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PROSPECTUS
GFSI, INC.
OFFER TO EXCHANGE ITS 9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF ITS
OUTSTANDING 9 5/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2007.
NOTWITHSTANDING THE DESIGNATION OF THE NOTES AS SENIOR SUBORDINATED NOTES,
THE COMPANY HAS NOT ISSUED, AND DOES NOT HAVE ANY CURRENT FIRM ARRANGEMENTS TO
ISSUE, ANY SIGNIFICANT INDEBTEDNESS TO WHICH THE NOTES WOULD BE SENIOR, AND
THE NOTES WILL BE EFFECTIVELY SUBORDINATE TO ESSENTIALLY ALL OF THE
OUTSTANDING INDEBTEDNESS OF THE COMPANY AND ITS SUBSIDIARIES. THE COMPANY DOES
NOT HAVE ANY CURRENT OR PENDING ARRANGEMENTS OR AGREEMENTS TO INCUR ANY
ADDITIONAL SIGNIFICANT INDEBTEDNESS TO WHICH THE NOTES WOULD BE SUBORDINATE.
GFSI, Inc., a Delaware corporation ("GFSI" or the "Company") and a direct,
wholly-owned subsidiary of GFSI Holdings, Inc., a Delaware corporation
("Holdings" or "Parent"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (the "Letter of Transmittal") (which together constitute the
"Exchange Offer"), to exchange up to $125 million aggregate principal amount
of 9 5/8% Series B Senior Subordinated Notes due 2007 (the "New Notes"), of
the Company for a like principal amount of the Company's issued and
outstanding 9 5/8% Series A Senior Subordinated Notes due 2007 (the "Old
Notes" and collectively with the New Notes, the "Notes"), with the holders
(each holder of Old Notes, a "Holder") thereof. The New Notes will be fully
and unconditionally guaranteed, jointly and severally, on a senior
subordinated basis, by all of the Company's future Restricted Subsidiaries (as
defined). The terms of the New Notes are substantially identical to the terms
of the Old Notes that are to be exchanged therefor. See "Description of the
Notes." The Company will receive no proceeds in connection with the Exchange
Offer. Upon the occurrence of a Change of Control, the Company will be
required, subject to certain conditions, to make an offer to purchase the
Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of purchase. In the event of a Change of
Control, there can be no assurance that the Company will have, or will have
access to, sufficient funds to repurchase the Notes or to pay the holders of
the Notes. See "Risk Factors--Change of Control Provisions; Limitations on
Rights of Repayment," "Description of Securities--Certain Covenants,"
"--Certain Definitions" and "Mandatory Offers to Purchase Senior Notes--Change
of Control."
Prior to the Exchange Offer, there has been no established trading market
for the Old Notes or the New Notes. The Company does not intend to apply for
listing or quotation of the New Notes on any securities exchange or stock
market. Therefore, there can be no assurance as to the liquidity of any
trading market for the New Notes or that an active public market for the New
Notes will develop. Any Old Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered, or
tendered but unaccepted, Old Notes could be adversely affected. Following the
consummation of the Exchange Offer, the holders of Old Notes will continue to
be subject to the existing restrictions on transfer thereof and the Company
will have no further obligations to such holders to provide for the
registration of the Old Notes under the Securities Act. See "The Exchange
Offer--Consequences of Not Exchanging Old Notes."
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON AUGUST 22, 1997, UNLESS EXTENDED.
(Cover continued on following page)
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
ON PAGE 15 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is July 24, 1997
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The Notes will be general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness of the
Company, including indebtedness under the New Credit Agreement, and pari passu
or senior in right of payment to any future subordinated indebtedness of the
Company. As of March 28, 1997, the aggregate principal amount of Senior
Indebtedness of the Company to which the Notes would have been subordinated
would have been approximately $68.0 million. The Indenture will permit the
Company and its subsidiaries to incur additional indebtedness, including
Senior Indebtedness, subject to certain limitations. See "Description of
Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
August 22, 1997, unless the Exchange Offer is extended (the "Expiration
Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain customary
conditions which may be waived by the Company. The Company has agreed to pay
the expenses of the Exchange Offer. There will be no cash proceeds to the
Company from the Exchange Offer. See "Use of Proceeds."
The Old Notes were issued and sold on February 27, 1997 (the "Old Note
Offering"), in a transaction not registered under the Securities Act of 1933,
as amended (the "Securities Act"), in reliance upon the exemption provided in
Section 4(2) of the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available. The New Notes
are being offered for exchange in order to satisfy certain obligations of the
Company under a Registration Rights Agreement (as defined) between the Company
and the Initial Purchasers (as defined). The New Notes will be obligations of
the Company evidencing the same indebtedness as the Old Notes and will be
entitled to the benefits of the same Indenture (as defined), which governs
both the Old Notes and the New Notes. The form and terms (including principal
amount, interest rate, maturity and ranking) of the New Notes are the same as
the form and terms of the Old Notes, except that the New Notes (i) will be
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Old Notes, (ii) will not be
entitled to registration rights and (iii) will not provide for any Liquidated
Damages (as defined). See "The Exchange Offer--Registration Rights; Liquidated
Damages."
The Company is making the Exchange Offer pursuant to the registration
statement of which this Prospectus is a part in reliance upon the position of
the staff of the Securities and Exchange Commission (the "Commission") set
forth in certain no-action letters addressed to other parties in other
transactions. However, the Company has not sought its own no-action letter and
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. Based on these
interpretations by the staff of the Commission, the Company believes that the
New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by Holders thereof (other than (i) any such
Holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes
directly from the Company solely in order to resell pursuant to Rule 144A of
the Securities Act or any other available exemption under the Securities Act,
or (iii) a broker-dealer who acquired the Old Notes as a result of market
making or other trading activities) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder is not participating and has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes.
By tendering, each Holder which is not a broker-dealer will represent to the
Company that, among other things, the person receiving the New Notes, whether
or not such person is the Holder, (i) will acquire the New Notes in the
ordinary course of such person's business, (ii) has no arrangement or
understanding with any person to participate in a distribution of the New
Notes and (iii) is not engaged in and does not intend to engage in a
distribution of the New Notes. If any Holder or any such other person has an
arrangement or understanding with any person to participate in a distribution
of such New Notes, is engaged in or intends to engage in a distribution
i
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of such New Notes, is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company, or acquired the Old Notes as a result of
market making or other trading activities, then such Holder or any such other
person (i) can not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes are acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 120 days after the
Expiration Date (as defined), it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
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SUMMARY
The following summary is qualified in its entirety by reference to and should
be read in conjunction with the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all references in this Prospectus to
the Company's business and pro forma data give effect to the Transactions (as
defined). Unless the context indicates or otherwise requires, references in
this Prospectus to the "Company" are to GFSI, Inc. and its predecessor, Winning
Ways, Inc., and references to a fiscal year are to the twelve months ended June
30 of such year.
