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 2, 1999
[ ] 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, 1999 was $0.
On September 1, 1999, there were 1,992.5 shares of the Registrant's common
stock, $.01 par value per share, issued and outstanding.
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TABLE OF CONTENTS
PART I
Page
----
Item 1 - Business.......................................................... 3
Item 2 - Properties........................................................ 9
Item 3 - Legal Proceedings................................................. 9
Item 4 - Submission of Matters to a Vote of Security Holders............... 9
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................... 10
Item 6 - Selected Financial Data........................................... 10
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 12
Item 7A - Quantative and Qualitative Disclosures About Market Risks........ 17
Item 8 - Consolidated Financial Statements and Supplementary Data.......... 18
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 41
PART III
Item 10 - Directors and Executive Officers................................. 41
Item 11 - Executive Compensation........................................... 44
Item 12 - Security Ownership of Certain Beneficial Owners and Management.... 45
Item 13 - Certain Relationships and Related Transactions................... 46
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................... 47
Signatures....................................................... 49
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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 provides increasing sales for the Company's
products at higher margins with increased operating expenses 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, June
27, 1997 and July 2, 1999 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 6,300 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.
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The Resort division, with fiscal 1999 net sales of $61.3 million,
accounted for 30.1% of total net sales. The Resort division's net sales have
decreased from $66.4 million in fiscal 1998 to $61.3 million in fiscal 1999. The
division's net sales have remained relatively constant as a percentage of total
net sales, decreasing from 31.4% in fiscal 1998 to 30.1% in fiscal 1999.
The Company distributes its Resort division products through its
national sales force of approximately 60 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.
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 5,700 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 1999 net sales of $72.6 million,
accounted for 35.6% of total net sales. The Corporate division's net sales have
decreased slightly from $72.9 million in fiscal 1998 to $72.6 million in fiscal
1999. The division's net sales as a percentage of total net sales have increased
from 34.5% in fiscal 1998 to 35.6% in fiscal 1999.
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 areas 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.
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, Bell South Corporation, Michelin North America, Inc., State
Farm, and Shelter Insurance. In fiscal 1999, Tandem Marketing accounted for
approximately $11.6 million, or 16.0%, of the Corporate division's net sales, of
which approximately 65% were derived from products designed and manufactured by
the Company.
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College Bookstore Division. The College Bookstore division is a leading
marketer of custom designed, embroidered and silk-screened sportswear and
activewear products to over 2,300 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., Follett College Stores and Nebraska
Book Company as well as high volume, university managed bookstores, such as the
University of Southern California, the University of Connecticut, Brigham Young
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 1999 net sales of $41.6
million, accounted for 20.4% of total net sales. The College Bookstore
division's net sales have decreased slightly from $42.7 million in fiscal 1998
to $41.6 million in fiscal 1999. The College Bookstore division's net sales as a
percent of total net sales has increased slightly from 20.2% in fiscal 1998 to
20.4% in fiscal 1999.
Sports Specialty Division. The Sports Specialty division had fiscal
1999 sales of $12.0 million, representing 5.9% of total net sales. The Sports
Specialty division's net sales have decreased from $13.1 million in fiscal 1998
to $12.0 million in fiscal 1999. The division's net sales as a percentage of
total net sales have decreased from 6.2% in fiscal 1998 to 5.9% in fiscal 1999.
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 and teams as well as major
sporting events. The Company's licensors include, among others, the NBA, the
NHL, NASCAR and Minor League Baseball. 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 900 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 1999 net sales of $10.6 million, or 5.2% of total net
sales. The Event 1 subsidiary sales have grown from $8.6 million in fiscal 1998
to $10.6 million in fiscal 1999. The subsidiary's net sales as a percentage of
total net sales have increased from 4.1% in fiscal 1998 to 5.2% in fiscal 1999.
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 and sports
luggage.
5
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The following illustrates the attributes of the Company's current
product lines:
Fleecewear. The Company's fleecewear products represented approximately
21% of net sales for fiscal 1999. Current styles offered by the Company include
classic crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops,
vests, henleys 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.
Outerwear. The Company's outerwear products represented approximately
31% of net sales for fiscal 1999. 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 23% of net sales for fiscal
1999. The Company's products 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 14% of net sales for fiscal 1999. 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 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
11% of net sales for fiscal 1999.
Design, Manufacturing and Materials Sourcing
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, Guatemala, 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.
6
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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, PUMA/Logo 7
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 For Sports(R) brand name and differentiate its
products on the basis of quality.
Employees
The Company employs approximately 787 people at its two facilities in
Lenexa, Kansas, of which approximately 77 are members of management, 312 are
involved in either product design, customer service, sales support or
administration and 398 are involved in manufacturing. The Company employs
approximately 79 people in its Bedford, Iowa facility all 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 relations with its employees are
excellent.
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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 2000, on terms comparable to
those under the Softwear License Agreement.
In fiscal year 1999, the Company entered into licensing agreements with
Bonmax Co., Ltd. (the "Bonmax License Agreement") and with GEAR For Sports, Ltd.
(the "GEAR Ltd. License Agreement") to produce and distribute GEAR For Sports(R)
sportswear in Japan and the 13 country European Union, respectively. Pursuant to
both of these agreements, Bonmax Co., Ltd. and Gear For Sports, Ltd. have
obtained exclusive, non-transferable and non-assignable licenses to manufacture,
advertise and promote adult apparel, headwear and bags in Japan and the European
Union, respectively. For three years after the termination of the licensing
agreements, Bonmax Co., Ltd. and Gear For Sports, Ltd. are prohibited from
selling products covered by the agreements or other similar products to any
customer who was not a customer prior to the commencement of the licensing
agreements. The Bonmax License Agreement has an initial term of one year, but
can be extended by Bonmax Co., Ltd. for two successive one year terms. In
consideration for the license grant, Bonmax Co., Ltd. agrees to pay the Company
an annual royalty calculated in the first year of the term as the greater of:
(i) $250,000 or (ii) 12.5% of Net Sales (as defined therein) to non-affiliates.
The minimum royalty payments to the Company in the second and third year of the
agreement, if extended, are $312,500 and $375,000, respectively. Such royalty
payments are due to the Company on a quarterly basis. The Company expects to
renew the Bonmax License Agreement, which is scheduled to expire March 31, 2000.
The Gear Ltd. License Agreement has an initial term of two years, but can be
extended by Gear For Sports, Ltd. for one additional four year term. In
consideration for the license grant, Gear For Sports, Ltd. agrees to pay the
Company an annual royalty calculated as the greater of (i) 62,500 pounds
sterling and 187,500 pounds sterling in the license periods ending December 1999
and December 2000, respectively, or (ii) 12.5% of Net Sales (as defined therein)
to non-affiliates. Such payments are due to the Company on a quarterly basis.
8
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Licenses
The Company markets its products, in part, under licensing agreements,
primarily in its College Bookstore and Sports Specialty divisions. In fiscal
1999, net sales under the Company's 450 active licensing agreements totaled
$40.8 million, or approximately 20.0% of the Company's net sales. In fiscal
1999, $25.3 million of College Bookstore division net sales, representing
approximately 60.7% of the division's net sales and 12.4% of total net sales,
were recorded under this division's licensing agreements. In addition, in fiscal
1999, $10.3 million of Sports Specialty division net sales, representing
approximately 85.7% of the division's net sales and 5.0% 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.
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 2, 1999.
9
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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, 1995,
June 30, 1996, June 27, 1997, July 3, 1998 and July 2, 1999; and (ii) balance
sheet data as of June 30, 1995, June 30, 1996, June 27, 1997, July 3, 1998 and
July 2, 1999. The historical financial statements for the Company for fiscal
1995 have been audited by Donnelly Meiners Jordan Kline, and the historical
financial statements for fiscal 1996, 1997, 1998 and 1999 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.
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.
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<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------
(Dollars in thousands, except per share amounts)
June 30, June 30, June 27, July 3, July 2,
1995 1996 1997 1998 1999
------ ------ ------ ----- ----
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Net sales $ 148,196 $ 169,321 $ 183,298 $ 211,164 $203,900
Gross profit 63,327 72,013 80,691 91,548 89,040
Operating expenses 34,428 39,179 44,752 53,881 58,229
--------- --------- --------- -------- --------
Operating income (1) 28,899 32,834 35,939 37,667 30,811
Income before extraordinary item 26,220 30,226 25,500 8,151 3,873
Balance Sheet Data (as of period end):
Cash and cash equivalents $ 112 $ 140 $ 1,117 $ 41,361 $ 10,278
Total assets 76,938 78,711 96,153 106,532 105,680
Long-term debt (including current portion)
and redeemable preferred stock 24,915 22,276 246,080 250,245 246,407
Total stockholders' equity (deficiency) 32,106 34,479 (174,215) (166,815) (163,368)
Other Data ( 2):
Cash flows from operating activities 23,905 34,000 26,029 3,893 21,039
Cash flows from investing activities (4,255) (2,480) 3,643 (2,648) (2,041)
Cash flows from financing activities (19,699) (31,493) (28,695) (1,001) (10,080)
EBITDA (3) 31,759 36,035 39,114 40,605 33,894
Depreciation 2,860 3,201 3,175 2,938 3,083
Capital expenditures 4,989 2,611 2,615 2,972 2,291
EBITDA margin (4) 21.4% 21.3% 21.3% 19.2% 16.6%
Ratio of earnings to fixed charges (5) 11.4x 12.5x 3.5x 1.5x 1.2x
</TABLE>
- ---------------
(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 $19.82 and $23.37 for the years ended June
30, 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.
