sports enthusiast through the Company's existing
distribution channels as well as through new channels such as stadium stores and
team retail outlets. The division markets its products to over 700 active
customer accounts, including the Indianapolis Motor Speedway, the Chicago Bulls,
the Cleveland Indians, the Boston Bruins and Madison Square Garden.
Event 1 Subsidiary. The Event 1 subsidiary was established in the
third quarter of fiscal 1998 to provide a retail outlet for the Company's
sportswear and activewear. The subsidiary has agreements with the NCAA and
various other conferences in the NCAA including the Big 10, Big 12 and the
Atlantic Coast Conference to provide concessionaire services at conference
events. The subsidiary had fiscal 1998 net sales of $5.2 million, or 2.5% of
total net sales.
PRODUCTS
The Company's extensive product offerings include: (i) fleecewear;
(ii) outerwear; (iii) polo shirts, woven shirts and sweaters; (iv) T-shirts and
shorts; and (v) other apparel items and accessories. These products are sold in
each of the Company's four markets and are currently offered in over 400
combinations of style and color. While its products are generally characterized
by a low fashion risk, the Company attempts to incorporate the latest trends in
style, color and fabrics with a heavy emphasis on innovative graphics to create
leading-edge fashion looks.
The Company believes that the quality and breadth of its product lines
and its innovative logo designs represent significant competitive advantages in
its markets. In order to further capitalize on these advantages, the Company
intends to continue to expand both the depth and breadth of its product lines.
Currently, the Company has major product introductions in headwear, sports
luggage and Baby GEAR products for infants and toddlers.
The following illustrates the attributes of the Company's current
product lines:
Fleecewear. The Company's fleecewear products represented
approximately 22% of net sales for fiscal 1998. Current styles offered by the
Company include classic crew sweatshirts, cowl neck tops, half-zip pullovers,
hooded tops, vests, Henley and bottoms. Products are constructed of a wide
range of quality fabrics including combed cotton, textured fleece ribbed knit
cotton and inside out fleece. The resulting product line offers customers a
variety of styles ranging from relaxed, functional looks to more sophisticated,
casual looks.
Outwear. The Company's outerwear products represented approximately
31% of net sales for fiscal 1998. These products are designed to offer
consumers contemporary styling, functional features and quality apparel.
Products offerings include a variety of weights and styles, including heavy
nylon parkas, denim jackets, corduroy hooded pullovers, nylon windshirts and
water-resistant poplin jackets. The Company also provides a number of
functional features such as adjustable cuffs, windflaps, vented backs,
drawstring bottoms and heavyweight fleece lining.
Polo Shirts, Woven Shirts and Sweaters. The Company's polo shirt,
woven shirt and sweater products represented approximately 26% of net sales for
fiscal 1998. The Company's product in this category are designed to be suitable
for both leisure and work-related activities with full range of materials and
styles.
T-Shirts and Shorts. The Company's T-shirt and shorts products
represented approximately 13% of net sales for fiscal 1998. The Company's
products are designed to address consumer needs for comfort, fit and function
while providing innovative logo designs. The Company offers a full line of T-
shirts and shorts in a variety of styles, fabrics and colors.
Other. The Company also sells headwear, sports luggage, lines of
women's products and children's products and a number of other miscellaneous
apparel items. In addition, through its Tandem Marketing division, the Company
distributes a full line of corporate fulfillment products. Sales of "Other"
items represented approximately 8 % of net sales for fiscal 1998.
5
DESIGN, MANUFACTURING AND MATERIALS SOURING
The Company operates state-of-the-art design, embroidery and screen
print manufacturing and distribution facilities in Lenexa, Kansas and Bedford,
Iowa.
The Company's design group consists of more than 70 in-house artists
and graphic designers who work closely with each customer to create the product
offering and customization that fulfills the account's needs. The design group
is responsible for presenting new ideas to each account in order to continually
generate new products. This design function is a key element in the Company's
ability to provide value-added services and maintain superior relations with its
customers. Once the design and logo specifications have been determined, the
Company's in-plant manufacturing process begins. This manufacturing process
consists of embroidery and/or screen printing applications to Company-designed
non-decorated apparel ("blanks"). Substantially all of the screen printing and
a significant portion of the embroidery operations are performed by the Company
in its Lenexa, Kansas and Bedford, Iowa facilities. In addition, the Company
outsources embroidery work to Impact Design, Inc. and Kansas Custom Embroidery,
each an affiliate of the Company, as well as to independent contractors, when
necessary. The Company maintains the most updated machinery and equipment
available in order to ensure superior product quality and consistency.
All of the Company's blanks are sourced and manufactured to the
Company's specifications by third party vendors. The Company closely monitors
each of its vendors in order to ensure that its specifications and quality
standards are met. A significant portion 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, Pakistan, Honduras, Israel, Fiji and Mexico. No foreign country has
a manufacturing concentration above 20%. Approximately 11% of its blanks are
contract manufactured in the United States. The Company has long-standing
contractual relationships with most of its eight independent buying agents who
assist the Company in its efforts to control garment quality and delivery. None
of these agents represent the Company on an exclusive basis. The Company has
independent buying agents in each foreign country where it purchases blanks.
COMPETITION
The Company's primary competitors vary within each of its four
distinct markets. In the resort and leisure market, there are few national
competitors and even fewer that operate in all of the varied segments in which
the Company operates. In the corporate identity market, there are several large
manufacturers of corporate identity products. The Company believes it is one of
the few manufacturers and marketers of corporate identity products that
specializes in the activewear product segment. In the college bookstore market,
the top five competitors hold an aggregate market share of approximately 50%,
and the Company believes the market share of each such competitor has remained
relatively constant over the last five years. In the sports specialty market,
the Company competes with a large number of manufacturers of licensed
sportswear. The Company believes, however, that it is one of the few
manufacturers of sports specialty products with a primary focus on the adult
sports enthusiast.
The following table sets forth the Company's primary competitors in
each of its markets:
Market Primary Competitors
- -------------------- -------------------------------------------------------
Resort Highly fragmented - primarily local and regional
competitors
Corporate HA-LO Marketing, Hermann Marketing, Swingster (American
Marketing Industries)
College Bookstore Champion Products, Jansport (VF Corp.), Cotton
Exchange, Russell Athletic, M.V. Sports
Sports Specialty Champion Products, Russell Corporation, Starter
Competition in each of the Company's markets generally is based on product
design and decoration, customer service and overall product quality. The
Company believes that it has been able to compete successfully because of its
ability to create diverse and innovative designs, provide excellent customer
service, leverage its GEAR brand name and differentiate its products on the
basis of quality.
6
EMPLOYEES
The Company employs approximately 750 people at its two facilities in
Lenexa, Kansas, of which approximately 58 are members of management, 354 are
involved in either product design, customer service, sales support or
administration and 338 are involved in manufacturing. The Company employs
approximately 23 people in its Bedford, Iowa facility of which are involved in
embroidery manufacturing. In an effort to adjust employment levels in
accordance with its production schedule and reduce its operating costs, the
Company has instituted a voluntary time off program under which management
occasionally grants a limited number of employees extended time off (typically
four to six weeks). During extended time off periods, employees remain on call
and continue to receive employee benefits such as health insurance, but do not
receive hourly wages. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that the dedication of
its employees is critical to its success, and that its relationship with its
employees are excellent.
TRADEMARKS
The Company markets its products primarily under the GEAR FOR SPORTS(R)
trademarked brand name. In addition, the Company markets its products under,
among others, the Pro GEAR(R), Tandem Marketing(R), Big Cotton(R), and Winning
Ways(R) trademarks. The Company is currently applying for a trademark for its
Baby GEAR brand name. However, there can be no assurance that the Company's
application will be approved. Generally, the Company's trademarks will remain
in effect as long as the trademark is used by the Company and the required
renewals are obtained.