THE COMPANY
The Company, which operates primarily under the brand name GEAR For Sports(R)
("GEAR"), 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, 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 13,000
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. The Company
believes that it has been able to compete successfully because of its ability
to create diverse and innovative designs, provide excellent customer service,
leverage its GEAR brand name and differentiate its products on the basis of
quality.
From fiscal 1991 to fiscal 1996, the Company's net sales increased from $94.7
million to $169.3 million from internal growth, representing a compound annual
growth rate ("CAGR") of 12.3% and an actual annual growth rate of 24.8%, 2.5%,
5.8%, 15.6% and 14.3% for the fiscal years of 1992, 1993, 1994, 1995, and 1996,
respectively. During the same period, the Company's EBITDA (as defined) grew
from $17.9 million to $36.0 million, representing a CAGR of 15.0% and an actual
annual growth rate of 28.5%, 7.7%, 8.7%, 18.2% and 13.5% for the fiscal years
of 1992, 1993, 1994, 1995, and 1996, respectively. The Company's EBITDA margin
for the period increased from 18.9% to 21.3% with an actual annual growth rate
of 2.6%, 5.2%, 2.9%, 1.9% and (0.5%) for the fiscal years of 1992, 1993, 1994,
1995, and 1996, respectively. At the same time, the Company's net income
increased from $14.5 million to $30.2 million, representing a CAGR of 15.8% and
an actual annual growth rate of 24.4%, 10.9%, 10.2%, 18.6% and 15.3% for the
fiscal years of 1992, 1993, 1994, 1995, and 1996 respectively. The Company's
cash flows from operating activities increased from $14.4 million to $34.0
million for the same periods, representing CAGR of 18.7% and an actual annual
growth rate of (22.6%), 88.4%, 16.4%, 2.2% and 42.2% for the fiscal years of
1992, 1993, 1994, 1995, and 1996, respectively. The Company believes it has
achieved a record of strong sales and EBITDA growth and stable operating
margins primarily due to its: (i) leading positions in niche markets;
(ii) diversified and stable customer base; (iii) superior product quality and
customer service; (iv) broad product portfolio; (v) value-added design and
manufacturing capabilities; and (vi) innovative management. The Company expects
to continue to grow by leveraging the strength of the GEAR brand name to expand
its product lines and access underpenetrated segments of its markets. The
Company believes that it is less vulnerable to earnings fluctuations than
typical apparel manufacturers and marketers because: (i) the Company designs
and custom manufactures basic, classic products with low fashion risk; (ii)
consumer demand for sportswear and activewear continues to increase; and (iii)
the Company's products are customized based on firm customer orders, minimizing
its risk of excess inventory.
The Company markets its products primarily through four separate divisions,
each of which serves distinct distribution channels and utilizes a salesforce
with a specialized knowledge of its particular markets and customers. The
Company's network of approximately 140 independent sales representatives and
over 70 in-house artists and graphic designers work directly with the Company's
customers to create innovative sportswear and activewear products to meet
customer specifications. The Company's four divisions include:
<PAGE>
[ ] The Resort Division (40.0% of fiscal 1996 net sales) is a leading
marketer of custom logoed sportswear and activewear to over 6,100 active
customer accounts, including destination resorts, family entertainment
companies, hotel chains, golf clubs, cruise lines, casinos and United
States military bases. The division's customers include widely recognized
names such as The Walt Disney Company, Universal Studios, The Ritz
Carlton, Pebble Beach, Princess Cruise Lines and The Mirage. The Company
believes that the breadth of its coordinated product line and its
national scope provide it with a distinct competitive advantage in the
resort market. See "Business--Sales Divisions--Resort Division."
[ ] The Corporate Division (27.9% of fiscal 1996 net sales) 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
3,500 active customer accounts, including Toyota, Hershey, Dr Pepper/7Up,
Anheuser-Busch, MCI and Exxon. The Company believes that it has an
advantage over its competitors because it is one of the few national
brand name suppliers of sportswear and activewear focused on the
corporate market. In addition, the Company recently formed Tandem
Marketing to leverage its existing corporate customer base by developing
and administering corporate fulfillment programs. The Company typically
implements corporate fulfillment programs in conjunction with a catalogue
featuring a full line of both apparel and non-apparel merchandise
customized with the corporate customer's name, logo or message. See
"Business--Sales Divisions--Corporate Division."
[ ] The College Bookstore Division (22.3% of fiscal 1996 net sales) 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, as well as high volume, university managed bookstores, such
as the University of Notre Dame, the University of Southern California,
Yale University, the University of Michigan and the United States Air
Force and Naval academies. The National Association of College Stores has
selected the Company as "Vendor of the Year" three times, an honor no
other supplier has won more than once. See "Business--Sales Divisions--
College Bookstore Division."
[ ] The Sports Specialty Division (3.7% of fiscal 1996 net sales),
established in 1994, 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, Major
League Baseball ("MLB"), the National Basketball Association ("NBA"), the
National Hockey League ("NHL"), NASCAR and The Breeder's Cup. The
division targets the upscale adult sports enthusiast through the
Company's existing distribution channels as well as through new channels
such as stadium stores and team retail outlets. The division markets its
products to over 600 active customer accounts, including the Indianapolis
Motor Speedway, the Chicago Bulls, the Cleveland Indians, the Boston
Bruins and Madison Square Garden. See "Business--Sales Divisions--Sports
Specialty Division."
FINANCIAL CHARACTERISTICS. The Company's business has the following financial
characteristics:
[ ] Diverse and Stable Customer Base. The Company sells to its niche markets
through a diverse base of over 13,000 active customer accounts. In fiscal
1996, no single account represented more than 2.5% of net sales, and the
Company's top ten customers which include various large corporations,
major universities and destination resorts, accounted for less than 13%
of net sales. Accordingly, the Company believes that the loss of any
single customer would not have a material adverse effect on the Company
and that none of its customers is, individually, material to the
Company's operations. The number of active customer accounts increased
from approximately 5,600 in fiscal 1991 to over 13,000 in fiscal 1996.