11
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's results of
operations and its liquidity and capital resources should be read in conjunction
with the consolidated financial statements and the related notes thereto
appearing elsewhere in this annual report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results
of operations and other sections of this annual report contain forward-looking
statements relating to future results of the Company. Such forward-looking
statements are identified by use of forward-looking words such as "anticipates",
"believes", "plans", "estimates", "expects", and "intends" or words or phrases
of similar expression. These forward-looking statements are subject to various
assumptions, risks and uncertainties, including but not limited to, changes in
political and economic conditions, demand for the Company's products, acceptance
of new products, 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):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------
June 27, 1997 July 3, 1998 July 2, 1999
-------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Resort $ 66,906 36.5% $ 66,346 31.4% $ 61,335 30.1%
Corporate . 56,179 30.6% 72,874 34.5% 72,634 35.6%
College Bookstore 38,053 20.8% 42,696 20.2% 41,645 20.4%
Sports Specialty 10,678 5.8% 13,083 6.2% 12,023 5.9%
Event 1 8,595 4.1% 10,571 5.2%
Other 11,482 6.3% 7,570 3.6% 5,692 2.8%
--------- --------- ---------
Total $ 183,298 $ 211,164 $ 203,900
========= ========= =========
</TABLE>
Results of Operations
The following table sets forth certain historical financial information
of the Company, expressed as a percentage of net sales, for fiscal 1997, 1998
and 1999:
Fiscal Year Ended
------------------------------------
June 27, July 3, July 2,
1997 1998 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross profit 44.0 43.4 43.7
EBITDA 21.3 19.2 16.6
Operating income 19.6 17.8 15.1
12
<PAGE>
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 2, 1999 compared to fiscal year ended July 3, 1998
Net Sales. Net sales for fiscal 1999 decreased 3.4% to $203.9 million
from $211.2 million in fiscal 1998. The decrease in net sales is primarily
attributable to decreases in the Company's Resort, College Bookstore and Sports
Specialty divisions of 7.6%, 2.5% and 8.1%, respectively. Management believes
that the decreases in net sales at the Resort, College Bookstore and Sports
Specialty divisions are primarily due to unseasonably warm fall and winter
temperatures in most of the country. These decreases in net sales were partially
offset by an increase in net sales in the Company's Event 1 subsidiary of 23.0%
for the year ended July 2, 1999.
Gross Profit. Gross profit for fiscal 1999 decreased 2.7% to $89.0
million from $91.5 million in fiscal 1998, due to the decreases in net sales
noted above. Gross profit as a percentage of net sales increased to 43.7% in
fiscal 1999 from 43.4% in fiscal 1998. The increase in gross profit as a
percentage of sales reflects a decrease in the cost of materials sold, as a
percentage of sales, to 47.0% in fiscal 1999 from 48.7% in fiscal 1998,
partially offset by an increase in production costs, as a percentage of sales to
9.4% in fiscal 1999 from 8.0% in fiscal 1998.
Operating Expenses. Operating expenses for fiscal 1999 increased 8.1%
to $58.2 million from $53.9 million in fiscal 1998 primarily due to increased
staffing levels and licensing and site fees associated with Event 1. Operating
expenses as a percentage of net sales increased to 28.5% in fiscal 1999 from
25.5% in fiscal 1998.
EBITDA. EBITDA for fiscal 1999 decreased 16.5% to $33.9 million from
$40.6 million in fiscal 1998 primarily as a result of the net sales and related
gross profit decreases and operating expense increases noted above. EBITDA as a
percentage of net sales decreased to 16.6% in fiscal 1999 from 19.2% in fiscal
1998.
Operating Income. Operating income for fiscal 1999 decreased 18.2% to
$30.8 million from $37.7 million in fiscal 1998 as a result of the net sales and
related gross profit decreases and operating expense increases noted above.
Operating income as a percentage of net sales decreased to 15.1% in fiscal 1999
from 17.8% in fiscal 1998.
Other Income (Expense). Other expense increased 2.1% in fiscal 1999 to
$24.8 million from $24.3 million in fiscal 1998 due to the increase in interest
expense on the $50 million Holdings Discount Notes which was partially offset by
decreases in GFSI interest expense due to the reduced revolver and term loan
balances. 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 decreased 58.8% to $2.2 million in
fiscal 1999 from $5.2 million in 1998 due primarily to the decrease in pretax
income. The Company's effective tax rate for fiscal 1999 and 1998 was 35.8% and
39.2%, respectively.
Net Income. Net income for fiscal 1999 was $3.9 million compared to
$7.9 million in fiscal 1998. The decrease in net income is the result of the
changes in operating income, interest expense and income tax expense described
above.
13
<PAGE>
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.
14
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities in fiscal 1999, 1998 and 1997 was
$21.0 million, $3.9 million and $26.0 million, respectively. Declining inventory
levels and small growth in accounts receivable contributed to the increase in
cash provided by operating activities in fiscal 1999 as compared to fiscal 1998.
Changes in working capital resulted in cash sources (uses) of $6.7 million,
($12.4) million and ($3.2) million in fiscal 1999, 1998 and 1997, respectively.
Cash used in investing activities for fiscal 1999 was $2.0 million
compared to $2.6 million and cash provided of $3.6 million for fiscal 1998 and
1997, 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, while 1998 and 1999 cash flows primarily represented
capital expenditures for plant and equipment.
Cash used in financing activities for fiscal 1999 was $10.1 million
compared to $1 million and $28.7 million for fiscal 1998 and fiscal 1997,
respectively. The cash used in financing activities in 1999 was primarily
attributable to long-term debt repayments and net payments under the Revolving
Credit Agreement. 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 borrowing under
the Credit Agreement, the Senior Subordinated Notes and Holdings Discount Notes.
The Company believes that cash flows 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 Agreement in 2002 and the Senior Subordinated Notes 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 and
approximately $19.6 million was utilized for outstanding commercial and stand-by
letters of credit as of July 2, 1999).
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 accrue interest at 11.375% per annum, compounded semi-annually to
an aggregate principal amount of $108.5 million at September 15, 2004.
Thereafter, the Holdings Discount Notes will accrue interest at the rate of
11.375% per annum, payable semi-annually, in cash on March 15 and September 15
of each year, commencing on March 15, 2005. Additionally, Holdings' cumulative
non-cash preferred stock ("Holdings Preferred Stock") dividends total
approximately $425,000 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. 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, 2000. The
Company is in the process of determining what impact the adoption of SFAS No.
133 will have on its financial position and 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.
15
<PAGE>
Year 2000 Compliance
The Company continues to assess the impact that the year 2000 will have
on its internal computer systems, facilities and production equipment, critical
business partners and business- critical third parties.
The Company has a program to identify, evaluate and implement changes
to all of its internal computer systems as necessary to address the Year 2000
issue. As part of the program, in fiscal year 1999, the Company upgraded and
implemented its management information system ("MIS") with a new system,
including Year 2000 functionality, 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. It is not
practical to segregate the cost of the Year 2000 functionality from the cost of
the upgrade and implementation of the MIS.
All of the Company's production and operations departments have
completed their inventory, assessment and remediation efforts in regard to all
non-information technology systems which include hardware, software and
associated embedded computer technologies that are used to operate the Company
facilities and equipment.
The Company has identified, prioritized and is continuing to
communicate with all critical business partners, including all third-party
suppliers of goods and services, to ascertain the status of their Year 2000
compliance programs. The Company intends to monitor the progress of these
critical third parties. Management believes that all third party supplier year
2000 issues will be resolved in 1999.
The Company does not anticipate that the Year 2000 issues related to
internally-controllable systems will significantly impact the overall business
operations or financial results of the Company. However, the Company could face
significant disruptions in business operations and financial losses if certain
business-critical, third parties, such as utility providers, telecommunication
systems, transportation service providers or certain government entities, do not
successfully complete their Year 2000 remediation plans. The Company is
currently in the process of identifying and developing contingency plans for the
most reasonable likely worst case scenarios. The Company expects to complete its
analysis and contingency planning by December 1999.
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 1999, net sales of the Company
during the first half and second half of the fiscal year were approximately 57%
and 43%, 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 Resort, Corporate and
Sports Specialty divisions typically show no significant seasonal variations. As
the Company continues to expand into other markets in its Resort, 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.