The Company licenses its GEAR FOR SPORTS(R) trademark to Softwear
Athletics, Inc. ("Softwear") to produce and distribute GEAR FOR SPORTS(R) adult
sportswear and activewear, headwear and sports luggage products in Canada in
accordance with a license agreement (the "Softwear License Agreement").
Pursuant to the Softwear License Agreement, Softwear has obtained an exclusive,
non-transferable and non-assignable license to manufacture, advertise and
promote adult apparel, headwear and bags in Canada. The Softwear License
Agreement had an initial term of eighteen months, ending September 30, 1995, but
has been extended by Softwear, at its option, for three successive one year
terms. In consideration for the license grant, Softwear pays the Company an
annual royalty calculated as the greater of: (i) $300,000 or (ii) 10% of Net
Sales (as defined therein) to non-affiliates. Such royalty payments are made to
the Company on a quarterly basis. In addition, for three years after the
termination of the Softwear License Agreement, Softwear will be prohibited from
selling products covered by the Softwear License Agreement or other similar
products to any Softwear customer who was not a Softwear customer prior to the
commencement of the Softwear License Agreement. The Company expects to renew
the license, which is scheduled to expire in fiscal 1999, on terms comparable to
those under the Softwear License Agreement.
LICENSES
The Company markets its products, in part, under licensing agreements,
primarily in its College Bookstore and Sports Specialty divisions. In fiscal
1998, net sales under the Company's 435 active licensing agreements totaled
$37.4 million, or approximately 17% of the Company's net sales. In fiscal 1998,
$27.1 million of College Bookstore division net sales, representing
approximately 63% of the division's net sales and 13% of total net sales, were
recorded under this division's licensing agreements. In addition, in fiscal
1998, $7.7 million of Sports Specialty division net sales, representing
approximately 59% of the division's net sales and 4% of total net sales, were
recorded under licensing agreements. The Company's licensing agreements are
mostly with (i) high volume, university managed bookstores such as the
University of Notre Dame, the University of Southern California and the
University of Michigan, (ii) professional sports leagues such as MLB, the NBA
and the NHL and (iii) major sporting events such as the Ryder Cup and the
Indianapolis 500. Such licensing agreements are generally renewable every one
to three years with the consent of the licensor.
7
ITEM 2 - PROPERTIES
The Company owns each of its three properties: its 250,000 square foot
headquarters and manufacturing facility in Lenexa, Kansas, its 100,000 square
foot manufacturing and distribution facility located approximately two miles
from its headquarters and its 23,000 square foot embroidery facility located in
Bedford, Iowa. Approximately 200,000 square feet of the
headquarter/manufacturing facility and all of the manufacturing/distribution
facility in Lenexa, and the embroidery facility in Bedford are devoted to the
design and manufacture of the Company's products and to customer service.
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 of financial condition, nor to any
other pending legal proceedings other than ordinary, routine litigation
incidental to its business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended July 3, 1998.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The only authorized, issued and outstanding class of capital stock of
Holdings is common stock. There is no established public trading market for
Holdings' common stock.
Holdings has not declared or 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 June 30, 1994,
June 30, 1995, June 30, 1996, June 27, 1997 and July 3, 1998; and (ii) balance
sheet data as of June 30, 1994, June 30, 1995, June 30, 1996, June 27, 1997 and
July 3, 1998. The historical financial statements for the Company for fiscal
1994 and 1995 have been audited by Donnelly Meiners Jordan Kline, and the
historical financial statements for fiscal 1996, 1997 and 1998 have been audited
by Deloitte & Touche 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.
8
Effective February 27, 1997, Winning Ways merged with and into GFSI, a new
entity with no previous operations, with GFSI as the surviving entity. The
statements of income data and other data presented below includes historical
information of Winning Ways through the merger date and the merged entity
Holdings subsequent thereto.
FISCAL YEARS ENDED
----------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 27, JULY 3,
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
STATEMENTS OF INCOME DATA:
Net Sales.......................................... $128,171 $148,196 $169,321 $ 183,298 $ 211,164
Gross profit....................................... 53,724 63,327 72,013 80,691 91,548
Operating expenses................................. 29,151 34,428 39,179 44,752 53,881
-------- -------- -------- --------- ---------
Operating income (1)............................... 24,573 28,899 32,834 35,939 37,667
Income before extraordinary item................... 22,105 26,220 30,226 25,500 8,151
BALANCE SHEET DATA (AS OF PERIOD END):
Cash and cash equivalents.......................... $ 132 $ 112 $ 140 $ 1,117 $ 41,361
Total assets...................................... 70,176 76,938 78,711 96,153 106,532
Long-term debt (including current portion)
and redeemable preferred stock............... 27,242 24,915 22,276 246,080 244,645
Total stockholders' equity (deficit).............. 29,429 32,106 34,479 (174,215) (166,815)
OTHER DATA ( 2):
Cash flows from operating activities.............. 24,431 23,905 34,000 26,029 3,893
Cash flows from investing activities.............. (2,597) (4,255) (2,480) 3,643 (2,648)
Cash flows from financing activities.............. (21,921) (19,699) (31,493) (28,695) (1,001)
EBITDA (3)........................................ 26,876 31,759 36,035 39,114 40,605
Depreciation and amortization..................... 2,303 2,860 3,201 3,175 2,938
Capital expenditures.............................. 2,856 4,989 2,611 2,615 2,972
EBITDA margin (4)................................. 21.0% 21.4% 21.3% 21.3% 19.2%
Ratio of earnings to fixed charges (5)............ 10.0x 11.4x 12.5x 3.5x 1.5x
_______________
(1) Operating income presented for the year ended June 27, 1997 does not
include the extraordinary loss related to the early extinguishment of debt
in the amount of $2,474 ($1,484 on an after-tax basis). Operating income
presented for the year ended July 3, 1998 does not include the
extraordinary loss related to the charge-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). See the audited
consolidated statements of income and the related notes thereto included
elsewhere in this annual report.
(2) Distributions per share totaled $16.91, $16.70, $19.82 and $23.37 for the
years ended June 30, 1993, 1994, 1995 and 1996 respectively. Distributions
per share in prior fiscal years are not comparable nor meaningful due to
the leveraged recapitalization transactions and the conversion to a C-
corporation from S-corporation for income tax reporting purposes which
occurred during fiscal 1997.
(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) In the computation of the ratio of earnings to fixed charges, earnings
consist of income before income taxes, plus fixed charges. Fixed charges
consist of interest expense on indebtedness, the portion of lease rental
expense representative of the interest factor and preferred stock dividends
accrued.
9
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's results of
operations and its liquidity and capital resources should be read in conjunction
with the 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, developments affecting the
Company's products and to those discussed in the Company's filings with the
Securities and Exchange Commission. Accordingly, actual results could differ
materially from those contemplated by the forward-looking statements.