New potential end-users of the Company's products are added each year as
new customers visit
2
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resorts and participate in other leisure activities, corporations
continue to expand their identity and promotional programs and new
students enroll at colleges and universities. See "Business--Financial
Characteristics"
[] Strong Sales and EBITDA Growth. From fiscal 1991 to fiscal 1996, the
Company's net sales increased from $94.7 million to $169.3 million from
internal growth, representing a CAGR of 12.3% and an actual annual growth
rate of 24.8%, 2.5%, 5.8%, 15.6% and 14.3% for the fiscal years of 1992,
1993, 1994, 1995, and 1996, respectively. During the same period, the
Company's EBITDA (as defined) grew from $17.9 million to $36.0 million,
representing a CAGR of 15.0% and an actual annual growth rate of 28.5%,
7.7%, 8.7% 18.2% and 13.5% for the fiscal years of 1992, 1993, 1994,
1995, and 1996, respectively. The Company's EBITDA margin for the period
increased from 18.9% to 21.3% with an actual annual growth rate of 2.6%,
5.2%, 2.9%, 1.9% and (0.5%) for the fiscal years of 1992, 1993, 1994,
1995, and 1996, respectively. The Company believes that this growth can
be attributed to: (i) its focus on niche markets where competition is
generally based on product and service quality rather than price; (ii)
operating leverage resulting from the introduction of new products in
established distribution channels; and (iii) its focus on manufacturing
efficiencies. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Results of Operations."
[] Low Capital Expenditures. The Company concentrates on the high value-
added production processes of custom design, embroidery, silk-screening
and other finishing elements at its state-of-the-art manufacturing
facilities. The capital intensive process of manufacturing unfinished
garments ("blanks") and other items is outsourced to a network of foreign
and domestic independent manufacturers who comply with the Company's
stringent specifications. As a result, the Company maintains low fixed
costs and requires limited annual capital expenditures. From fiscal 1992
to fiscal 1996, total annual capital expenditures averaged approximately
$3 million, or an average of 2.2% of net sales and 10.5% of EBITDA for
such years. See "Selected Historical Financial Data."
[] Historically Non-Cyclical Business. The Company has not experienced a
reduction of its business as a result of past general economic downturns.
The Company believes that its record of consistent growth is a result of
the relatively non-cyclical nature of its primary market segments as well
as its competitive position as a supplier of high quality, customized
products that are less susceptible to consumer price sensitivity. The
Company believes that the diversity of its products, distribution
channels and markets also minimizes its exposure to particular customers,
economic cycles and geographic concentration.
BUSINESS STRATEGY. The Company's objective is to continue to increase sales,
EBITDA and operating margins, and is based upon the following strategic
elements:
[] Superior Product Quality and Customer Service. Each of the Company's
divisions focuses on high-end, customized sportswear, activewear and
related products. The Company's products uniquely address each account's
specific requirements, while providing the end-user with a high quality
product. The Company's ability to maintain consistency in product quality
and customer service, regardless of order size, enables it to effectively
service a broad range of customers. With over 70 in-house artists and
graphic designers and state-of-the-art manufacturing and distribution
facilities, the Company believes that it provides products and service
that are superior to those of its competitors in each of its markets.
[] Leading Position in Multiple Niche Markets. The Company has a leading
position in the resort, corporate and college bookstore markets. The
Company's superior service and product customization enable it to more
effectively serve the particular needs of these customers. As a result,
the Company believes that: (i) it is one of the few national competitors
in the highly fragmented resort and leisure market; (ii) it has a leading
share of the corporate identity market, where it competes primarily with
smaller local and regional companies as well as a few national
competitors; and (iii) it has the second largest share of the college
bookstore market.
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. Leveraging the GEAR For Sports(R) Brand Name. The Company leverages its
GEAR brand name by introducing new products through its established
distribution channels. For example, the Company recently introduced new
headwear, sports luggage and Baby GEAR product lines. The Company
believes that the GEAR brand name is widely recognized by customers and
end-users in each of its markets and enjoys a reputation for high quality
products. The Company intends to continue to leverage this brand name
recognition through its existing distribution channels as well as through
alternative distribution channels and markets.
. Efficient Operations. The Company uses its state-of-the-art facilities to
design, embroider and screenprint a significant portion of its products.
In addition, the Company uses independent contractors to manufacture its
blanks and, where appropriate, to provide other value-added manufacturing
services in order to maximize sourcing flexibility while minimizing
overhead costs and fixed charges. Only one of these independent
contractors supplies such services exclusively to the Company. The
Company does not have a contract with this independent contractor. The
Company minimizes the risk of excess inventory by designing and
manufacturing its products against firm customers orders.
. Experienced Management Team with Significant Equity Ownership. The
Company's management team has extensive experience in the sportswear and
activewear business. The top five senior executives have each been with
the Company for at least 13 years and have combined industry experience
of over 115 years. Approximately 20 members of the management team
contributed an aggregate of $13.6 million in exchange for 50% of the
capital stock of the Company's parent, GFSI Holdings, Inc. ("Holdings").
The management team will have significant incentive to continue to
increase the Company's sales and EBITDA as a result of their substantial
equity ownership and performance based incentive compensation programs
that the Company intends to implement.
----------------
The Company was incorporated in the state of Delaware on January 15, 1996. On
February 27, 1997, the Company effected a merger with Winning Ways, Inc.
("Winning Ways"), a Missouri corporation, in which Winning Ways merged with and
into the Company. The Company's principal executive offices are located at 9700
Commerce Parkway, Lenexa, Kansas 66219 and its telephone number is (913) 888-
0445.
THE TRANSACTIONS
Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by
affiliates of The Jordan Company ("TJC") and management, including
Jordan/Zalaznick Capital Corporation, A. Richard Caputo, Jr., John W. Jordan
II, David W. Zalaznick, MCIT PLC, Leucadia Investors, Inc., Jonathan F.
Boucher, Adam E. Max, John R. Lowden, James E. Jordan, Paul Rodzevik and
Douglas Zych (each of which may be deemed to be affiliates of TJC), John L.
Menghini, Robert G. Shaw, Robert M. Wolff, Larry D. Graveel, Michael H. Gary,
Martin Becker, Terry Glenn, Kirk Kowalewski, Mark Schimpf, Anthony Gagliano,
David Churchman, Dave Geneens, Steve Arnold, Frank Pikus, Jason Krakow, Carl
Allard, Howie Ellis, Scott Durham, Tom Martin, John White, Sue Agnitsch, Dave
Hosier and Jim Keaton (each of which are members of management), to effect the
acquisition of Winning Ways. Pursuant to an agreement for the purchase and sale
of stock, dated as of January 24, 1997 (the "Acquisition Agreement"), Holdings
and GFSI acquired all of the issued and outstanding capital stock of Winning
Ways on February 27, 1997, and Winning Ways immediately thereafter merged with
and into GFSI.