16
<PAGE>
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 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 2, 1999 is as follows:
<TABLE>
<CAPTION>
Principal Notional Receive Maturity
Amount Amount Pay Rate Rate Date Fair Value
--------- -------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt:
Senior Subordinated Notes $ 125,000,000 N/A 9.625% N/A March, 2007 $ 105,000,000
Mortgage Payable 377,855 N/A 7.60% N/A June, 2004 377,855
Subordinated Discount Notes 60,983,963 N/A 11.375% N/A Feb., 2009 43,908,453
Variable Rate Debt:
Term Loan A 31,000,000 N/A 7.4375%(1) N/A March, 2002 31,000,000
Interest Rate Swap Agreement N/A $7,000,000 5.62%(3) 5.0%(4) Nov., 2000 (1,574)
Term Loan B 24,500,000 N/A 7.9375%(2) N/A March, 2004 24,500,000
(1) Rate resets periodically to Eurodollar Rate plus 2.25%. Rate represents rate
in effect at July 2, 1999.
(2) Rate resets periodically to Eurodollar Rate plus 2.75%. Rate represents rate
in effect at July 2, 1999.
(3) Fixed payment rate.
(4) Rate resets periodically to LIBOR. Rate represents rate in effect at July 2,
1999.
</TABLE>
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.
17
<PAGE>
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 2, 1999 and July 3, 1998,
and the related consolidated statements of income, stockholders' equity
(deficiency) and cash flows for each of the three years in the period ended July
2, 1999. 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 audits 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 2, 1999
and July 3, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended July 2, 1999, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
August 20, 1999
18
<PAGE>
Item 8 - Consolidated Financial Statements and Supplementary Data
Page
----
Independent Auditor's Report 18
Consolidated Balance Sheets - July 3, 1998 and July 2, 1999 20
Consolidated Statements of Income - Years Ended June 27, 1997,
July 3, 1998 and July 2, 1999 21
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Years Ended June 27, 1997, July 3, 1998
and July 2, 1999 22
Consolidated Statements of Cash Flows - Years Ended June 27, 1997,
July 3, 1998 and July 2, 1999 23
Notes to Consolidated Financial Statements 24
Schedule I - GFSI Holdings, Inc. and Subsidiary Parent Company
Only Financial Statements 37
19
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 3, July 2,
1998 1999
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,360,853 $ 10,278,391
Accounts receivable, net of allowance for doubtful accounts of
$821,429 and $832,487 at July 3, 1998 and July 2, 1999 27,663,898 28,380,708
Inventories, net 44,298,295 36,323,596
Deferred income taxes 1,679,601 1,790,011
Prepaid expenses and other current assets 1,483,638 1,041,137
------------ -----------
Total current assets 76,486,285 77,813,843
Property, plant and equipment, net 21,242,500 20,244,605
Other assets:
Deferred financing costs, net of accumulated amortization of
$1,562,772 and $2,744,749 at July 3, 1998 and July 2, 1999 8,798,329 7,616,352
Other 4,495 5,001
------------
8,802,824 7,621,353
------------ ------------
Total assets $106,531,609 $105,679,801
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 8,408,498 $ 8,289,400
Accrued interest expense 4,521,240 4,484,043
Accrued expenses 8,637,847 7,947,616
Current portion of long-term debt 5,049,890 6,549,660
Total current liabilities 26,617,475 27,270,719
Deferred income taxes 1,234,366 1,183,085
Revolving credit agreement 5,600,000 --
Long-term debt . 235,458,966 235,312,158
Other long-term obligations 300,000 736,524
Redeemable preferred stock 4,135,725 4,545,250
Commitments and contingencies (Note 6)
Stockholders' equity (deficiency):
Series A Common Stock, $.01 par value, 1,105 shares authorized,
1,000 shares issued at July 3, 1998
and July 2, 1999 10 10
Series B Common Stock, $.01 par value, 1,000 shares authorized,
1,000 shares issued at July 3, 1998
and July 2, 1999 10 10
Additional paid-in capital 199,980 199,980
Accumulated deficiency (167,014,923) (163,567,434)
Treasury Stock, at cost (7.5 Series A shares at July 2, 1999) (501)
------------- -------------
Total stockholders' equity (deficiency) (166,814,923) (163,367,935)
------------- --------------
Total $106,531,609 $ 105,679,801
============ =============
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------
June 27, July 3, July 2,
1997 1998 1999
------ ------- -----
<S> <C> <C> <C>
Net sales $183,297,733 $211,164,245 $203,900,105
Cost of sales 102,606,239 119,616,037 114,860,210
------------- ------------- -------------
Gross profit 80,691,494 91,548,208 89,039,895
Operating expenses:
Selling 18,432,943 22,987,548 23,341,330
General and administrative 26,319,209 30,893,690 34,887,852
------------- ------------- -------------
44,752,152 53,881,238 58,229,182
------------- ------------- -------------
Operating income 35,939,342 37,666,970 30,810,713
Other income (expense):
Interest expense (9,098,218) (24,203,492) (25,019,024)
Other 99,326 (55,394) 245,821
------------- ------------- -------------
(8,998,892) (24,258,886) (24,773,203)
------------- ------------- -------------
Income before income taxes and
extraordinary item 26,940,450 13,408,084 6,037,510
Provision for income taxes (1,440,000) (5,257,242) (2,164,530)
------------- ------------- -------------
Income before extraordinary item 25,500,450 8,150,842 3,872,980
Extraordinary item, net of tax benefit of $989,634 in 1997
and $135,286 in 1998 (1,484,451) (202,929) --
------------- ------------- -------------
Net income 24,015,999 7,947,913 3,872,980
Preferred stock dividends (1,080,000) (1,336,205) (425,491)
------------- ------------- -------------
Net income attributable to
common shareholders $ 22,935,999 $ 6,611,708 $ 3,447,489
============= ============ =============
Supplemental information:
Income before income taxes and extraordinary item $ 26,940,450
Pro forma income tax provision 11,045,000
------------
Pro forma income before extraordinary item $ 15,895,450
============
See notes to consolidated financial statements.
</TABLE>
21
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED JUNE 27, 1997, JULY 3, 1998 and JULY 2, 1999
<TABLE>
<CAPTION>
GFSI GFSI
Holdings, Holdings, Winning
Inc. Inc. Ways, Retained Notes
Series A Series B Inc. Additional Earnings Receivable
Common Common Common Paid-In (Accumulated Treasury from
Stock Stock Stock Capital Deficiency) Stock Stockholders Total
----- ----- ----- ------- ----------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 149,100 $ 1,585,691 $ 35,045,220 $ (2,301,278) $ 34,478,733
Reissuance of treasury
stock 1,134,396 267,791 1,402,187
Net income 24,015,999 24,015,999
Distributions to
Winning Ways, Inc. (47,807,375) (47,807,375)
shareholders
Distributions and
recapitalization of
Winning Ways, Inc. (149,100) (2,720,087) (182,327,938) 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) $ 10 $ 10 199,980 (1,472,537) $ (788,500) (2,061,037)
Accrued dividends on
redeemable
preferred stock (1,080,000) (1,080,000)
----- ----- ---------- ---------- -------------- ------------ ----------- -------------
Balance, June 27, 1997 10 10 199,980 (173,626,631) (788,500) (174,215,131)
Redemption of notes
receivable from
stockholders 788,500 788,500
Net income 7,947,913 7,947,913
Accrued dividends on
redeemable
preferred stock (1,336,205) (1,336,205)
----- ----- ---------- ---------- -------------- ------------ ----------- -------------
Balance, July 3, 1998 10 10 199,980 (167,014,923) (166,814,923)
Net income 3,872,980 3,872,980
Accrued dividends on
redeemable preferred
stock (425,491) (425,491)
Treasury stock purchase (501) (501)
----- ----- ---------- ---------- -------------- ------------ ----------- --------------
Balance, July 2, 1999 $ 10 $ 10 $ - $ 199,980 $(163,567,434) $ (501) $ -- $(163,367,935)
===== ===== ========== ========== ============== ============ =========== ==============
See notes to consolidated financial statements.