THE FOLLOWING SETS FORTH THE AMOUNT AND PERCENTAGE OF NET SALES FOR
EACH OF THE PERIODS INDICATED (DOLLARS IN THOUSANDS):
FISCAL YEAR ENDED
----------------------------------------
JUNE 30, 1996 JUNE 27, 1997 JULY 3, 1998
------------- ------------- ------------
Resort................ $ 67,739 40.0% $ 66,906 36.5% $ 66,346 31.4%
Corporate............. 47,167 27.9% 56,179 30.6% 72,874 34.5%
College Bookstore..... 37,733 22.3% 38,053 20.8% 42,696 20.2%
Sports Specialty...... 6,342 3.7% 10,678 5.8% 13,083 6.2%
Event 1............... 5,195 2.5%
Other................. 10,340 6.1% 11,482 6.3% 10,970 5.2%
-------- -------- --------
Total................. $169,321 $183,298 $211,164
======== ======== ========
RESULTS OF OPERATIONS
The following table sets forth certain historical financial information of the
Company, expressed as a percentage of net sales, for fiscal 1996, 1997 and 1998:
FISCAL YEAR ENDED
------------------------------------
JUNE 30, JUNE 27, JULY 3,
1996 1997 1998
-------- -------- -------
Net sales................. 100.0% 100.0% 100.0%
Gross profit.............. 42.5 44.0 43.4
EBITDA.................... 21.3 21.3 19.2
Operating income.......... 19.4 19.6 17.8
10
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 JULY 3, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 27, 1997
Net Sales. Net sales for fiscal 1998 increased 15.2% to $211.2 million from
$183.3 million in fiscal 1997. The increase in net sales is primarily
attributable to increases in the Company's Corporate, Sports Specialty and
College Bookstore division sales of 29.7%, 22.5% and 12.2%, respectively, and
the addition of $5.2 million in Event 1 sales, partially offset by a .8%
decrease in net sales at the Resort division. These divisional sales increases
were the result of volume increases due to continued account and product
expansion.
Gross Profit. Gross profit for fiscal 1998 increased 13.5% to $91.5 million
from $80.7 million in fiscal 1997, primarily as a result of the increase in net
sales described above. Gross profit as a percentage of net sales decreased to
43.4% in fiscal 1998 from 44.0% in fiscal 1997. The decrease in gross profit
reflects an increase in the cost of materials sold, as a percentage of sales, to
48.6% in fiscal 1998 from 48.4% in fiscal 1997 and an increase in production
costs, as a percentage of sales to 8.0% in fiscal 1998 from 7.6% in fiscal 1997.
Operating Expenses. Operating expenses for fiscal 1998 increased 20.4% to
$53.9 million from $44.8 million in fiscal 1997 primarily due to increased sales
volume, staffing levels and the site fees and royalties associated with Event 1
activity. Operating expenses as a percentage of net sales increased to 25.5% in
fiscal 1998 from 24.4% in fiscal 1997.
EBITDA. EBITDA for fiscal 1998 increased 3.8% to $40.6 million from $39.2
million in fiscal 1997, primarily as a result of the net sales and related gross
profit increases described above. EBITDA as a percentage of net sales decreased
to 19.2% in fiscal 1998 from 21.3% in fiscal 1997. The decrease in EBITDA as a
percentage of net sales is attributed to the decrease in gross profit as a
percentage of net sales and the increase in operating expenses as a percentage
of net sales in fiscal 1998 described above.
Operating Income. Operating income for fiscal 1998 increased 4.8% to $37.7
million from $35.9 million in fiscal 1997, primarily as a result of the net
sales increase described above. Operating income as a percentage of net sales
decreased to 17.8% in fiscal 1998 from 19.6% in fiscal 1997. The decrease in
operating income as a percentage of net sales reflects the change in EBITDA
described above.
Other Income (Expense). Other expense for fiscal 1998 increased 169.6% to
$24.3 million from $9.0 million primarily as a result of increased interest
expense associated with the Company's recapitalization and subsequent issuance
of $125 million Senior Subordinated Notes, borrowings under the Company's credit
facility and the issuance of the $50 million of Holdings Discount Notes. The
effect of derivative financial instruments protect against unplanned changes in
interest expense due to changes in interest rates. Interest rate fluctuations
and their effect were immaterial for the periods presented. A reasonable likely
change in the underlying rate, price or index would not have a material impact
on the financial position of the Company.
Income Taxes. Income tax expense increased 265.1% to $5.2 million in fiscal
1998 from $1.4 million in fiscal 1997 due to the Company's change in tax status
from an S-Corporation to a C-Corporation for income tax reporting purposes which
was effective February 27, 1997. The Company's effective tax rate for fiscal
1998 was 39.2%.
Net Income. Net income for fiscal 1998 was $7.9 million compared to $22.9
million in fiscal 1997. The decrease in net income is the result of the changes
in operating income, interest expense and income tax expense described above.
FISCAL YEAR ENDED JUNE 27, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Net Sales. Net sales for fiscal 1997 increased 8.3% to $183.3 million from
$169.3 million in fiscal 1996. The increase in net sales primarily reflects
increases in net sales at the Company's Corporate and Sports Specialty divisions
of 19.1%, and 68.4%, respectively, and was partially offset by a slight decrease
in net sales at the Resort division. These increases were driven primarily by
volume increases due to continued account expansion and the introduction of new
product lines through each distribution channel.
11
Gross Profit. Gross profit for fiscal 1997 increased 12.1% to $80.7 million
from $72.0 million in fiscal 1996, primarily as a result of the net sales
increase described above. Gross profit as a percentage of net sales increased to
44.0% in fiscal 1997, from 42.5% in fiscal 1996. The increase in margin reflects
a decrease in the cost of materials sold, as a percentage of net sales, from
50.0% in fiscal 1996 to 48.4% in fiscal 1997. These changes were driven
primarily by growth in the Corporate division, which focuses on higher margin,
production intensive embroidered products.
Operating Expenses. Operating expenses for fiscal 1997 increased 14.3% to
$44.8 million from $39.2 million in fiscal 1996 due primarily to increased sales
and staffing levels. Operating expenses as a percentage of net sales increased
to 24.4% for fiscal 1997, from 23.1% in fiscal 1996. The increase in operating
expenses, as a percentage of net sales, is primarily due to an increase in
non-recurring MIS consulting charges associated with the installation of the
Company's new MIS system which increased from $625,000 in fiscal 1996 to $2.2
million in fiscal 1997.
EBITDA. EBITDA for fiscal 1997 increased 8.6% to $39.1 million from $36.0
million in fiscal 1996, primarily as a result of the net sales and related gross
profit increase described above. EBITDA as a percentage of net sales remained
consistent at 21.3% in fiscal 1997 and 21.3% in fiscal 1996. The consistent
margin level reflects the change in gross profit described above offset by an
increase in selling and general and administrative expenses.
Operating Income. Operating income for fiscal 1997 increased 9.5% to $35.9
million from $32.8 million in fiscal 1996, primarily as a result of the net
sales increase described above. Operating income as a percentage of net sales
increased to 19.6% in fiscal 1997, from 19.4% in fiscal 1996. This increase in
operating income reflects the change in EBITDA described above.
Other Income (Expense). Other expense for fiscal 1997 increased 246.2% to
$9.0 million from $2.6 million in fiscal 1996, primarily as a result of
increased interest expense associated with the Company's recapitalization and
subsequent issuance of $125 million Senior Subordinated Notes, borrowings of
$68.0 million under the Company's credit facility and the issuance of the $25
million of Subordinated Holdings Notes. The effect of derivative financial
instruments protect against unplanned changes in interest expense due to changes
in interest rates. Interest rate fluctuations and their effect were immaterial
for the periods presented. A reasonable likely change in the underlying rate,
price or index would not have a material impact on the financial position of the
Company.
Income Taxes. An income tax provision of $1.4 million was recorded for
fiscal 1997 due to the Company's change in tax status from an S-Corporation to a
C-Corporation for income tax reporting purposes which was effective February 27,
1997. Company earnings subsequent to February 27, 1997 are subject to corporate
income taxes. The effect of the change in income tax reporting status from an
S-Corporation to a C-Corporation was $1.0 million and an additional $400,000 of
the income tax provision was related to operations, subsequent to the change in
tax status.
Extraordinary Item. The Company recognized an extraordinary loss for fiscal
1997 of $2.5 million ($1.5 million on an after-tax basis) which consisted of a
penalty incurred in the prepayment of the Company's mortgage and a write-off of
previously capitalized deferred financing costs.