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 the Winning Ways'
Existing Indebtedness (as defined) including a $2.4 million prepayment penalty.
To finance the Acquisition, including approximately $11.5 million of related
fees and expenses: (i) TJC, its affiliates and MCIT 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 in cash to the
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<PAGE>
Company (the "Equity Contribution"); (ii) the Company consummated the offering
of Old Notes in the aggregate principal amount of $125.0 million (the
"Offering"); and (iii) the Company entered into a credit agreement (the "New
Credit Agreement"), providing for borrowings of up to $115.0 million, of which
approximately $68.0 million was outstanding and $22.9 million was utilized to
cover outstanding letters of credit at Closing. The Equity Contribution is
comprised of: (i) a contribution of $13.6 million from the Jordan Investors to
Holdings in exchange for cumulative preferred stock of Holdings due 2009
("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 subordinated notes of Holdings (the
"Holdings Subordinated Notes"). Approximately $0.8 million of the contribution
from the Management Investors was financed by loans from Holdings. Consummation
of the Offering was conditioned upon the concurrent consummation of the
Acquisition, the Equity Contribution and the initial borrowings under the New
Credit Agreement. For additional information, see "The Transactions" and "Use
of Proceeds."
The Company's predecessor, Winning Ways, terminated its income tax reporting
status as an S-Corporation immediately prior to the Closing of the Transactions
on February 27, 1997. Immediately prior to the Closing, Winning Ways
distributed to its shareholders $26.1 million, representing the accumulated and
undistributed S-Corporation earnings of the Company as of February 27, 1997.
The Company recognized, with a post-closing adjustment, $1.0 million in net
deferred income tax liabilities upon the conversion from S-Corporation to
C-Corporation status for income tax reporting purposes. The Company does not
anticipate any future material adverse tax liabilities arising from this
distribution.
5
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THE EXCHANGE OFFER
Securities Offered.......... $125,000,000 principal amount of 9 5/8% Series B
Senior Subordinated Notes due 2007. The terms of
the New Notes and the Old Notes are identical in
all material respects, except for certain
transfer restrictions and registration rights
relating to the Old Notes and except for certain
Liquidated Damages provisions relating to the Old
Notes described below under "--Summary
Description of the New Notes."
Issuance of Old Notes;
Registration Rights........ The Old Notes were issued on February 27, 1997 to
Donaldson, Lufkin & Jenrette Securities
Corporation and Jefferies & Company, Inc.
(collectively, the "Initial Purchasers"), which
placed the Old Notes with "qualified
institutional buyers" (as such term is defined in
Rule 144A promulgated under the Securities Act).
In connection therewith, the Company executed and
delivered for the benefit of the holders of Old
Notes a certain registration rights agreement
(the "Registration Rights Agreement"), pursuant
to which the Company agreed (i) to file a
registration statement (the "Registration
Statement") on or prior to 90 days after February
27, 1997 with respect to the Exchange Offer and
(ii) to use their best efforts to cause the
Registration Statement to be declared effective
by the Commission on or prior to 150 days after
February 27, 1997. In certain circumstances, the
Company will be required to provide a shelf
registration statement (the "Shelf Registration
Statement") to cover resales of the Old Notes by
the holders thereof. If the Company does not
comply with its obligations under the
Registration Rights Agreement, it will be
required to pay Liquidated Damages to holders of
the Old Notes under certain circumstances. See
"The Exchange Offer--Registration Rights;
Liquidated Damages." Holders of Old Notes do not
have any appraisal rights in connection with the
Exchange Offer.
The Exchange Offer.......... The New Notes are being offered in exchange for a
like principal amount of Old Notes. The issuance
of the New Notes is intended to satisfy the
obligations of the Company contained in the
Registration Rights Agreement. Based upon the
position of the staff of the Commission set forth
in no-action letters issued to third parties in
other transactions substantially similar to the
Exchange Offer, the Company believes that the New
Notes issued pursuant to the Exchange Offer may
be offered for resale, resold and otherwise
transferred by holders thereof (other than (i)
any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act, (ii) an Initial Purchaser who
acquired the Old Notes directly from the Company
solely in order to resell pursuant to Rule 144A
of the Securities Act or any other available
exemption under the Securities Act, or (iii) a
broker-dealer who acquired the Old Notes as a
result of market making or other trading
activities) without further compliance with the
registration and prospectus delivery requirements
of the Securities Act, provided that
6
<PAGE>
such New Notes are acquired in the ordinary
course of such holder's business and such holder
is not participating and has no arrangement or
understanding with any person to participate in a
distribution (within the meaning of the
Securities Act) of such New Notes. By tendering,
each Holder, which is not a broker-dealer will
represent to the Company that, among other
things, the person receiving the New Notes,
whether or not such person is the Holder, (i)
will acquire the New Notes in the ordinary course
of such person's business, (ii) has no
arrangement or understanding with any person to
participate in a distribution of the New Notes
and (iii) is not engaged in and does not intend
to engage in a distribution of the New Notes. If
any Holder or any such other person has an
arrangement or understanding with any person to
participate in a distribution of such New Notes,
is engaged in or intends to engage in a
distribution of such New Notes, is an
"affiliate," as defined under Rule 405 of the
Securities Act, of the Company, or acquired the
Old Notes as a result of market making or other
trading activities, then such Holder or any such
other person (i) can not rely on the applicable
interpretations of the staff of the Commission
and (ii) must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Each broker-dealer that receives New
Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale for such New Notes. Although there has
been no indication of any change in the staff's
position, there can be no assurance that the
staff of the Commission would make a similar
determination with respect to the resale of the
New Notes. See "Risk Factors."
Procedures for Tendering.. Tendering holders of Old Notes must complete and
sign the Letter of Transmittal in accordance with
the instructions contained therein and forward
the same by mail, facsimile or hand delivery,
together with any other required documents, to
the Exchange Agent, either with the Old Notes to
be tendered or in compliance with the specified
procedures for guaranteed delivery of Old Notes.
Holders of the Old Notes desiring to tender such
Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Old
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
are urged to contact such person promptly if they
wish to tender Old Notes pursuant to the Exchange
Offer. Letters of Transmittal and certificates
representing Old Notes should not be sent to the
Company. Such documents should only be sent to
the Exchange Agent. Questions regarding how to
tender and requests for information should be
directed to the Exchange Agent. See "The Exchange
Offer--Procedures for Tendering Old Notes."