</TABLE>
22
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
-------------------------------------------
June 27, 1997 July 3,1998 July 2, 1999
------------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $24,015,999 $7,947,913 $ 3,872,980
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,174,863 2,938,400 3,083,490
Amortization of deferred financing costs 394,264 1,184,613 1,181,977
(Gain) loss on sale or disposal of property, plant and equipment (11,659) 15,206 (44,282)
Deferred income taxes 250,366 (695,601) (161,691)
Amortization of discount on long-term debt -- 4,581,163 6,402,801
Increase in cash value of life insurance (1,041,343) -- --
Extraordinary loss 2,473,192 338,215 --
Changes in operating assets and liabilities:
Accounts receivable, net (1,122,137) (3,958,309) (716,810)
Inventories, net (9,778,813) (6,736,529) 7,974,699
Prepaid expenses, other current assets and other assets (481,061) (197,492) 441,995
Income taxes payable 200,000 (200,000) --
Accounts payable, accrued expenses and other long-term obligations 7,954,986 (1,324,416) (996,526)
------------ ------------ ------------
Net cash provided by operating activities 26,028,657 3,893,163 21,038,633
------------ ------------ -----------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 948,993 323,375 249,398
Proceeds from surrender or transfer of cash value of life insurance 5,309,214 -- --
Purchased of property, plant and equipment (2,615,228) (2,971,624) (2,290,711)
------------ ----------- -----------
Net cash provided by (used in) investing activities 3,642,979 (2,648,249) (2,041,313)
----------- ----------- -----------
Cash flows from financing activities:
Net changes to revolving credit agreement borrowings -- 2,600,000 (5,600,000)
Net changes to short-term borrowings (7,000,000) -- --
Issuance of revolving credit agreement 3,000,000 -- --
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 (24,276,038) (4,500,000) (5,049,839)
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 (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 --
Redemption of preferred stock -- -- (15,966)
Treasury stock purchase -- -- (501)
Proceeds from training grants -- -- 586,524
Issuance of redeemable preferred stock 26,211,500 -- --
Proceeds from sales of treasury stock 1,402,187 -- --
--------------- ----------- -------------
Net cash used in financing activities (28,695,101) (1,000,573) (10,079,782)
--------------- ----------- -------------
Net increase in cash and cash equivalents 976,535 244,341 8,917,538
Cash and cash equivalents
Beginning of period 139,977 1,116,512 1,360,853
-------------- ----------- -------------
End of period $ 1,116,512 $ 1,360,853 $ 10,278,391
============== =========== ============
Supplemental cash flow information:
Interest paid $ 4,074,961 $18,814,599 $ 17,295,085
============== =========== ============
Income taxes paid -- $ 6,314,500 $ 2,804,209
============== =========== ============
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 $ 425,491
============== =========== ============
See notes to consolidated financial statements.
</TABLE>
23
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 27, 1997, JULY 3, 1998 AND JULY 2, 1999
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
=======
24
<PAGE>
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 $425,000 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, June 27, 1997 and July 2, 1999 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 $1,464,865 and $1,174,147 at July 3, 1998 and July 2,
1999, 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.
25
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments--Holdings is a party to an interest
rate swap 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
$1,383,261, $1,631,259 and $1,658,814 for the years ended June 27, 1997, July 3,
1998 and July 2, 1999, 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 year ended June 27, 1997 relative to
the statement of income has been provided which reflects a provision for income
taxes assuming a 41% effective income tax rate.
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.
26
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Standards -- 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, 2000. The Company is in the process of
determining what impact the adoption of SFAS No. 133 will have on its financial
position and 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.
Business Segments -- SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" was issued in June 1997. This pronouncement
establishes standards for the way that enterprises report information about
operating segments in annual and interim financial statements. The Company
adopted SFAS No. 131 during fiscal 1999. The Company has determined that it
currently operates in one segment.
Reclassifications--Certain reclassifications have been made to the 1997
and 1998 consolidated financial statements to conform to the 1999 presentation.
3. PROPERTY, PLANT AND EQUIPMENT
July 3, 1998 July 2, 1999
------------ ------------
Land $ 2,455,373 $ 2,455,373
Buildings and improvements 20,358,360 20,493,021
Furniture and fixtures 14,615,142 16,351,396
---------- ----------
37,428,875 39,299,790
Less accumulated depreciation 16,578,089 19,368,979
---------- ----------
20,850,786 19,930,811
Construction in progress 391,714 313,794
------------ -----------
$ 21,242,500 $ 20,244,605
============ ============
27
<PAGE>
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 an
interest rate that periodically adjusts to the Eurodollar rate plus 2.25% (9.5%
at July 3, 1998). The Line is secured by substantially all of the property,
plant and equipment of the Company 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 the Company
to maintain a fixed charge coverage ratio greater than 1.02 to 1.0, an interest
expense coverage ratio of greater than 1.45 to 1.0 and a maximum leverage ratio
of less than 5.75 to 1.0, as defined in the agreement. The Company 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
$5,600,000 at July 3, 1998. There were no borrowings against this line as of
July 2, 1999.
Letters of credit against this Line at July 3, 1998 and July 2, 1999,
for unshipped merchandise aggregated $23,744,257 and $17,783,802 , respectively.
Stand-by letters of credit issued against the Line at July 3, 1998 and July 2,
1999, aggregated $1,198,107 and $1,866,561, respectively.
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
July 3, July 2,
1998 1999
----- ----
<S> <C> <C>
Senior Subordinated Notes, 9.625% interest rate, due 2007 $125,000,000 $125,000,000
Term Loan A, variable interest rate, 7.688% and 7.4375%
at July 3, 1998 and July 2, 1999, respectively, due 2002 35,750,000 31,000,000
Term Loan B, variable interest rate, 8.188% and 7.9375%
at July 3, 1998 and July 2, 1999, respectively, due 2004 24,750,000 24,500,000
Subordinated Discount Notes, 11.375% interest rate, due 2009 54,581,162 60,983,963
Mortgage payable to the City of Bedford, Iowa, 7.60% interest rate 427,694 377,855
------------- -------------
240,508,856 241,861,818
Less current portion 5,049,890 6,549,660
------------ ------------
$235,458,966 $235,312,158
============ ============
</TABLE>
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.
28
<PAGE>
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 20, 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.
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.
At July 2, 1999, the Senior Subordinated Notes estimated fair value
approximated $105,000,000.
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 2, 1999, the Company was in
compliance with all such covenants.
29
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 2, 1999, 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.
In December 1998, the Company received $300,000 from the Community
Economic Betterment Account of the Iowa Department of Economic Development (the
"CEBA Grant") that is included in other long-term obligations in the
accompanying Consolidated Balance Sheets. The CEBA Grant will be forgiven by the
Iowa Department of Economic Development if the Company meets certain Iowa
employment requirements as of June 30, 2001 and for a period of thirteen weeks
following June 30, 2001 and assuming such requirements are met, the CEBA Grant
will be recognized as income. Management believes that the requisite Iowa
employment levels will be reached prior to June 30, 2001.
30
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate maturities of the Holdings' long-term debt as of July 2, 1999
are as follows assuming a 52/53 week fiscal year:
Fiscal year,
2000 $ 6,549,660
2001 8,058,052
2002 10,062,621
2003 14,567,549
2004 16,572,865
Thereafter 186,051,071
------------
Total $241,861,818
============
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.
31
<PAGE>
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
$120 per share, payable on March 1 of each year, in accordance with the terms
set forth in the Articles of Incorporation. The liquidation preference for each
share of Preferred Stock is $1,000 plus any accrued and unpaid dividends.
Mandatory redemption of the liquidation preference plus any accrued and unpaid
dividends occurs on March 1, 2009.
On September 17, 1997, through an offering of exchangeable units,
certain holders of the Preferred Stock exchanged their preferred shares for
25,000 shares of Series D 11.375% Preferred Stock which were ultimately redeemed
for $25.0 million of Holdings Discount Notes.
Redeemable preferred stock consists of the following:
July 3, July 2,
1998 1999
------------ -----------
Series A 12% Cumulative Preferred Stock,
$0.1 par value 1,774 and 1,761 shares
outstanding at July 3, 1998 and
July 2, 1999, respectively $ 2,067,863 $ 2,264,559
Series B 12% Cumulative Preferred Stock,
$0.1 par value, 1,445 and shares
outstanding at July 3, 1998 and July 2, 1999 1,684,925 1,858,337
Series C 12% Cumulative Preferred Stock,
$0.1 par value, 329 and shares
outstanding at July 3, 1998 and July 2, 1999 382,937 422,354
----------- -----------
$ 4,135,725 $ 4,545,250
=========== ===========
8. PROFIT SHARING AND 401(k) PLAN
On August 1, 1996, the Company amended its previously non-contributory
defined contribution plan to include employee directed contributions with an
annual Company matching contribution of 50% on up to 4% of a participant's
annual compensation. Participants exercise control over the assets of their
account and choose from a broad range of investment alternatives. Contributions
made by the Company to the plan related to the 401(k) match and profit sharing
portions totaled $131,843 and $443,624, respectively for the year ended June 27,
1997, $288,521 and $344,177, respectively for the year ended July 3, 1998, and
$364,096 and $476,291, respectively for the year ended July 2, 1999.