Net Income. Net income for fiscal 1997 was $24.0 million compared to $30.2
million in fiscal 1996. The decrease in net income is primarily the result of
interest expense, income taxes, and the extraordinary item, as mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in fiscal 1998, 1997 and 1996 was $3.9
million, $26.0 million and $34.0 million, respectively. Decreased earnings in
fiscal 1998 due to a substantial increase in interest expense, coupled with
working capital changes attributed to the decrease in cash provided by
operations from $26.0 million in fiscal 1997 to $3.9 million in fiscal 1998.
Changes in working capital resulted in cash sources (uses) of ($12.4) million,
($3.2) million and $0.9 million in fiscal 1998, 1997 and 1996, respectively.
Cash used in investing activities for fiscal 1998 was $2.6 million compared
to cash provided by of $3.6 million and cash used of $2.5 million for fiscal
1997 and 1996, respectively. Cash provided by investing activities in fiscal
1997 was primarily related to proceeds from surrender or transfer of cash value
of life insurance of $5.3 million.
12
Cash used in financing activities for fiscal 1998 was $1 million compared to
cash used of $28.7 million and $31.5 million for fiscal 1997 and fiscal 1996,
respectively. The cash used in financing activities in 1998 was primarily
attributable to payments on long-term debt partially offset by additional
borrowings under the revolving credit agreement. The cash used in financing
activities for fiscal 1997 resulted from the cash used to complete the
recapitalization transactions as previously described net of new borrowings
under the Credit Agreement, the Senior Subordinated Notes and Holdings Discount
Notes. Cash used in financing activities in fiscal 1996 was primarily used to
make Subchapter S distributions to the Company's stockholders and scheduled loan
principal payments.
The Company believes that cash flow from operating activities and borrowings
under the Credit Agreement will be adequate to meet the Company's short-term and
long-term liquidity requirements prior to the maturity of its credit facilities
in 2007, although no assurance can be given in this regard. Under the Credit
Agreement, the Revolver provides $50 million of revolving credit availability
(of which $5.6 million was borrowed as of July 3, 1998 and approximately $24.9
million was utilized for outstanding commercial and stand-by letters of credit).
GFSI 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 to provide funds to
service the indebtedness represented by $50.0 million of Holdings Discount
Notes. Holdings Discount Notes do not have an annual cash flow requirement until
2005 as they accrued 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 $427,000 annually. Holdings Preferred Stock may be redeemed at
stated value (approximately $3.6 million) plus accrued dividends with mandatory
redemption in 2009.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was issued in June 1997. This Statement established
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement is effective for the Company's fiscal 1999
financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for the Company's fiscal 1999 financial statements.
The Company is in the process of evaluating the impact or applicability of this
new Statement on the presentation of the financial statements and disclosures
therein.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" was issued in February 1998. This statement revises
employers' disclosures about pension and other post-retirement benefit plans,
but does not change the measurement or recognition of such plans. This statement
is effective for the Company's fiscal 1999 financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all quarters of fiscal years beginning after
June 15, 1999. The Company believes that the adoption of SFAS No. 133 will not
have a material effect on its financial position or results of operations.
13
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of internal use computer software at
various stages of development. This SOP is effective for fiscal years beginning
after December 15, 1998. The Company does not expect the implementation of this
SOP to have a material impact on the Company's financial statements.
Year 2000 Compliance
The Company has a program to identify, evaluate and implement changes to
its computer systems as necessary to address the Year 2000 issue. As part of the
program, the Company is currently upgrading its existing management information
system ("MIS") with a new system designed to improve the overall efficiency of
the Company's operations and to enable management to more closely track the
financial performance of each of its sales and operating areas. Based on
management's best estimates, the new MIS will be operational during fiscal year
ending July 2, 1999. The costs associated with the new MIS implementation are
not expected to be material to the Company and are being expensed as incurred.
Any difficulty with the installation, initial operation or untimely resolution
of the new MIS may present an uncertainty that would be reasonably likely to
affect the Company's inventory purchasing control, sales and customer service
which could materially and adversely impact the Company's future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition.
Also as part of the Company's Year 2000 program, the Company has
initiated communications with suppliers with which it interacts to determine
their plans for addressing Year 2000 concerns. Based upon management's best
estimates, all year 2000 issues will be resolved in 1999. However, the Company
cannot make any assurances that its computer systems, or the computer systems of
its suppliers will be Year 2000 ready on schedule, or that management's cost
estimates will be achieved.
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 1998, net sales of the Company
during the first half and second half of the fiscal year were approximately 55%
and 45%, respectively. The seasonality of sales and profitability is primarily
due to higher volume at the College Bookstore division during the first two
fiscal quarters. Sales and profitability at the Company's Resorts, Corporate and
Sports Specialty divisions typically show no significant seasonal variations. As
the Company continues to expand into other markets in its Resorts, Corporate and
Sports Specialty divisions, seasonal fluctuations in sales and profitability are
expected to decline.
The impact of inflation on the Company's operations has not been significant
to date. However, there can be no assurance that a high rate of inflation in the
future would not have an adverse effect on the Company's operating results.
14
Item 7A - Quantitative and Qualitative Disclosures about Market Risks
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. Derivative financial instruments, including an
interest rate swap and an interest rate cap agreement are used by the Company to
manage its exposure on variable rate debt obligations. The Company enters into
such agreements for hedging purposes and not with a view toward speculating in
the underlying instruments. The Company uses a balanced mix of debt maturities
along with both fixed rate and variable rate debt of manage its exposure to
interest rate changes. For additional information on the Company's derivative
financial instruments, refer to notes 10 and 11 to the Consolidated Financial
Statements. The Company's outstanding long-term debt at July 3, 1998 is as
follows:
Principal Notional Receive Maturity
Amount Amount Pay Rate Rate Date Fair Value
------ ------ -------- ---- ---- ----------
Fixed Rate Debt:
Senior Subordinated Notes $ 125,000,000 N/A 9.625% N/A March, 2007 $ 128,750,000
Mortgage Payable 427,694 N/A 7.60% N/A June, 2004 427,694
Subordinated Discount Notes 54,300,683 N/A 11.375% N/A Feb., 2009 54,300,683
Variable Rate Debt/Risk:
Term Loan A $ 35,750,000 N/A 7.688%(1) N/A March, 2002 $35,750,000
Interest Rate Swap Agreement N/A $7,000,000 5.620%(3) 5.77%(4) Nov., 2000 1,700
Interest Rate Cap Agreement N/A 19,000,000 N/A 7.50%(5) March, 1999 Nil
Term Loan B 24,750,000 N/A 8.188%(2) N/A March, 2004 24,750,000
Revolving Credit Agreement 5,600,000 N/A 9.5%(6) N/A Dec., 2002 5,600,000
(1) Rate resets periodically to Eurodollar Rate plus 2.25% subject to a rate
cap of 7.5% on $19,000,000 of the loan. Rate represents rate in effect at
July 3, 1998.
(2) Rate resets periodically to Eurodollar Rate plus 2.75%. Rate represents
rate in effect at July 3, 1998.
(3) Fixed payment rate.
(4) Rate resets periodically to LIBOR. Rate represents rate in effect at
July 3, 1998.
(5) Fixed interest rate cap on notional amount of Term Loan A borrowings.
(6) Rate resets periodically to Eurodollar rate plus 2.25%. Rate represents
rate in effect at July 3, 1998 which was adjusted to the Eurodollar rate
plus 2.25% shortly after year end when the term of the borrrowings was
locked in at three months.
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 revolving credit
agreement, 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.