7
<PAGE>
Tenders, Expiration Date;
Withdrawal............... The Exchange Offer will expire the earlier of (i)
5:00 p.m., New York City time, on August 22, 1997
or (ii) the date when all Old Notes have been
tendered, or such later date and time to which it
is extended, provided it may not be extended
beyond September 5, 1997. The tender of Old Notes
pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any Old
Note not accepted for exchange for any reason will
be returned without expense to the tendering
holder thereof as promptly as practicable after
the expiration or termination of the Exchange
Offer. See "The Exchange Offer--Terms of the
Exchange Offer; Period for Tendering Old Notes"
and "--Withdrawal Rights."
Certain Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain customary
conditions, all of which may be waived by the
Company, including the absence of
(i) threatened or pending proceedings seeking to
restrain the Exchange Offer or resulting in a
material delay to the Exchange Offer; (ii) a
general suspension of trading on any national
securities exchange or in the over-the-counter
market; (iii) a banking moratorium; (iv) a
commencement of war, armed hostilities or other
similar international calamity directly or
indirectly involving the United States; and (v)
change or threatened change in the business,
properties, assets, liabilities, financial
condition, operations, results of operations or
prospects of the Company and its subsidiaries
taken as a whole that, in the sole judgment of the
Company, is or may be adverse to the Company. The
Company shall not be required to accept for
exchange, or to issue New Notes in exchange for,
any Old Notes, if at any time before the
acceptance of such Old Notes for exchange or the
exchange of New Notes for such Old Notes, any of
the foregoing events occurs which, in the sole
judgment of the Company, make it inadvisable to
proceed with the Exchange Offer and/or with such
acceptance for exchange or with such exchange. In
the event the Company asserts or waives a
condition to the Exchange Offer which constitutes
a material change to the terms of the Exchange
Offer, the Company will disclose such change in a
manner reasonably calculated to inform prospective
investors of such change, and will extend the
period of the Exchange Offer by five business
days. If the Company fails to consummate the
Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy,
it will file with the Commission a Shelf
Registration Statement to cover resales of the
Transfer Restricted Securities (as defined) by the
holders thereof who satisfy certain conditions. If
the Company fails to consummate the Exchange Offer
or file a Shelf Registration Statement in
accordance with the Registration Rights Agreement,
the Company will pay Liquidated Damages to each
holder of Transfer Restricted Securities until the
cure of all defaults. The Exchange Offer is not
conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
See "The Exchange Offer--Registration Rights;
Liquidated Damages" and "--Certain Conditions to
the Exchange Offer."
Federal Income Tax
Consequences............ In the opinion of Mayer, Brown & Platt, tax
counsel to the Company, for Federal income tax
purposes, the exchange pursuant to the Exchange
8
<PAGE>
Offer will not result in any income, gain or loss
to the Holders or the Company. See "Certain
Federal Income Tax Considerations" for a
dicussion of the material Federal income tax
consequences expected to result from the Exchange
Offer.
Use of Proceeds............. There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Appraisal Rights............ Holders of Old Notes will not have dissenters'
rights or appraisal rights in connection with the
Exchange Offer.
Exchange Agent.............. Fleet National Bank is serving as Exchange Agent
in connection with the Exchange Offer.
CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. See "Risk
Factors--Consequences of Exchange and Failure to Exchange" and "The Exchange
Offer--Consequences of Exchanging Old Notes."
SUMMARY DESCRIPTION OF THE NEW NOTES
Notwithstanding the designation of the Notes as Senior Subordinated Notes,
the Company has not issued, and does not have any current firm arrangements to
issue, any significant indebtedness to which the Notes would be senior, and the
Notes will be effectively subordinate to essentially all of the outstanding
indebtedness of the Company and its subsidiaries. The Company does not have any
current or pending arrangements or agreements to incur any additional
significant indebtedness to which the Notes would be subordinate.
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that, if the Exchange Offer is not
consummated by September 5, 1997, subject to certain exceptions, with respect
to the first 90-day period immediately following thereafter, the Company will
be obligated to pay Liquidated Damages to each Holder of Old Notes in an amount
equal to $.05 per week for each $1,000 principal amount of Old Notes, as
applicable, held by such Holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week with respect to each subsequent 90-day
period until the Exchange Offer is consummated, or any other Registration
Default (as defined) is cured, up to a maximum of $.40 per week for each $1,000
principal amount of Old Securities, as applicable.
The New Notes will bear interest from the most recent date to which interest
has been paid on the Old Notes or, if no interest has been paid on the Old
Notes, from February 27, 1997. Accordingly, registered Holders of New Notes on
the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from February 27, 1997. Old Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
of Old Notes whose Old Notes are accepted for exchange will not receive any
payment in respect of interest on such Old Notes otherwise payable on any
interest payment date which occurs on or after consummation of the Exchange
Offer.
9
<PAGE>
THE NEW NOTES
Issuer...................... GFSI, Inc.
Securities Offered.......... $125 million aggregate principal amount of 9 5/8%
Series B Senior Subordinated Notes due 2007.
Maturity.................... March 1, 2007.
Interest.................... The Old Notes bear interest and the New Notes
will bear interest at a rate of 9 5/8% per annum,
payable semi-annually in cash in arrears on each
March 1 and September 1, commencing on the first
such date to occur after the Expiration Date.
Optional Redemption......... On or after March 1, 2002, the Notes will be
redeemable at the option of the Company, in whole
or in part, at any time at the redemption prices
set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of redemption. Notwithstanding the
foregoing, at any time prior to March 1, 2000,
the Company may redeem up to 40% of the original
aggregate principal amount of the Notes with the
net proceeds of one or more Equity Offerings (as
defined) at a redemption price equal to 110% of
the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of redemption. See "Description of
Notes--Redemption of Notes."
Mandatory Redemption........ Except after the passage of certain events, the
Company is not required to make any mandatory
redemption, purchase or sinking fund payments
with respect to the Notes. See "Description of
Notes--Mandatory Offers to Purchase Notes."
Change of Control........... Upon the occurrence of a Change of Control (as
defined), each holder of Notes will have the
right to require the Company to purchase such
holder's Notes pursuant to an Offer (as defined)
at a purchase price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if
any, to the date of purchase. Certain
transactions with affiliates of the Company may
not be deemed to be a Change of Control.
Transactions constituting a Change of Control are
not limited to hostile takeover transactions not
approved by the current management of the
Company. Except as described under "Description
of Notes--Mandatory Offers to Purchase Notes,"
the Indenture does not contain provisions that
permit the holders of Notes to require the
Company to purchase or redeem the Notes in the
event of a takeover, recapitalization or similar
restructuring, including an issuer
recapitalization or similar transaction with
management.
Guarantees.................. The Notes will be fully and unconditionally
guaranteed (the "Note Guarantees"), jointly and
severally, on a senior subordinated basis, by all
of the Company's future Restricted Subsidiaries
(the "Guarantors"). As of the date of the
Indenture (as defined), the Company does not have
any Subsidiaries (as defined).