32
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
The provisions for income taxes for the years ended June 27, 1997, July
3, 1998 and July 2, 1999 consist of the following:
<TABLE>
<CAPTION>
June 27, July 3, July 2,
1997 1998 1999
------ ------- ------
<S> <C> <C> <C>
Current income tax provision $ 200,000 $ 5,682,271 $ 2,326,221
Deferred income tax provision (benefit) 250,366 (560,315) (161,691)
----------- ----------- ------------
Total income tax provision $ 450,366 $ 5,121,956 $ 2,164,530
=========== ============ ===========
Allocated to:
Operating activities $1,440,000 $ 5,257,242 $ 2,164,530
Extraordinary loss. (989,634) (135,286) --
----------- ----------- ------------
Total income tax provision $ 450,366 $ 5,121,956 $ 2,164,530
=========== ============ ============
</TABLE>
The income tax provisions from operating activities differ from amounts
computed at the statutory federal year ended income tax rate as follows:
<TABLE>
<CAPTION>
June 27, 1997 July 3, 1998 July 2, 1999
-------------------- --------------------- --------------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at the statutory rate $ 9,429,158 35.0% $ 4,692,829 35.0% $ 2,052,753 34.0%
Income attributable to S-Corporation earnings (9,146,583) (34.0) -- -- -- --
Change in tax status to C-Corporation 993,621 3.7 -- -- -- --
Effect of state income taxes, net of federal 163,804 .6 670,405 5.0 241,500 4.0
benefit
Other (105,992) (.8) (129,723) (2.2)
----------- ------ ----------- ----- ----------- -----
$ 1,440,000 5.3% $ 5,257,242 39.2% $ 2,164,530 35.8%
=========== ====== =========== ===== =========== =====
</TABLE>
33
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The sources of the differences that give rise to the
deferred income tax assets and liabilities as of and July 3, 1998 and July 2,
1999, along with the income tax effect of each, are as follows:
<TABLE>
<CAPTION>
July 3, 1998 July 2, 1999
Deferred Income Tax Deferred Income Tax
----------------------------- --------------------------------
<S> <C> <C> <C> <C>
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Accounts receivable. $ 350,668 $ -- $ 387,874 $ --
Inventory valuation 344,318 -- 361,154 --
Property, plant, and equipment -- 1,345,573 -- 1,228,389
Accrued expenses 1,097,119 -- 1,112,767 --
Other -- 1,297 -- 26,480
---------- ------------ ----------- -----------
Total $ 1,792,105 $ 1,346,870 $ 1,861,795 $ 1,254,869
=========== ============ =========== ===========
</TABLE>
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company engages in transactions which result in off-balance sheet
risk. Interest rate swap and cap agreements are used in conjunction with
on-balance sheet liabilities to reduce the impact of changes in interest rates.
Interest rate swap agreements are contractual agreements to exchange, or "swap",
a series of interest rate payments over a specified period, based on an
underlying notional amount but differing interest rate indices, usually fixed
and floating. Interest rate cap agreements are contractual agreements in which a
premium is paid to reduce the impact of rising interest rates on floating rate
debt. The notional principal amount does not represent a cash requirement, but
merely serves as the amount used, along with the reference rate, to calculate
contractual payments. Because the instrument is a contract or agreement rather
than a cash market asset, the financial derivative transactions described above
are referred to as "off-balance sheet" instruments.
The Company attempts to minimize its credit exposure to counter parties
by entering into interest rate swap and cap agreements only with major financial
institutions.
The fair values of the Company's interest rate swap and cap agreements
are not recognized in the Financial Statements as they are used in conjunction
with on balance sheet liabilities and were as follows:
Contract or Estimated
Notional Fair Weighted Average
Amount Value Interest Rate
----------- --------- -------------------------
Receivable Payable
---------- -------
Swap:
July 3, 1998 $ 7,000,000 $ 1,700 5.77% 5.62%
July 2, 1999 7,000,000 (1,574) 5.0% 5.62%
Cap:
July 3, 1998 $19,000,000 -- greater than 7.50% --
34
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GFSI has entered into two swap agreements to exchange fixed interest
rates for floating rate debt payments. One agreement carries a notional amount
of $7,000,000 and terminates on November 18, 2000, as further described in Note
5 to the consolidated financial statements. The notional amount of the other
interest rate swap agreement fluctuated based on the GFSI's anticipated level of
short-term borrowings with the maximum notional amount equaling $19,900,000.
This agreement was effective July 1, 1996, however, this interest rate swap
agreement was terminated on February 27, 1997. The $300,000 gain realized by the
Company on the terminated swap was deferred and is being amortized over the
remaining life of the Credit Agreement.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires that GFSI disclose estimated fair
values for its financial instruments which include cash and cash equivalents,
accounts receivables, short-term borrowings, accounts payables, long-term debt
and interest rate swap agreements.
Cash and cash equivalents--The carrying amount reported on the balance
sheet represents the fair value of cash and cash equivalents.
Accounts receivable--The carrying amount of accounts receivable
approximates fair value because of the short-term nature of the financial
instruments.
Short-term borrowings and revolving credit agreement--Short-term
borrowings have variable interest rates which adjust daily. The carrying value
of these borrowings is a reasonable estimate of their fair value.
Accounts payable--The carrying amount of accounts payable approximates
fair value because of the short-term nature of the financial instruments.
Long-term debt-- Current market values, if available, are used to
determine fair values of debt issues with fixed rates. The carrying value of
floating rate debt is a reasonable estimate of their fair value.
Derivative Financial Instruments--Quoted market prices or dealer quotes
are used to estimate the fair value of interest rate swap and cap agreements.
The following summarizes the estimated fair value of financial
instruments, by type:
<TABLE>
<CAPTION>
July 3, 1998 July 2, 1999
------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Assets and liabilities:
Cash and cash equivalents $ 1,360,853 $ 1,360,853 $ 10,278,391 $ 10,278,391
Accounts receivable 27,663,898 27,663,898 28,380,708 28,380,708
Accounts payable 8,408,498 8,408,498 8,289,400 8,289,400
Revolving credit agreement 5,600,000 5,600,000 -- --
Long-term debt 240,508,856 244,258,856 241,861,818 204,786,308
Off-Balance Sheet Financial Instruments:
Interest rate swap agreements
(asset/(liability)) -- 1,700 -- (1,574)
Interest rate cap agreements -- -- -- --
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instruments.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
35
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. RELATED PARTY TRANSACTIONS
The Company has entered into supply agreements with several affiliated
companies controlled by certain members of Company management. The agreements
allow the Company to outsource embroidery work to the affiliates in the event
that demand exceeds the Company's manufacturing capacity. Amounts paid to these
entities were $4,566,713, $5,781,092 and $5,716,298 for the years ended June 27,
1997, July 3, 1998 and July 2, 1999, respectively.
During fiscal 1997, the cash value of life insurance on officers was
liquidated into cash or transferred to the respective individuals at carrying
value. The net proceeds to the Company totaled $5,309,214 for the year ended
June 27, 1997. Prior to June 27, 1997, a shareholder purchased the corporate
aircraft from the Company for approximately $898,000 in cash resulting in no
gain or loss to the Company.
In connection with the transactions on February 27, 1997, Holdings
entered into an agreement with an affiliate of the Company to render services to
the Company including consultation on its financial and business affairs, its
relationship with its lenders and stockholders, and the operation and expansion
of its business. The agreement will renew for successive one year terms unless
either party, within 60 days prior to renewal, elects to terminate the
agreement. In connection with the transactions, the Company paid the affiliate
$3.25 million pursuant to the terms of the affiliate agreement during 1997.
These fees are included as deferred financing costs in the accompanying
financial statements. In addition, the Company incurred consulting fees totaling
$500,000 for each of the years ended, June 27, 1997, July 3, 1998 and July 2,
1999, which are included in general and administrative expenses in the
accompanying consolidated financial statements.
Effective upon the consummation of the transactions on February 27,
1997, Holdings entered into a noncompete agreement with a shareholder. In
exchange for the covenant not to compete, the shareholder will be paid $250,000
per annum for a period of ten years. For each of the years ended, June 27, 1997,
July 3, 1998 and July 2, 1999, $250,000 of expense related to this agreement was
included in general and administrative expenses in the accompanying consolidated
financial statements.
The Subordinated Notes, as described in Note 5 to the financial
statements, were issued to an affiliate of the Jordan Company. Interest expense
paid to the Jordan Company affiliate totaled $1,141,667 during the year ended
July 3, 1998.