15
Item 8 - Consolidated Financial Statements and Supplementary Data
Page
Report of Independent Auditors................................................. 17
Consolidated Balance Sheets - June 27, 1997 and July 3, 1998................... 18
Consolidated Statements of Income - Years ended June 30, 1996,
June 27, 1997 and July 3, 1998............................................ 19
Consolidated Statements of Change in Stockholders' Equity
(Deficiency) - Years ended June 30, 1996, June 27, 1997
and July 3, 1998.......................................................... 20
Consolidated Statements of Cash Flows - Years ended June 30, 1996
June 27, 1997 and July 3, 1998............................................ 21
Notes to Consolidated Financial Statements..................................... 22
Schedule I - GFSI Holdings, Inc. and Subsidiary Parent Company
Only Financial Statements................................................. 35
16
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI Holdings, Inc. and subsidiary
Lenexa, Kansas
We have audited the accompanying consolidated balance sheets of GFSI
Holdings, Inc. and subsidiary ("Holdings") as of July 3, 1998 and June 27, 1997,
and the related consolidated statements of income, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended July
3, 1998. These consolidated financial statements are the responsibility of
Holdings' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Holdings as of July 3, 1998 and
June 27, 1997, and the results of their operations and their cash flows for each
of the three years in the period ended July 3, 1998, in conformity with
generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, GFSI,
Inc., a wholly subsidiary of Holdings, completed recapitalization transactions
on February 27, 1997 which included the merger of Winning Ways, Inc. with and
into GFSI, Inc. with GFSI, Inc. as the surviving entity.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
August 21, 1998
17
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 27, July 3,
ASSETS 1997 1998
------ ------
Current assets:
Cash and cash equivalents........................................ $ 1,116,512 $1,360,853
Accounts receivable, net of allowance for doubtful accounts
of $579,093 and $821,429 at June 27, 1997 and July 3, 1998..... 23,705,589 27,663,898
Inventories, net................................................. 37,561,766 44,298,295
Deferred income taxes............................................ 926,606 1,679,601
Prepaid expenses and other current assets........................ 1,286,646 1,483,638
---------- ----------
Total current assets......................................... 64,597,119 76,486,285
Property, plant and equipment, net.................................... 21,547,857 21,242,500
Other assets:
Deferred financing costs, net of accumulated amortization of
$394,264 and $1,562,772 at June 27, 1997 and July 3, 1998...... 10,004,390 8,798,329
Other............................................................. 3,995 4,495
------------ ------------
10,008,385 8,802,824
------------ ------------
Total assets............................................ $ 96,153,361 $106,531,609
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable................................................. $12,199,032 $8,408,498
Accrued interest expense......................................... 4,719,282 4,521,240
Accrued expenses................................................. 5,543,206 8,918,326
Income taxes payable............................................. 200,000 --
Current portion of long-term debt................................ 4,500,000 5,049,890
---------- ----------
Total current liabilities.................................... 27,161,520 26,897,954
Deferred income taxes................................................. 1,176,972 1,234,366
Revolving credit agreement............................................ 3,000,000 5,600,000
Long-term debt........................................................ 210,500,000 235,178,487
Other long-term obligations........................................... 450,000 300,000
Redeemable preferred stock............................................ 28,080,000 4,135,725
Commitments and contingencies (Note 6)
Stockholders' equity (deficiency):
Series A Common Stock, $.01 par value, 1,000 shares
authorized, 1,000 shares issued and outstanding at June 27, 1997
and July 3, 1998.................................................. 10 10
Series B Common Stock, $.01 par value, 1,000 shares
authorized 1,000 shares issued and outstanding at June 27, 1997
and July 3, 1998.................................................. 10 10
Additional paid-in capital........................................ 199,980 199,980
Notes receivable from stockholders................................ (788,500) --
Accumulated deficiency............................................. (173,626,631) (167,014,923)
------------- -------------
Total stockholders' equity (deficiency).................... (174,215,131) (166,814,923)
------------ -------------
Total..................................................... $ 96,153,361 $106,531,609
============ =============
See notes to consolidated financial statements
18
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
--------------------------------------
June 30, June 27, July 3,
1996 1997 1998
------ ------ ------
Net sales......................................... $169,320,620 $183,297,733 $211,164,245
Cost of sales..................................... 97,307,746 102,606,239 119,616,037
------------ ------------ ------------
Gross profit.............................. 72,012,874 80,691,494 91,548,208
Operating expenses:
Selling....................................... 16,963,137 18,432,943 22,987,548
General and administrative.................... 22,216,193 26,319,209 30,893,690
----------- ---------- ----------
39,179,330 44,752,152 53,881,238
----------- ---------- ----------
Operating income.......................... 32,833,544 35,939,342 37,666,970
Other income (expense):
Interest expense.............................. (2,608,154) (9,098,218) (24,203,492)
Other ........................................ 490 99,326 (55,394)
------------ ------------ -------------
(2,607,664) (8,998,892) (24,258,886)
------------ ------------ -------------
Income before income taxes and
extraordinary item.............................. 30,225,880 26,940,450 13,408,084
Provision for income taxes........................ (1,440,000) (5,257,242)
----------- ------------ --------------
Income before extraordinary item.................. 30,225,880 25,500,450 8,150,842
Extraordinary item, net of tax benefit of
$989,634 in 1997 and $135,286 in 1998............. (1,484,451) (202,929)
----------- ------------ --------------
Net income........................................ 30,225,880 24,015,999 7,947,913
Preferred stock dividends......................... (1,080,000) (1,336,205)
----------- ------------ --------------
Net income attributable to
common shareholders........................... $ 30,225,880 $ 22,935,999 $ 6,611,708
============= ============== =============
Supplemental information:
Income before income taxes
and extraordinary item...................... $ 30,225,880 $ 26,940,450
Pro forma income tax
provision................................. 12,393,000 11,045,000
--------------- -------------
Pro forma income before
extraordinary item.............................. $ 17,832,880 $ 15,895,450
============== =============
See notes to consolidated financial statements
19
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 30, 1996, JUNE 27, 1997
AND JULY 3, 1998
GFSI GFSI
Holdings, Holdings, Winning
Inc. Inc. Ways, Retained
Series A Series B Inc. Additional Earnings
Common Common Common Paid-In (Accumulated
Stock Stock Stock Capital Deficiency)
----- ----- ----- ------- -----------
Balance, July 1, 1995 .... $ 149,100 $ 882,746 $ 33,554,728
Reissuance of treasury
stock........... 702,945
Net income............ 30,225,880
Dividends declared.... (28,735,388)
------ ------- -------- ---------- ------------
Balance, June 30, 1996.... 149,100 1,585,691 35,045,220
Reissuance of treasury
stock........... 1,134,396
Net income ........... 24,015,999
Distributions to
Winning Ways, Inc. (47,807,375)
shareholders ...
Distributions and
recapitalization of
Winning Ways, Inc.. (149,100) (2,720,087) (182,327,938)
Issuance of GFSI
Holdings, Inc.
Series A and B
Common Stock (net of
issuance costs of
$1,472,637)..... $ 10 $ 10 199,980 (1,472,537)
Accrued dividends on
redeemable
preferred stock. (1,080,000)
------ ------- ---------- -------- -------------
Balance, June 27, 1997 . 10 10 199,980 (173,626,631)
Redemption of notes
receivable from
stockholders....