10
<PAGE>
Ranking..................... The Notes will be general unsecured obligations
of the Company, subordinated in right of payment
to all existing and future Senior Indebtedness
(as defined) of the Company, including
Indebtedness (as defined) under the New Credit
Agreement, and pari passu or senior in right of
payment to any future subordinated Indebtedness
of the Company. As of March 28, 1997, the
aggregate principal amount of Senior Indebtedness
of the Company to which the Notes would have been
subordinated would have been approximately $68.0
million. The indenture pursuant to which the
Notes will be issued (the "Indenture") will
permit the Company and its subsidiaries to incur
additional Indebtedness, including Senior
Indebtedness, subject to certain limitations,
including a specified Cash Flow Coverage Ratio
(as defined). See "Description of Notes--Certain
Covenants" and "Description of Certain
Indebtedness."
The Company believes that prepayment of the Notes
pursuant to a Change of Control would constitute
a default under the New Credit Agreement. In the
event a Change of Control occurs, the Company
will likely be required to refinance the
Indebtedness outstanding under the New Credit
Agreement and the Notes. If there is a Change of
Control, any Indebtedness under the New Credit
Agreement could be accelerated, which
Indebtedness is secured and effectively ranks
senior to the Notes. Moreover, there can be no
assurance that sufficient funds will be available
at the time of any Change of Control to make any
required repurchases of the Notes given the
Company's high leverage. See "Risk Factors--
Leverage and Debt Service."
Certain Covenants........... The Indenture contains the following material
covenants which limit the ability of the Company
and its Restricted Subsidiaries to: (i) pay
dividends or make certain other Restricted
Payments (as defined); (ii) incur additional
Indebtedness; (iii) encumber or sell assets; (iv)
enter into certain guarantees of Indebtedness;
(v) enter into transactions with affiliates; and
(vi) merge or consolidate with any other entity
and to transfer or lease all or substantially all
of their assets. In addition, under certain
circumstances, the Company is required to offer
to purchase Notes at a price equal to 100% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of purchase with the proceeds of certain
Asset Sales (as defined). See "Description of
Notes--Certain Covenants" and "--Mandatory Offers
to Purchase Notes--Asset Sales."
Satisfaction and
Discharge.................. The Indenture contains provisions which would
allow the Company to terminate all of its and any
future guarantors obligations under the Notes,
any guarantees of Notes and the Indenture,
including the covenants contained in the
Indenture, except for certain specified
obligations. In order to exercise this option
with respect to the Notes outstanding, the
Company must irrevocably deposit in trust with
the trustee money or U.S. Government obligations
(as defined) for the payment of principal of and
premium and unpaid interest and
11
<PAGE>
Liquidated Damages, if any, on the Notes then
outstanding to redemption or maturity, as the
case may be, and must comply with certain other
conditions. See "Description of Notes--
Satisfaction and Discharge of the Indenture."
RISK FACTORS
Holders of Old Notes should consider carefully all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors." Risk factors which Holders of Old Notes
should evaluate include the consequences of exchanging and not exchanging Old
Notes for New Notes, the Company's leverage and coverage, the ranking of the
Notes among other indebtedness of the Company, the Company's dependence on
intercompany transfers to meet its debt service and other obligations, the
Company's limited operating history and the limited relevance of its historical
financial information, the restrictive covenants contained in the Indenture and
the New Credit Agreement, the absence of a market for the New Notes, the
ability of the Company to purchase the Notes upon a Change of Control, the
influence of the Company's principal stockholders and fraudulent transfer
considerations.
12
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The discussions set forth within may contain forward-looking comments based
on current expectations that involve a number of risks and uncertainties.
Actual results could differ materially from those projected or suggested in the
forward-looking comments. Factor's that could cause the Company's actual
results in future periods to differ materially include, but are not limited to,
those which may be discussed herein, as well as those discussed or identified
from time to time in the Company's filings with the Commission.
The following table presents summary: (i) historical operating and other data
of the Company for the fiscal years ended June 30, 1992, 1993, 1994, 1995 and
1996, and the nine months ended March 31, 1996, and March 28, 1997; (ii)
historical balance sheet data of the Company for the fiscal years, ended June
30, 1992, 1993, 1994, 1995 and 1996, and the nine months ended March 28, 1997;
and (iii) pro forma data for fiscal 1996, and the nine months ended March 28,
1997. The historical financial statements of the Company for fiscal 1992, 1993,
1994 and 1995 have been audited by Donnelly Meiners Jordan Kline, and the
historical financial statements for fiscal 1996 have been audited by Deloitte &
Touche LLP. The historical data of the Company for the nine months ended March
31, 1996, and March 28, 1997 have been derived from, and should be read in
conjunction with, the unaudited financial statements of the Company and the
related notes thereto, which are included elsewhere in this Prospectus. In the
opinion of management, such interim financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the information presented for such periods. The results of
operations for the nine months ended March 28, 1997 are not necessarily
indicative of the results of operations to be expected for the full year. The
pro forma income statement data of the Company for the nine months ended March
28, 1997, and the year ended June 30, 1996 have been prepared as if the
Transactions had occurred on the first day of such period. The summary pro
forma data does not purport to represent what the Company's results of
operations or financial position would have been if the Transactions had been
completed as of the date or for the periods presented, nor does such data
purport to represent the results of operations for any future period. The
summary financial data set forth below should be read in conjunction with "The
Transactions," "Selected Historical Financial Data," "Management's Discussion
and Analysis of Results of Operations and Financial Condition," the unaudited
pro forma financial statements and the historical financial statements of the
Company and the related notes thereto included elsewhere in this Prospectus.