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI Holdings, Inc. and subsidiary
Lenexa, Kansas
We have audited the consolidated financial statements of GFSI Holdings,
Inc. and subsidiary as of July 2, 1999 and July 3, 1998, and for each of the
three years in the period ended July 2, 1999, and have issued our report thereon
dated August 20, 1999. Our audits also included the financial statement schedule
which follows. The financial statement schedule is the responsibility of
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
August 20, 1999
37
<PAGE>
SCHEDULE I
GFSI HOLDINGS, INC. AND SUBSIDIARY
PARENT COMPANY ONLY
BALANCE SHEETS
July 3, 1998 and July 2, 1999
<TABLE>
<CAPTION>
July 3, July 2,
1998 1999
-------------- -------------
<S> <C> <C>
ASSETS:
- -------
Current assets:
Cash $ 14,682 $ 14,682
Income tax receivables 1,353,030 892,721
------------ -------------
1,367,712 907,403
Deferred financing costs 294,769 268,372
------------ -------------
$ 1,662,481 $ 1,175,775
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
- ----------------------------------------
Current liabilities--accrued expenses $ 133,229 $ --
Negative investment in GFSI, Inc. 109,627,289 109,627,289
Long-term debt 54,581,162 60,983,963
Redeemable preferred stock 4,135,725 4,545,250
Stockholders' deficiency:
Common stock 20 20
Accumulated deficiency (166,814,944) (173,980,246)
Treasury stock, at cost (7.5 shares at July 2, 1999) -- (501)
------------- -------------
Total stockholders' deficiency (166,814,944) (173,980,727)
------------- -------------
$ 1,662,481 $ 1,175,775
============== =============
</TABLE>
38
<PAGE>
SCHEDULE I
GFSI HOLDINGS, INC. AND SUBSIDIARY
PARENT COMPANY ONLY
STATEMENTS OF INCOME
Period from February 27, 1997 (Date operations
commenced) to June 27, 1997, Year Ended July 3, 1998 and
Year Ended July 2, 1999
<TABLE>
<CAPTION>
Period from
February 27, 1997- Year Ended Year Ended
June 27, 1997 July 3, 1998 July 2, 1999
------------------- --------------- --------------
<S> <C> <C> <C>
General and administrative expenses $ -- $ (1,336) $ (29,510)
Other income 18,185 11,680 --
Interest expense (1,010,737) (4,986,383) (6,429,198)
--------------- ------------- -------------
Loss before income taxes, extraordinary item and equity in net
income of GFSI, Inc. (992,552) (4,976,039) (6,458,708)
Income tax benefit 397,021 1,990,416 2,518,896
--------------- ------------- -------------
Loss before extraordinary item and equity in net income
of GFSI, Inc. (595,531) (2,985,623) (3,939,812)
Extraordinary loss, net of tax benefit of $135,000 -- (202,929) --
--------------- -------------- -------------
Loss before equity in net income of GFSI, Inc. (595,531) (3,188,552) (3,939,812)
Equity in net income of GFSI, Inc. 24,611,530 11,136,465 7,812,792
--------------- ------------- -------------
Net income 24,015,999 7,947,913 3,872,980
Preferred stock dividends (1,080,000) (1,336,205) (425,491)
-------------- ------------- -------------
Net income attributable to common shareholders $ 22,935,999 $ 6,611,708 $ 3,447,489
============== ============== ============
</TABLE>
39
<PAGE>
SCHEDULE I
GFSI HOLDINGS, INC. AND SUBSIDIARY
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
Period from February 27, 1997 (Date operations
commenced) to June 27, 1997, Year Ended July 3, 1998 and
Year Ended July 2, 1999
<TABLE>
<CAPTION>
Period from Year Year
February 27, 1997- Ended Ended
June 27, 1997 July 3, 1998 July 2, 1999
------------------ -------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 24,015,999 $ 7,947,913 $ 3,872,980
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred tax provision (259,271) -- --
Equity in net income of GFSI, Inc. (24,611,530) (11,136,465) (7,812,792)
Distributions received from GFSI, Inc. 870,987 1,141,667 --
Amortization of deferred financing costs -- 27,364 26,397
Amortization of discount on long-term debt -- 4,300,683 6,402,801
Extraordinary loss -- 338,215 --
Changes in:
Accounts receivable (18,185) 18,185 --
Income tax receivable (138,750) (1,215,280) 460,309
Accrued expenses 483,333 (350,105) (133,228)
Deferred income taxes -- 259,271 --
-------------- -------------- -----------
Net cash provided by operating activities 343,583 1,331,448 2,816,467
-------------- -------------- -----------
Cash flows from investing activities--Equity contribution to GFSI, Inc. (49,938,963) -- --
-------------- -------------- -----------
Net cash used in investing activities (49,938,963) -- --
-------------- -------------- -----------
Cash flows from financing activities:
Issuance of subordinated notes 25,000,000 -- --
Issuance of redeemable preferred stock 27,000,000 -- --
Issuance of common stock, net of offering costs (2,061,037) -- --
Capital contribution to GFSI, Inc. -- (1,000,000) (2,800,000)
Cash paid for financing costs (343,583) (316,766) --
Redemption of preferred stock -- -- (15,966)
Treasury stock purchase -- -- (501)
------------- -------------- -----------
Net cash provided by (used in) financing activities 49,595,380 (1,316,766) (2,816,467)
------------- -------------- -----------
Net increase in cash -- 14,682 --
------------- ------------- ------------
Cash, beginning of period -- -- 14,682
------------- -------------- -----------
Cash, end of period $ -- $ 14,682 $ 14,682
============= ============= ==========
Supplemental schedule of non-cash financing activities:
Exchange of subordinated notes and preferred stock for
discount notes $ 50,000,000
=============
Accrual of preferred stock dividends $ 1,336,205 $ 425,491
============= ===========
</TABLE>
40
<PAGE>
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10 - Directors and Executive Officers
The following sets forth the names and ages of Holdings' directors and executive
officers and the positions they hold as of the date of this annual report:
Name Age Position with Company
- ---- --- ---------------------
Robert M. Wolff 64 Chairman
John L. Menghini 49 President, Chief Executive Officer
and Director
Robert G. Shaw 48 Senior Vice President, Finance and
Human Resources and Director
Larry D. Graveel 50 Executive Vice President, Chief
Operating Officer and Director
Michael H. Gary 46 Senior Vice President, Sales
Administration
A. Richard Caputo, Jr. 33 Director
John W. Jordan II 51 Director
David W. Zalaznick 45 Director
Set forth below is a brief description of the business experience of
each director and executive officer of Holdings including each person's
principal occupations and employment during the past five years, the name and
principal business of any corporation or other organization in which such
occupations and employment were carried on and whether such corporation or
organization is a parent, subsidiary or other affiliate of the registrant.
Robert M. Wolff has served as Chairman of the Company since its
inception in 1974.
John L. Menghini was recently appointed Chief Executive Officer. He has
served as President, Chief Operating Officer and a director of the Company since
1984. Prior to that, Mr. Menghini served as a merchandise manager of the Company
since 1977.
Robert G. Shaw has served as Senior Vice President, Finance and Human
Resources and a director of the Company since 1993. Prior to that, Mr. Shaw held
several management positions with the Company since 1976, including Vice
President of Finance.
Larry D. Graveel was recently appointed Chief Operating Officer. He has
served as a director of the Company since February 1997 and as Senior Vice
President, Merchandising of the Company since 1993. Prior to that, Mr. Graveel
served as a merchandising manager of the Company since 1984.
Michael H. Gary has served as Senior Vice President, Sales
Administration of the Company since 1993. Prior to that, Mr. Gary held several
management positions in sales administration with the Company since 1982.
41
<PAGE>
A. Richard Caputo, Jr. has served as a director of the Company since
February 1997. Mr. Caputo is a managing director of TJC, a private merchant
banking firm, with which he has been associated since 1990. Mr. Caputo is also a
director of AmeriKing, Inc. and Jackson Products, Inc. as well as other
privately held companies.
John W. Jordan II has served as a director of the Company since
February 1997. Mr. Jordan has been a managing director of TJC since 1982. Mr.
Jordan is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc.,
American Safety Razor Company, Apparel Ventures, Inc., AmeriKing, Inc., Jordan
Telecommunication Products, Inc., Motors and Gears, Inc., Jackson Products, Inc.
and Rockshox, Inc. as well as other privately held companies.
David W. Zalaznick has served as a director of the Company since
February 1997. Mr. Zalaznick has been a managing director of TJC since 1982. Mr.
Zalaznick is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc.,
American Safety Razor Company, Apparel Ventures, Inc., Marisa Christina, Inc.,
AmeriKing, Inc., Jordan Telecommunications Products, Inc., Motors and Gears,
Inc. and Jackson Products, Inc. as well as other privately held companies.
Stockholders Agreement
In connection with the Acquisition, Holdings, the Management Investors
and the Jordan Investors entered into a subscription and stockholders agreement
(the "Stockholders Agreement") which sets forth certain rights and restrictions
relating to the ownership of Holdings stock and agreements among the parties
thereto as to the governance of Holdings.
The Stockholders Agreement contains material provisions which, among
other things and subject to certain exceptions, including any restrictions
imposed by applicable law or by the Company's debt agreements, (i) provide for
put and call rights in the event a Stockholder (as defined therein) is no longer
employed by the Company, (ii) restrict the ability of all Stockholders to
transfer their respective ownership interests, other than with respect to
transfers to Permitted Transferees (as defined therein), including rights of
first refusal and tag along rights held by each of the remaining stockholders,
(iii) grant drag along rights to Selling Stockholders (as defined therein) in
which the holders of 75% or more of the common stock of Holdings who agree to
transfer their stock in an arms-length transaction to a nonaffiliated party may
require the remaining stockholders to sell their stock on the same terms and
conditions and (iv) grant each Stockholder piggyback registration rights to
participate in certain registrations initiated by the Company.
The Stockholders Agreement also contains certain material governance
provisions which, among other things, (i) provide for the election of three
directors (the "Management Directors") nominated by the Management Investors,
three directors (the "Jordan Directors") nominated by the Jordan Investors and
one director nominated by the Stockholders, (ii) prohibit the removal of the
Management Directors other than by the Management Investors or the Jordan
Directors other than by the Jordan Investors and (iii) require the approval of
at least five directors of certain fundamental transactions affecting Holdings
or GFSI, including any proposed dissolution, amendment to the certificate of
incorporation or by-laws or merger, consolidation or sale of all or
substantially all of the assets of the Company. The provisions described under
"Stockholders Agreement" represent all of the material provisions of such
agreement.