Net income ....... 7,947,913
Accrued dividends on
redeemable
preferred stock. (1,336,205)
-------- -------- -------- ------- -------------
Balance, July 3, 1998..... $ 10 $ 10 $ $199,980 $(167,014,923)
======== ======== ======== ======= =============
Notes
Receivable
Treasury from
Stock Stockholders Total
----- ------------ -----
Balance, July 1, 1995 .... $ (2,480,333) $ 32,106,241
Reissuance of treasury
stock........... 179,055 882,000
Net income............ 30,225,880
Dividends declared.... (28,735,388)
---------- ----------- ------------
Balance, June 30, 1996.... (2,301,278) 34,478,733
Reissuance of treasury
stock........... 267,791 1,402,187
Net income ........... 24,015,999
Distributions to
Winning Ways, Inc. (47,807,375)
shareholders ...
Distributions and
recapitalization of
Winning Ways, Inc.. 2,033,487 (183,163,638)
Issuance of GFSI
Holdings, Inc.
Series A and B
Common Stock (net of
issuance costs of
$1,472,637)..... $ (788,500) (2,061,037)
Accrued dividends on
redeemable
preferred stock. (1,080,000)
---------- --------- -------------
Balance, June 27, 1997 . (788,500) (174,215,131)
Redemption of notes
receivable from
stockholders.... 788,500 788,500
Net income ....... 7,947,913
Accrued dividends on
redeemable
preferred stock. (1,336,205)
----------- --------- -------------
Balance, July 3, 1998..... $ __ $ __ $(166,814,923
=========== ========= ==============
See notes to consolidated financial statements.
20
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
----------------------------------------------
June 30, 1996 June 27, 1997 July 3, 1998
------------- ------------- ------------
Cash flows from operating activities:
Net income................................................................. $ 30,225,880 $24,015,999 $7,947,913
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................................... 3,191,595 3,174,863 2,938,400
Amortization of deferred financing costs............................... 9,356 394,264 1,184,613
(Gain) loss on sale or disposal of property, plant and equipment....... 1,009 (11,659) 15,206
Deferred income taxes.................................................. -- 250,366 (695,601)
Amortization of discount on long-term debt............................. -- -- 4,300,683
Increase in cash value of life insurance............................... (331,967) (1,041,343) --
Extraordinary loss..................................................... -- 2,473,192 338,215
Changes in operating assets and liabilities:
Accounts receivable, net............................................... (4,502,972) (1,122,137) (3,958,309)
Inventories, net....................................................... 1,701,718 (9,778,813) (6,736,529)
Prepaid expenses, other current assets and other assets................ 665,925 (481,061) (197,492)
Income taxes payable................................................... 200,000 (200,000)
Accounts payable, accrued expenses and other long-term obligations 3,039,727 7,954,986 (1,043,936)
---------- ---------- ----------
Net cash provided by operating activities.............................. 34,000,271 26,028,657 3,893,163
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment..................... 131,032 948,993 323,375
Proceeds from surrender or transfer of cash value of life insurance -- 5,309,214 --
Purchased of property, plant and equipment............................... (2,611,019) (2,615,228) (2,971,624)
---------- ---------- ----------
Net cash provided by (used in) investing activities.................. (2,479,987) 3,642,979 (2,648,249)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of revolving credit agreement................................... -- 3,000,000 2,600,000
Net changes to short-term borrowings..................................... (1,000,000) (7,000,000) --
Issuance of senior subordinated notes.................................... -- 125,000,000 --
Issuance of subordinated notes........................................... -- 25,000,000 --
Issuance of Credit Agreement............................................ -- 67,000,000 --
Proceeds from long-term debt............................................. -- -- 427,694
Payments on long-term debt............................................... (2,639,378) (24,276,038) (4,500,000)
Cash paid for penalties related to early extinguishment of debt.......... -- (2,390,546) --
Cash paid for financing costs............................................ -- (10,398,654) (316,767)
Distributions to Winning Ways, Inc. shareholders......................... (28,735,388) (47,807,375) --
Distributions and recapitalization of Winning Ways, Inc.................. -- (183,163,638) --
Issuance of GFSI Holdings, Inc. Common Stock ............................ -- (1,272,537) --
Redemption of notes receivable from sale of stock........................ -- -- 788,500
Issuance of redeemable preferred stock................................... -- 26,211,500 --
Proceeds from sales of treasury stock.................................... 882,000 1,402,187 --
----------- ----------- -----------
Net cash used in financing activities........................ (31,492,766) (28,695,101) (1,000,573)
----------- ------------ -----------
Net increase in cash......................................... 27,518 976,535 244,341
Cash and cash equivalents
Beginning of period...................................................... 112,459 139,977 1,116,512
------------- ------------ ------------
End of period............................................................ $ 139,977 $ 1,116,512 $ 1,360,853
============= ============ ============
Supplemental cash flow information:
Interest paid........................................................ $ 2,628,291 $ 4,074,961 $ 18,814,599
============= ============ ============
Income taxes paid........................................... $ -- $ -- $ 6,314,500
============= ============ ============
Supplemental schedule of non-cash financing activities:
Exchange of subordinated notes and preferred stock for discount notes $ 50,000,000
============
Notes receivable from sale of stock....................................... $ 788,500
============
Accrual of preferred stock dividends...................................... $ 1,080,000 $ 1,336,205
============ ============
See notes to consolidated financial statements.
21
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RECAPITALIZATION TRANSACTION
On October 31, 1996, the Board of Directors of Winning Ways, Inc. ("Winning
Ways") executed a letter of intent to enter into a transaction with the Jordan
Company. The transaction included the formation of a holding company, GFSI
Holdings, Inc. ("Holdings") and GFSI, Inc. ("GFSI"), a wholly owned subsidiary
of Holdings (collectively, the "Company"), to effect the acquisition of Winning
Ways. On February 27, 1997, pursuant to the acquisition agreement, 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 the Equity Contribution, as described below.
The aggregate purchase price for Winning Ways was $242.3 million, consisting
of $173.1 million in cash at closing, a post closing payment at April 30, 1997
of $10.0 million and the repayment of $59.2 million of Winning Ways' existing
indebtedness. To finance the Acquisition, including approximately $11.5 million
of related fees and expenses: (i) the Jordan Company, its affiliates and JZEP
PLC (collectively the "Jordan Investors") and certain members of management (the
"Management Investors") invested $52.2 million in Holdings and Holdings
contributed $51.4 million of this amount to GFSI (the "Equity Contribution");
(ii) GFSI entered into a credit agreement (the "Credit Agreement") which
provides for borrowings of up to $115.0 million, of which approximately $68.0
million was outstanding at closing and approximately $22.9 million was utilized
to cover outstanding letters of credit at Closing; and (iii) GFSI issued $125.0
million of Senior Subordinated Notes (the "Senior Subordinated Notes") which
were purchased by institutional investors through a Rule 144A private placement.
The Equity Contribution was comprised of (i) a contribution of $13.6 million
from the Jordan Investors to Holdings in exchange for Holdings Preferred Stock
and approximately 50% of the Common Stock of Holdings; (ii) a contribution of
$13.6 million from the Management Investors to Holdings in exchange for Holdings
Preferred Stock and approximately 50% of the Common Stock of Holdings, and (iii)
a contribution of $25.0 million from a Jordan Investor to Holdings in exchange
for Holdings Subordinated Notes. Approximately $0.8 million of the contribution
from the Management Investors was financed by loans from Holdings.
The transactions described above are reflected in the accompanying
consolidated financial statements of the Company as of and for the year ended
June 27, 1997 as a leveraged recapitalization under which the existing basis of
accounting for Winning Ways was continued for financial accounting and reporting
purposes. The historical financial information presented herein includes the
operations and activities of Winning Ways through February 27, 1997 and the
merged entity, GFSI subsequent thereto as a result of the merger and the
leveraged recapitalization.