Effective February 27, 1997, Winning Ways, Inc., merged with and into GFSI,
Inc., a new entity with no previous operations, with GFSI, Inc. as the
surviving entity. The statements of income data and other data presented below
includes historical information of Winning Ways, Inc. through the merger date
and the merged entity subsequent, thereto.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED
-------------------------------------------- -------------------
MARCH 31, MARCH 28,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Net sales............... $118,187 $121,131 $128,171 $148,196 $169,321 $132,068 $ 144,182
Gross profit............ 47,079 50,936 53,724 63,327 72,013 57,347 64,060
Operating expenses...... 25,949 28,201 29,151 34,428 39,179 30,030 33,835
Operating income........ 21,130 22,735 24,573 28,899 32,834 27,317 30,225(/3/)
BALANCE SHEET DATA (AS
OF PERIOD END):
Cash and cash
equivalents............ $ 527 $ 219 $ 132 $ 112 $ 140 $ 5,569
Total assets............ 64,520 67,510 70,176 76,938 78,711 98,446
Long-term debt,
including current
portion................ 22,760 19,157 27,242 24,915 22,276 190,000
Total stockholders'
equity deficiency...... 27,489 27,502 29,429 32,106 34,479 (121,608)
PRO FORMA DATA(5):
Operating Income........ $ 32,980 $ 30,155
Net Income.............. $ 8,368 $ 9,618
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(1)............... $22,960 $24,733 $26,876 $31,759 $36,035 $29,696 $32,769
Cash flows from
operating activities... 11,138 20,985 24,431 23,905 34,000 28,424 25,821
Cash flows from
investing activities... (2,149) (2,163) (2,597) (4,255) (2,480) (1,238) (1,566)
Cash flows from
financing activities... (8,995) (19,130) (21,921) (19,669) (31,493) (25,277) (18,826)
Depreciation and
amortization........... 1,830 1,998 2,303 2,860 3,201 2,379 2,544
Capital expenditures.... 2,149 2,304 2,856 4,989 2,611 1,360 2,512
EBITDA margin(2)........ 19.4% 20.4% 21.0% 21.4% 21.3% 22.5% 22.7%
Ratio of earnings to
fixed charges(4)....... 7.6x 9.1x 10.0x 11.4x 12.6x 13.4x 9.1x
</TABLE>
- --------------------
(1) 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 ("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.
(2) EBITDA margin represents EBITDA as a percentage of net sales.
(3) The operating income presented for the nine months ended March 28, 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). See the
unaudited statements of income and the related notes thereto included
elsewhere in this prospectus.
(4) The ratio of earnings to fixed charges computed on a pro forma basis would
have been 1.8x and 2.1x for the fiscal year ended June 30, 1996 and the
nine months ended March 28, 1997, respectively. Adjustments to pro forma
fixed charges include the additional interest expense related to the new
indebtedness incurred upon completion of the Acquisition. See "The
Transactions." Adjustments to pro forma pretax income from operations
include a reduction in depreciation expense related to the sale of the
corporate aircraft and reduction of insurance expense due to the
liquidation of officer life insurance policies.
(5) See "GFSI, Inc. Unaudited Pro Forma Statements of Income."
14
<PAGE>
RISK FACTORS
Holders of the Old Notes should carefully consider the following risk
factors, as well as other information set forth in this Prospectus, before
tendering their Old Notes in the Exchange Offer. The risk factors set forth
below (other than "Consequences of Exchange and Failure to Exchange") are
generally applicable to the Old Notes as well as the New Notes.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Notes
under the Securities Act. In addition, upon the consummation of the Exchange
Offer holders of Old Notes which remain outstanding will not be entitled to
any rights to have such Old Notes registered under the Securities Act or to
any rights under the Registration Rights Agreement. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered, or tendered but unaccepted, Old Notes could be adversely
affected. See "The Exchange Offer--Consequences of Not Exchanging Old Notes."
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties in other transactions substantially
similar to the Exchange Offer, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) an Initial Purchaser who acquired the Old Notes directly
from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, or
(iii) a broker-dealer who acquired the Old Notes as a result of market making
or other trading activities) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and
that such holder is not participating and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. The Company has not, however, sought its
own no-action letter from the staff of the Commission. Although there has been
no indication of any change in the staff's position, there can be no assurance
that the staff of the Commission would make a similar determination with
respect to the resale of the New Notes. By tendering, each Holder which is not
a broker-dealer will represent to the Company that, among other things, the
person receiving the New Notes, whether or not such person is the Holder, (i)
will acquire the New Notes in the ordinary course of such person's business,
(ii) has no arrangement or understanding with any person to participate in a
distribution of the New Notes, and (iii) is not engaged in and does not intend
to engage in a distribution of the New Notes. If any Holder or any such other
person has an arrangement or understanding with any person to participate in a
distribution of such New Notes, is engaged in or intends to engage in a
distribution of such New Notes, is an "affiliate," as defined under Rule 405
of the Securities Act, of the Company, or acquired the Old Notes as a result
of market making or other trading activities, then such Holder or any such
other person (i) can not rely on the applicable interpretations of the staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless such sale is made pursuant to an exemption from
such requirements. See "The Exchange Offer--Purpose of the Exchange Offer."
LEVERAGE AND DEBT SERVICE
Upon consummation of the Transactions, the Company has substantial
indebtedness and debt service obligations. At March 28, 1997, the Company's
total indebtedness, including current portion, was approximately $193.0
million and its net capital deficiency was $121.6 million. In addition,
subject to the restrictions under the New Credit Agreement and the Indenture,
the Company may incur additional indebtedness, including Senior Indebtedness,
from time to time. See "The Transactions," "Capitalization" and "Description
of Notes--Limitation on Incurrence of Indebtedness."
15
<PAGE>
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be limited; and (iii) the
Company's level of indebtedness could limit its flexibility to react to
changes in its operating environment and economic conditions generally.
The Company's ability to pay principal of and interest and Liquidated
Damages, if any, on the Notes and to satisfy its other debt obligations will
depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control, as well as the availability of
revolving credit borrowings under the New Credit Agreement or a successor
facility. Additionally, the Company may be required to refinance a portion of
the principal of the Notes prior to their maturity and, if the Company is
unable to service its indebtedness, it will be forced to take actions such as
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing its indebtedness, or seeking additional equity capital. There can
be no assurance that any of these remedies can be effected on satisfactory
terms, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Securities."
SUBORDINATION
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including all obligations under the
New Credit Agreement. Upon any acceleration of the maturity of the Notes or
upon any payment or distribution of assets of the Company to creditors upon
any liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors, marshaling of assets or any bankruptcy, insolvency or
similar proceedings of the Company, the holders of all Senior Indebtedness
will be first entitled to receive payment in full in cash or Marketable
Securities (as defined) of all Obligations (as defined) due or to become due
thereon before the Holders of Notes will be entitled to receive any payment
with respect to the Notes. In addition, upon the occurrence of a payment
default or certain other defaults in respect of outstanding Senior
Indebtedness, Holders of Notes may be prevented from receiving payments with
respect to the Notes for an extended period. The Indenture will limit, but not
prohibit, the incurrence by the Company and its Restricted Subsidiaries of
additional Senior Indebtedness. At March 28, 1997, the Company had
approximately $68.0 million in principal amount of Senior Indebtedness
outstanding and had additional availability under the New Credit Agreement of
approximately $47.0 million, subject to certain financial ratios and
compliance with certain other conditions.