42
<PAGE>
Board of Directors
Liability Limitation. The Certificate of Incorporation provides that a
director of Holdings shall not be personally liable to it or its stockholders
for monetary damages to the fullest extent permitted by the Delaware General
Corporation Law. In accordance with the Delaware General Corporation Law, the
Certificate of Incorporation does not eliminate or limit the liability of a
director for acts or omissions that involve intentional misconduct by a director
or a knowing violation of law by a director for voting or assenting to an
unlawful distribution, or for any transaction from which the director will
personally receive a benefit in money, property, or services to which the
director is not legally entitled. The Delaware General Corporation Law does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. Any amendment to
these provisions of the Delaware General Corporation Law will automatically be
incorporated by reference into the Certificate of Incorporation and the Bylaws,
without any vote on the part of its stockholders, unless otherwise required.
Indemnification Agreements. Simultaneously with the consummation of the
Offering, Holdings and each of its directors entered into indemnification
agreements. The indemnification agreements provide that Holdings will indemnify
the directors against certain liabilities (including settlements) and expenses
actually and reasonably incurred by them in connection with any threatened or
pending legal action, proceeding or investigation (other than actions brought by
or in the right of Holdings) to which any of them is, or is threatened to be,
made a party by reason of their status as a director, officer or agent of
Holdings, or serving at the request of Holdings in any other capacity for or on
behalf of Holdings; provided that (i) such director acted in good faith and in a
manner not opposed to the best interest of Holdings, (ii) with respect to any
criminal proceedings had no reasonable cause to believe his or her conduct was
unlawful, (iii) such director is not finally adjudged to be liable for
negligence or misconduct in the performance of his or her duty to Holdings,
unless the court views in light of the circumstances the director is
nevertheless entitled to indemnification, and (iv) the indemnification does not
relate to any liability arising under Section 16(b) of the Exchange Act, or the
rules or regulations promulgated thereunder. With respect to any action brought
by or in the right of Holdings, directors may also be indemnified to the extent
not prohibited by applicable laws or as determined by a court of competent
jurisdiction against expenses actually and reasonably incurred by them in
connection with such action if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interest of Holdings.
Director Compensation. Each director of Holdings receives $20,000 per
year for serving as a director of Holdings. In addition, Holdings reimburses
directors for their travel and other expenses incurred in connection with
attending meetings of the Board of Directors.
43
<PAGE>
Item 11 - Executive Compensation
The following table sets forth information concerning the aggregate
compensation paid and accrued to the Company's top five executive officers for
services rendered to the Company during each of the three most recent fiscal
years. The executive officers include Robert M. Wolff, Chairman, John L.
Menghini, President and Chief Operating Officer, Robert G. Shaw, Senior Vice
President, Finance and Human Resources, Larry D. Graveel, Senior Vice President,
Merchandising and Michael H. Gary, Senior Vice President, Sales Administration.
<TABLE>
<CAPTION>
Fiscal Other Annual
Position Year Salary Bonus Compensation (1)
- -------- ------ ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Robert M. Wolff, Chairman 1999 $ 170,000 $ $ --
1998 155,000 -- --
1997 147,498 -- 16,822
John L. Menghini 1999 250,000 378,365 6,400
President and Chief 1998 250,000 422,750 7,040
Executive Officer 1997 249,038 300,000 14,773
Robert G. Shaw, Senior Vice President 1999 160,000 166,112 6,400
and Chief Financial Officer 1998 160,000 194,112 7,040
1997 159,615 120,000 14,773
Larry D. Graveel 1999 180,000 177,983 6,400
Executive Vice President 1998 180,000 201,060 7,040
Chief Operating Officer 1997 179,615 120,000 17,809
Michael H. Gary 1999 180,000 171,035 6,400
Senior Vice President 1998 180,000 194,112 7,040
1997 185,769 120,000 18,973
(1) Other annual compensation consists of car allowances, profit sharing,
group medical benefits and individual beneficiary life insurance
premiums paid by the Company.
</TABLE>
Incentive Compensation Plan
The Company adopted an incentive compensation plan (the "Incentive
Plan"), for senior executives during the fiscal year ended July 3, 1998. The
Incentive Plan provides for annual cash bonuses payable based on a percentage of
EBIT (as defined in the Incentive Plan) if certain EBIT targets are met.
44
<PAGE>
Item 12 - Security Ownership and Certain Beneficial Owners and Management
The table below sets forth certain information regarding beneficial
ownership of the common stock of Holdings held by (i) each of its directors and
executive officers who own shares of common stock of Holdings, (ii) all
directors and executive officers of Holdings as a group and (iii) each person
known by Holdings to own beneficially more than 5% of its common stock. The
Company believes that each individual or entity named has sole investment and
voting power with respect to shares of common stock of Holdings as beneficially
owned by them, except as otherwise noted.
Amount of Beneficial
Ownership
---------------------------
Number
of Percentage
Shares Owned
--------- -----------
Executive Officers and Directors:
- --------------------------------
Robert M. Wolff (2)(3) 60.0 3.0%
John L. Menghini (2)(4) 257.0 12.9
Robert G. Shaw (2)(5) 235.0 11.8
Larry D. Graveel (2)(6) 110.0 5.5
Michael H. Gary (2)(7) 110.0 5.5
John W. Jordan II (8)(9) 78.3125 3.9
David W. Zalaznick(8) 78.3125 3.9
A. Richard Caputo, Jr. (8) 50.0 2.5
All directors and executive officers
as a group (8 persons) 971.125 48.7
Other Principal Stockholders:
- -----------------------------
JZ Equity Partners PLC (10) 500.0 25.0
Leucadia Investors, Inc. (11) 125.0 6.3
- -------------
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. As of July 3, 1998, there
were 2,000 shares of common stock of Parent issued and outstanding.
(2) The address of each of Messrs. Wolff, Menghini, Shaw, Graveel and Gary is
c/o GFSI, Inc., 9700 Commerce Parkway, Lenexa, Kansas 66219.
(3) All shares are held by the Robert M. Wolff Trust, of which Mr. Wolff is a
trustee.
(4) 197 shares are held by the John Leo Menghini Revocable Trust, of which Mr.
Menghini is a trustee. The remaining 60 shares are held in trust for family
members of Mr. Menghini.
(5) 175 shares are held by the Robert Shaw Living Trust, of which Mr. Shaw is a
trustee. The remaining 60 shares are held by Robert Shaw as custodian of
family members.
(6) All shares are held by the Larry D. Graveel Revocable Trust, of which Mr.
Graveel is a trustee.
(7) 90 shares are held by Michael H. Gary Revocable Trust, of which Mr. Gary is
a trustee. The remaining 20 shares are held in trust for family members of
Mr. Gary.
(8) The address of each of Messrs. Jordan, Zalaznick and Caputo is c/o The
Jordan Company, 767 Fifth Avenue, New York, NY 10153.
(9) All shares are held by the John W. Jordan II Revocable Trust, of which Mr.
Jordan is trustee.
(10) The principal address of JZ Equity Partners PLC is c/o Jordan/Zalaznick
Capital Company, 767 Fifth Avenue, New York, NY 10153.
(11) The principal address of Leucadia Investors, Inc. is 315 Park Avenue South,
New York, NY 10010.
45
<PAGE>
Item 13 - Certain Relationships and Related Transactions
Wolff Employment Agreement. In connection with the acquisition of
Winning Ways, Inc., the Company entered into an Employment Agreement with Robert
M. Wolff (the "Wolff Employment Agreement"). Pursuant to the Wolff Employment
Agreement, Mr. Wolff will serve as Chairman of the Company for a ten-year period
ending on the tenth anniversary of the Acquisition. In exchange for his
services, the Company will compensate Mr. Wolff with a base salary of $140,000
per annum, subject to annual increases set forth in the Wolff Employment
Agreement, to provide him with certain employee benefits comparable to that
received by other Company senior executives, including the use of Company cars,
and to reimburse him for expenses incurred in connection with the performance of
his duties as Chairman. In the event that Mr. Wolff no longer provides services
to the Company due to his dismissal for Cause (as defined in the Wolff
Employment Agreement), he will no longer be entitled to any compensation from
the Company as of the date of his dismissal, subject to certain rights of
appeal.
Wolff Noncompetition Agreement. In connection with the Acquisition of
Winning Ways, Holdings entered into a Noncompetition Agreement with Robert M.