The following summarizes the sources and uses of funds by the transactions
described above (in millions):
SOURCES OF FUNDS:
Credit Agreement........................................................... $ 68.0
Senior Subordinated Notes due 2007......................................... 125.0
Equity Contribution from GFSI Holdings, Inc................................ 51.4
Existing cash balances in the business..................................... 9.4
------
Total sources........................................................ $253.8
======
USES OF FUNDS:
Cash purchase price of the Acquisition..................................... $183.1
Repayment of Existing Indebtedness......................................... 59.2
Fees and expenses.......................................................... 11.5
------
Total uses...................................................... $253.8
======
22
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent to the recapitalization transactions described above, GFSI is a
wholly-owned subsidiary of Holdings. Holdings is dependent upon the cash flows
of GFSI to provide funds to service the indebtedness represented by $50.0
million of Holdings Series B Senior Discount Notes due 2009 ("Holdings Discount
Notes"). Holdings Discount Notes do not have an annual cash flow requirement
until 2005. Additionally, Holdings' cumulative non-cash preferred stock
dividends total approximately $427,000 annually.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--Holdings' through its wholly-owned subsidiary,
GFSI, is a leading designer, manufacturer and marketer of high quality, custom
designed sportswear and activewear bearing names, logos and insignia of resorts,
corporations, colleges and professional sports. The Company's customer base is
spread throughout the United States.
Principles of Consolidation--The consolidated financial statements include
the accounts of Holdings and its wholly-owned subsidiary, GFSI. All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year--During 1997, Holdings converted its fiscal year to a 52/53
week fiscal year which ends on the Friday nearest June 30. Previously, Holding's
fiscal year ended June 30. The twelve month periods ended June 30, 1996 and June
27, 1997 each contain 52 weeks and the twelve month period ended July 3, 1998
contains 53 weeks.
Cash and Cash Equivalents--Holdings considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Inventories--Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method. Included in inventories are
markdown allowances of $305,608 and $1,432,775 at June 27, 1997 and July 3,
1998, 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--Impairment losses are recognized when information
indicates the carrying amount of long-lived assets, identifiable intangibles and
goodwill related to those assets will not be recovered through future operations
or disposal based upon a review of expected undiscounted cash flows. The Company
expects the carrying amounts to be fully recoverable.
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.
23
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments--Holdings is a party to an interest rate
swap agreement and an interest rate cap agreement. Income or expense resulting
from interest rate swap agreements used in conjunction with on-balance sheet
liabilities are accounted for on an accrual basis and recorded as an adjustment
to expense on the matched instrument. Interest rate swap agreements that are not
matched with specific liabilities are recorded at fair value, with changes in
the fair value recognized in current operations.
Gains and losses on terminations of interest rate swap and cap agreements
are recognized as other income (expense) when terminated in conjunction with the
retirement of the associated debt. Gains and losses on terminated agreements are
deferred and amortized in those cases where the underlying debt is not retired.
Redesignations which are appropriately matched against underlying debt
instruments will continue to qualify for settlement accounting.
Advertising Costs-- All costs related to advertising Holdings' products are
expensed in the period incurred. Advertising expenses totaled $1,011,784,
$1,383,261 and $1,631,259 for the years ended June 30, 1996, June 27, 1997 and
July 3, 1998, respectively.
Income Taxes-- Effective July 1, 1982, GFSI's predecessor, Winning Ways,
Inc., elected to be taxed under the S-Corporation provisions of the Internal
Revenue Code which provide that, in lieu of corporate income taxes, the
shareholders are taxed on the Company's taxable income. Therefore, no provision
or liability for income taxes is reflected in the accompanying statements
through February 27, 1997. Upon consummation of the recapitalization
transactions (described in Note 1) on February 27, 1997, the Company converted
from S-Corporation to C-Corporation status for income tax reporting purposes. In
conjunction with this change in tax status, the Company began accounting 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 bases of assets and liabilities and their carrying amount for
financial reporting purposes, as measured by the enacted tax rates which will be
in effect when these differences are expected to reverse.
Supplemental information for the years ended June 30, 1996 and June 27, 1997
relative to the statements of income has been provided which reflects a
provision for income taxes assuming a 41% effective income tax rate for the
periods presented.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards--SFAS No. 130, "Reporting Comprehensive Income,"
was issued in June 1997. This Statement established standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. This
Statement is effective for Holding's fiscal 1999 financial statements.
24
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company is in the process of evaluating the impact or applicability of this
new Statement on the presentation of the financial statements and the
disclosures therein. This Statement is effective for Holding's fiscal 1999
financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" was issued in February 1998. This statement revises
employers' disclosures about pension and other post-retirement benefit plans,
but does not change the measurement or recognition of such plans. This Statement
is effective for the Company's fiscal 1999 financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all quarters of fiscal years beginning after
June 15, 1999. The Company believes that the adoption of SFAS No. 133 will not
have a material effect on its financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance on accounting for the costs of internal use computer software at
various stages of development. This SOP is effective for fiscal years beginning
after December 15, 1998. The Company does not expect the implementation of this
SOP to have a material impact on the Company's financial position or results of
operations.
Reclassifications--Certain reclassifications have been made to the 1997
consolidated financial statements to conform to the 1998 presentation.
3. PROPERTY, PLANT AND EQUIPMENT
June 27, 1997 July 3, 1998
------------- ------------
Land....................................................... $ 2,442,373 $ 2,455,373
Buildings and improvements................................. 19,108,548 20,358,360
Furniture and fixtures..................................... 14,150,193 14,615,142
------------- ------------
35,701,114 37,428,875
Less accumulated depreciation.............................. 15,186,104 16,578,089
------------- ------------
20,515,010 20,850,786
Construction in progress................................... 1,032,847 391,714
------------- ------------
$ 21,547,857 $ 21,242,500
============= ============
25
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. REVOLVING CREDIT AGREEMENT
In conjunction with the recapitalization transactions (see Note 1), the
Company obtained a $50,000,000 secured line of credit (the "Line") with floating
interest of 7.938% and 9.5% at June 30, 1997 and July 3, 1998, respectively. The
Line is secured by substantially all of GFSI's the property, plant and equipment
and matures in December of 2002. The Line is subject to certain restrictions and
covenants, among them being the maintenance of certain financial ratios, the
most restrictive of which require GFSI to maintain a fixed charge coverage ratio
greater than 1.01 to 1.0, an interest expense coverage ratio of greater than
1.35 to 1.0 and a maximum leverage ratio of less than 5.95 to 1.0, as defined in
the agreement. GFSI is limited with respect to the making of payments (dividends
and distributions), the incurrence of certain liens, the sale of assets under
certain circumstances, certain transactions with affiliates, certain
consolidations, mergers, and transfers, and the use of loan proceeds. Borrowings
against this Line totaled $3,000,000 and $5,600,000 at June 27, 1997 and July 3,
1998, respectively.
Letters of credit against this Line at June 27, 1997 and July 3, 1998, for
unshipped merchandise aggregated $27,234,109 and $23,744,257, respectively.
Stand-by letters of credit issued against the Line at June 27, 1997 and July 3,
1998, aggregated $2,541,257 and $1,198,107, respectively.
5. LONG-TERM DEBT
Long-term debt consists of:
July 3, June 27,
1998 1997
------- ---------
Senior Subordinated Notes, 9.625% interest rate, due 2007.......................... $125,000,000 $125,000,000
Term Loan A, variable interest rate, 7.938% and 7.688%
at June 27, 1997 and July 3, 1998, respectively, due 2002...................... 40,000,000 35,750,000
Term Loan B, variable interest rate, 8.438% and 8.188%
at June 27, 1997 and July 3, 1998, respectively, due 2004...................... 25,000,000 24,750,000
Subordinated Notes to Affiliate, 12.0% fixed interest rate, due 2008............... 25,000,000 --
Subordinated Discount Notes, 11.375% interest rate, due 2009....................... -- 54,300,683
Mortgage payable to the City of Bedford, Iowa, 7.60% interest rate................. -- 427,694
------------ ------------
215,000,000 240,228,377
Less current portion............................................................... 4,500,000 5,049,890
------------ ------------
$210,500,000 $235,178,487
============ ============
On February 27, 1997, the Company entered into a Credit Agreement with a
group of financial institutions to provide for three credit facilities: (i) a
term loan of $40,000,000 ("Term Loan A"), (ii) a term loan of $25,000,000 ("Term
Loan B" and collectively, with Term Loan A, the "Term Loans") and (iii) a
$50,000,000 secured line of credit (see Note 4). At closing of the
recapitalization transaction, $68,000,000 was borrowed under the Credit
Agreement, including all of the Term Loans, to finance the transactions
described in Note 1 to the financial statements.
The Credit Agreement is secured by substantially all of the property, plant
and equipment of Holding's wholly-owned subsidiary, GFSI, and is subject to
general and financial covenants that place certain restrictions on GFSI. GFSI is
limited with respect to the making of payments (dividends and distributions) to
Holdings; the incurrence of certain liens; the sale of assets under certain
circumstances; certain transactions with affiliates; certain consolidations,
mergers, and transfers; and the use of loan proceeds.
26
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 10 to the consolidated financial statements, the
floating interest rate on a Winning Ways line of credit agreement was partially
converted to a fixed interest rate of 5.62% by a $7,000,000 notional amount
interest rate swap agreement terminating on November 18, 2000. This interest
rate swap agreement was not terminated at February 27, 1997 in conjunction with
the early extinguishment of the debt. Such interest rate swap has been
redesignated to the new Term Loan A debt agreement. As also discussed in Note 10
to the consolidated financial statements, a portion of the floating interest
rate on the Term Loans has been capped at 7.50% by a $19,000,000 notional amount
interest rate cap agreement maturing in March of 1999.
On February 27, 1997, GFSI issued the 9.625% Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes") in the aggregate principal amount of
$125,000,000 in a Rule 144A private placement. Proceeds from the Senior
Subordinated Notes were also used to finance the transactions described in Note
1 to the consolidated financial statements. GFSI's Registration Statement on
Form S-4 was declared effective on July 24, 1997, providing for the exchange of
the Senior Subordinated Notes registered under the Securities Act of 1933, for
the Regulation 144A privately placed Senior Subordinated Notes.
Interest on the Senior Subordinated Notes is payable semi-annually in cash
in arrears on September 1 and March 1, commencing September 1, 1997. The Senior
Subordinated Notes mature on March 1, 2007 and are redeemable, in whole or in
part, at the option of 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
At any time prior to March 1, 2000, GFSI may redeem up to 40% of the
original aggregate principal amount of the Senior Subordinated Notes with the
net proceeds of one or more equity offerings at a redemption price equal to 110%
of the principal amount plus any accrued and unpaid interest to the date of
redemption. Upon the occurrence of a change of control, GFSI will be required,
subject to certain conditions, to make an offer to purchase the Senior
Subordinated Notes at a price equal to 101% of the principal amount plus accrued
and unpaid interest to the date of purchase.
The Senior Subordinated Notes are senior unsecured obligations of GFSI
and pursuant to the terms of the Senior Subordinated Notes indenture, rank pari
passu in right of payment to any future subordinated indebtedness of the
Company, and effectively rank junior to secured indebtedness of GFSI, including
borrowings under the Credit Agreement.
The Senior Subordinated Notes Indenture includes covenants that, among
other things, limit payments of dividends and other restricted payments and the
incurrence of additional indebtedness. As of July 3, 1998, the Company was in
compliance with all such covenants.
On February 27, 1997, Holdings issued the 12% Subordinated Notes due
2009 (the "Subordinated Notes") in the aggregate principal amount of $25.0
million to an affiliate of the Jordan Company. Proceeds from the Subordinated
Notes were also used to finance the transactions described in Note 1 to the
financial statements. On September 17, 1997, certain holders of Holdings'
Subordinated Notes and Holdings' Preferred Stock sold $50.0 million of units
(the "Units") which were purchased by institutional investors through a Rule
144A private placement (the "Offering"). The Units consisted of 11.375%
Subordinated Discount Notes (the "Subordinated Discount Notes") due 2009 and
11.375% Series D Preferred Stock due 2009 ("Preferred Stock") which were
exchangeable at the option of Holdings any time on or after September 29, 1997
into a like amount of 11.375% Series A Senior Discount Notes due 2009 (the "Old
Notes"). On October 23, 1997, the Units were exchanged for the Old Notes (the
"Old Exchange"). Holdings did not receive any proceeds from either the sale of
the Units or the Old Exchange. Holdings' Registration Statement on Form S-4 was
declared effective on December 30, 1997, providing for the exchange (the "New
Exchange") of 11.375% Series B Senior Discount Notes due 2009 (the "Holdings
Discount Notes") registered under the Securities Act, for a like amount of the
Old Notes. Holdings did not receive any proceeds from the New Exchange. The
Discount Notes were issued to repay $25.0 million of Holdings' Subordinated
Notes and $25.0 million of Holdings' Preferred Stock and accrued dividends. The
Discount Notes will accrue at a rate of 11.375% 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. Holdings will be dependent on GFSI to provide
funds to service the indebtedness.
27
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest on the Discount Notes is an unsecured obligation of Holdings
and pursuant to the terms of the Discount Notes, effectively ranked junior to
the other unsecured debt of GFSI, including the Senior Subordinated Notes, and
the secured indebtedness of GFSI, including borrowings under the Credit
Agreement.
The Discount Notes include certain affirmative and negative covenants.
As of July 3, 1998, the Company was in compliance with all such covenants.
On June 1, 1998, GFSI purchased a building and land in Bedford, Iowa
for approximately $428,000 in the form of a mortgage note payable 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. GFSI began utilizing the building for embroidery production
in fiscal year 1999.
Aggregate maturities of the Holdings' long-term debt as of July 3,
1998 are as follows assuming a 52/53 week fiscal year:
Fiscal year,
1999.................................. $5,049,890
2000.................................. 6,553,816
2001.................................. 8,058,052
2002.................................. 10,062,621
2003.................................. 14,567,549
Thereafter............................ 195,936,449
-----------
Total................................. $240,228,377
============
In connection with the early extinguishment of debt existing at February
27, 1997, the Company recognized an extraordinary loss in the consolidated
statement of income for the fiscal year ended June 27, 1997 of $2,474,085
($1,484,451 on an after-tax basis). This loss consisted of a $83,538 ($50,123 on
an after-tax basis) of deferred financing costs related to the repayment of the
Company's debt and a prepayment penalty of $2,390,546 ($1,434,328 on an
after-tax basis) incurred in connection with the prepayment of GFSI's then
existing first mortgage loan.
In connection with the issuance and exchange of the Subordinated Notes for
the 11.375% Series A Senior Discount Notes, the Company recognized an
extraordinary loss in the consolidated statement of income for the year ended
July 3, 1998 of $338,215 ($202,929 on an after-tax basis) representing the
write-off of deferred financing costs.
6. 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 is
currently reviewing 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.
28
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. REDEEMABLE PREFERRED STOCK
In connection with the recapitalization transactions described in Note 1 to
the financial statements, the Company issued 27,000 shares of Cumulative
Preferred Stock, 13,500 shares as Series A 12% Cumulative Preferred Stock,
11,000 shares as Series B 12% Cumulative Preferred Stock, and 2,500 shares as
Series C 12% Cumulative Preferred Stock (which along with the Series A and
Series B Preferred Stock shall be collectively referred to as the "Preferred
Stock"). The holders of Preferred Stock are entitled to annual cash dividends of