Wolff (the "Wolff Noncompetition Agreement"). Pursuant to the Wolff
Noncompetition Agreement, Mr. Wolff will not, directly or indirectly, (i) (a)
engage in or have any active interest in any sportswear or activewear business
comparable to that of the Company or (b) sell to, supply, provide goods or
services to, purchase from or conduct business in any form with the Company or
Holdings for a ten-year period ending on the tenth anniversary of the
Acquisition, (ii) disclose at any time other than to the Company or Holdings any
Confidential Information (as defined in the Wolff Noncompetition Agreement) and
(iii) engage in any business with the Company or Holdings through an affiliate
for as long as Mr. Wolff or any member of his family is the beneficial owner of
Holdings' capital stock. In exchange for his covenant not to compete, Holdings
will pay Mr. Wolff $250,000 per annum for a period of ten years. In the event
that the Wolff Noncompetition Agreement is terminated for Cause (as defined in
the Wolff Noncompetition Agreement), Holdings will no longer be obligated to
make any payment to Mr. Wolff, but Mr. Wolff will remain obligated to comply
with the covenants set forth in the Wolff Noncompetition Agreement until its
expiration on the tenth anniversary of the Acquisition.
Indemnification Agreements. In connection with the Acquisition of
Winning Ways, the Company and each of its directors entered into indemnification
agreements. The indemnification agreements provide that the Company will
indemnify the directors against certain liabilities (including settlements) and
expenses actually and reasonably incurred by them in connection with any
threatened or pending legal action, proceeding or investigation (other than
actions brought by or in the right of the Company) to which any of them is, or
is threatened to be, made a party by reason of their status as a director,
officer or agent of the Company, or serving at the request of the Company in any
other capacity for or on behalf of the Company; provided that (i) such director
acted in good faith and in a manner not opposed to the best interest of the
Company, (ii) with respect to any criminal proceedings had no reasonable cause
to believe his or her conduct was unlawful, (iii) such director is not finally
adjudged to be liable for negligence or misconduct in the performance of his or
her duty to the Company, unless the court views in light of the circumstances
the director is nevertheless entitled to indemnification, and (iv) the
indemnification does not relate to any liability arising under Section 16(b) of
the Exchange Act, or the rules or regulations promulgated thereunder. With
respect to any action brought by or in the right of the Company, directors may
also be indemnified to the extent not prohibited by applicable laws or as
determined by a court of competent jurisdiction against expenses actually and
reasonably incurred by them in connection with such action if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interest of the Company.
46
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements appearing in
Item 8, which Index is incorporated herein by reference.
(2) Financial Statement Schedule
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are not applicable and therefore have been omitted, or the
information has been included in the consolidated financial statements and
supplementary data or is considered immaterial.
(3) Exhibits
A list of the exhibits included as part of this Form 10-K is set forth
below.
EXHIBIT INDEX
Exhibit
Number Description Page
------ ----------- ----
1 Purchase Agreement, dated September 17, 1997, by and
among GFSI Holdings, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation. *
2.1 Agreement for Purchase and Sale of Stock, dated January 24,
1997, among GFSI Holdings, Inc., GFSI, Inc. and the
Shareholders of Winning Ways, Inc. *
2.2 Amendment No. 1 to Agreement for Purchase and Sale of Stock,
dated February 27, 1997, among GFSI Holdings, Inc., GFSI, Inc.
and the Shareholders of Winning Ways, Inc. *
3.1 Certificate of Incorporation of GFSI Holdings, Inc. *
3.2 Bylaws of GFSI Holdings, Inc. *
4.1 Indenture, dated September 17, 1997, between
GFSI Holdings, Inc. and State Street Bank and
Trust Company as Trustee *
4.2 Global Series A Senior Discount Note *
4.4. Registration Rights Agreement, dated September 17, 1997,
by and among GFSI Holdings, Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation *
4.5 Subscription and Stockholders Agreement, dated
February 27, 1997, by and among GFSI Holdings, Inc.
and the investors listed thereto *
47
<PAGE>
Exhibit
Number Description Page
------ ----------- ----
10.1 Credit Agreement, dated February 27, 1997, by and among
GFSI, Inc., the lenders listed thereto and The First
National Bank of Chicago, as Agent *
10.2 Amendment No. 1 to Credit Agreement, dated September 17, 1997,
by and among GFSI, Inc., the lenders listed thereto and
The First National Bank of Chicago, as Agent *
10.3 Tax Sharing Agreement, dated February 27, 1997,
between GFSI, Inc. and GFSI Holdings, Inc. *
10.4 Management Consulting Agreement, dated February 27, 1997,
between GFSI Holdings, Inc. and TJC Management Corporation *
10.5 Employment Agreement, dated February 27, 1997, between
GFSI, Inc. and Robert M. Wolff *
10.6 Noncompetition Agreement, dated February 27, 1997, between
GFSI Holdings, Inc. and Robert M. Wolff *
10.7 Form of Indemnification Agreement, dated February 27, 1997,
between GFSI Holdings, Inc. and its director and
executive officers *
10.8 Form of Promissory Note, dated February 27, 1997, between
GFSI Holdings, Inc. and the Management Investors *
12 Statement re: Computation of Ratios
25 Statement of Eligibility of Trustee *
27 Financial Data Schedule
* Incorporated by reference to the exhibits filed with the
Registration Statement on Form S-4 of Holdings filed with
the Securities and Exchange Commission on December 17, 1997
(Commission File No. 333-38951) and all supplements thereto.
(b) Reports on Form 8-K
None.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on September 28, 1999.
GFSI HOLDINGS, INC.
By: /s/ JOHN L. MENGHINI
---------------------------------
John L. Menghini
President, Chief Executive Officer
and a Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on
September 28, 1999.
Signatures Title
---------- -----
/s/ ROBERT M. WOLFF Chairman and a Director
- -----------------------------
Robert M. Wolff
/s/ JOHN L. MENGHINI President, Chief Executive Officer
- ----------------------------- and a Director (Principal Executive Officer)
John L. Menghini
/s/ ROBERT G. SHAW Senior Vice President, Finance and a Director
- ----------------------------- (Principal Financial and Accounting Officer)
Robert G. Shaw
/s/ LARRY D. GRAVEEL Executive Vice President, Chief Operating
- ----------------------------- Officer and a Director
Larry D. Graveel
/s/ A. RICHARD CAPUTO, JR. Vice President and a Director
- ------------------------------
A. Richard Caputo, Jr.
/s/ JOHN W. JORDAN II Director
- -------------------------------
John W. Jordan II
/s/ DAVID W. ZALAZNICK Director
- -------------------------------
David W. Zalaznick
49
Exhibit 12
GFSI HOLDINGS, INC.
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED
CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------
June 30, June 30, June 27, July 3, July 2,
1995 1996 1997 1998 1999
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Registrant's pretax income from continuing
operations $ 26,220 $ 30,226 $ 26,940 $ 13,408 $ 6,038
Interest 2,522 2,608 8,704 23,018 23,837
Amortization of debt expense and
discount on premium 9 9 394 1,185 1,182
Total fixed charges 2,531 2,617 9,098 24,203 25,019
Total earnings and fixed charges 28,751 32,843 36,038 37,611 31,057
Preferred stock dividends 1,080 1,336 425
Total fixed charges and preferred
stock dividends 2,531 2,617 10,178 25,539 25,444
Ratio 11.4x 12.5x 3.5x 1.5x 1.2x
PRO FORMA
Pretax income from continuing
operations 11,106
Interest 25,015
Total earnings and fixed charges 36,121
Preferred stock dividends 228
Total fixed charges 25,243
Pro forma ratio 1.4x
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the GFSI
Holdings, Inc. Audited Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0001036180
<NAME> GFSI HOLDINGS, INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUL-03-1998 JUL-02-1999
<PERIOD-START> JUN-28-1997 JUL-03-1998
<PERIOD-END> JUL-03-1998 JUL-02-1999
<CASH> 1,360,853 10,278,391
<SECURITIES> 0 0
<RECEIVABLES> 28,485,327 29,213,195
<ALLOWANCES> 821,429 832,487
<INVENTORY> 44,298,295 36,323,596
<CURRENT-ASSETS> 76,486,285 77,813,843
<PP&E> 37,820,589 39,613,584
<DEPRECIATION> 16,578,089 19,368,979
<TOTAL-ASSETS> 106,531,609 105,679,801
<CURRENT-LIABILITIES> 26,617,475 27,270,719
<BONDS> 241,058,966 235,312,158
4,135,725 4,545,250
0 0
<COMMON> 20 20
<OTHER-SE> (166,814,943) (163,367,955)
<TOTAL-LIABILITY-AND-EQUITY> 106,531,609 105,679,801
<SALES> 211,164,245 203,900,105
<TOTAL-REVENUES> 211,164,245 203,900,105
<CGS> 119,616,037 114,860,210
<TOTAL-COSTS> 173,497,275 173,089,392
<OTHER-EXPENSES> 55,394 (245,821)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 24,203,492 25,019,024
<INCOME-PRETAX> 13,408,084 6,037,510
<INCOME-TAX> 5,257,242 2,164,530
<INCOME-CONTINUING> 8,150,842 3,872,980
<DISCONTINUED> 0 0
<EXTRAORDINARY> (202,929) 0
<CHANGES> 0 0
<NET-INCOME> 7,947,913 3,872,980
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