CONTROL BY PRINCIPAL STOCKHOLDERS AND CERTAIN TRANSACTIONS
After the consummation of the Transactions, the Company's executive officers
and directors (and their respective affiliates, including TJC) (collectively,
the "Principal Stockholders") will own a majority of the issued and
outstanding capital stock of Holdings. See "Principal Stockholders." The
Principal Stockholders, if voting together, will have sufficient voting power
to elect the entire Board of Directors of each of Holdings and the Company,
exercise control over the business, policies and affairs of Holdings and the
Company, and, in general, determine the outcome of any corporate transaction
or other matters submitted to the stockholders for approval such as any
amendment to the certificate of incorporation of the Company (the "Certificate
of Incorporation"), the authorization of additional shares of capital stock,
and any merger, consolidation, sale of all or substantially all of the assets
of the Company and could prevent or cause a change of control of the Company,
all of which may adversely affect the Company and holders of the Notes.
Messrs. Jordan, Zalaznick and Caputo, all directors of Holdings and the
Company, are partners of TJC. In addition, the Company will maintain affiliate
transactions with certain members of senior management and, upon the
consummation of the Offering, the Company and Holdings will enter into certain
affiliate transactions with
16
<PAGE>
TJC, including the TJC Agreement. While certain of these affiliate
transactions could give rise to conflicts of interest, the Company does not
believe that such conflicts of interest would have a material adverse impact
on the Company. Pursuant to a policy adopted by the Company upon the closing
of the Transactions, future transactions involving such conflicts of interest
must be approved by a majority of the disinterested members of the Board of
Directors. See "Certain Transactions."
In addition, pursuant to the Stockholders Agreement (as defined), all of the
holders of Common Stock of the Company prior to the Exchange Offer (the
"Stockholders"), have agreed to vote all of their shares of Common Stock for
the election of directors designated by certain Stockholders. Further, the
Stockholders Agreement contains prohibitions and restrictions on the transfer
by the Stockholders including certain co-sale rights and rights of first
refusal for the Company and each Stockholder to purchase the shares of Common
Stock prior to transfer by any other Stockholder which could prevent or cause
a change of control of the Company. See "Principal Stockholders" and
"Management--Stockholders Agreement."
RESTRICTIVE COVENANTS
The Indenture contains certain material covenants which will restrict, among
other things, the Company's ability to pay dividends or make certain other
Restricted Payments, to incur additional Indebtedness, to encumber or sell
assets, to enter into transactions with affiliates, to enter into certain
guarantees of Indebtedness, to merge or consolidate with any other entity and
to transfer or lease all or substantially all of its assets. See "Description
of Notes--Certain Covenants." In addition, the New Credit Agreement will
contain other and more restrictive covenants and will prohibit the Company
from prepaying other indebtedness, including the Notes.
The indebtedness outstanding under the New Credit Agreement will be secured
by liens on substantially all of the personal property and certain real
property of the Company. The New Credit Agreement includes certain covenants
that, among other things, restrict: (i) the making of investments, loans and
advances and the paying of dividends and other restricted payments; (ii) the
incurrence of additional indebtedness; (iii) the granting of liens, other than
liens created pursuant to the New Credit Agreement and certain permitted
liens; (iv) mergers, consolidations, and sales of all or a substantial part of
the Company's business or property; (v) the sale of assets; (vi) the making of
capital expenditures; and (vii) operating lease rentals. The New Credit
Agreement also requires the Company to comply with certain financial ratios,
including minimum interest coverage, minimum fixed charge coverage and maximum
leverage ratios. The ability of the Company to comply with these and other
provisions of the New Credit Agreement may be affected by events beyond the
Company's control. The breach of any of these covenants could result in a
default under the New Credit Agreement, in which case, depending on the
actions taken by the lenders thereunder or their successors or assignees, such
lenders could elect to declare all amounts borrowed under the New Credit
Agreement, together with accrued interest, to be due and payable and the
Company could be prohibited from making payments of interest and principal on
the Notes until the default is cured or all Senior Indebtedness is paid or
satisfied in full. If the Company were unable to repay such borrowings, such
lenders could proceed against their collateral. If the indebtedness under the
New Credit Agreement were to be accelerated, there can be no assurance that
the assets of the Company would be sufficient to repay in full such
indebtedness and the other indebtedness of the Company, including the Notes.
See "Description of Notes" and "Description of Certain Indebtedness--New
Credit Agreement."
CHANGE OF CONTROL
In the event of a Change of Control, each holder of Notes will be entitled
to require the Company to purchase any or all of the Notes held by such holder
at the price stated herein. See "Description of Notes--Mandatory Offers to
Purchase Notes--Change of Control" and "--Certain Definitions--Change of
Control." The Company expects that prepayment of the Notes following a Change
of Control would constitute a default under the New Credit Agreement. In the
event that a Change of Control occurs, the Company would likely be required to
refinance the indebtedness outstanding under the New Credit Agreement and the
Notes. However, because of the change of control and subordination provisions
of the Notes, and the change of control provisions, covenants and default
provisions in the New Credit Agreement, the Company must repay any
indebtedness
17
<PAGE>
outstanding under the New Credit Agreement (or obtain an appropriate waiver)
prior to repurchasing any Notes. There can be no assurance that the Company
would be able to refinance such indebtedness or, if such refinancing were to
occur, that such refinancing would be on terms favorable to the Company.
The holders of Notes have limited rights to require the Company to purchase
or redeem the Notes in the event of a takeover, recapitalization or similar
restructuring, including an issuer recapitalization or similar transaction
with management. Consequently, the Change of Control provisions will not
afford any protection in a highly leveraged transaction, including such a
transaction initiated by the Company, management of the Company or an
affiliate of the Company, if such transaction does not result in a Change of
Control. In addition, because the obligations of the Company with respect to
the Notes are subordinated to Senior Indebtedness of the Company and all
obligations of the Company's future subsidiaries, existing or future Senior
Indebtedness of the Company or obligations of the Company's future
subsidiaries may prohibit the Company from repurchasing or redeeming any of
the Notes upon a Change of Control. Moreover, the ability of the Company to
repurchase or redeem the Notes following a Change of Control will be limited
by the Company's then-available resources. Accordingly, the Change of Control
provision is likely to be of limited usefulness in such situations. The Change
of Control provisions may not be waived by the Board of Directors of the
Company or the Trustee without the consent of holders of at least a majority
in principal amount of the Notes. See "Description of Notes--Mandatory Offers
to Purchase Notes--Change of Control." As a result, the Change of Control
purchase feature of the Notes may in certain circumstances discourage or make
more difficult a sale or takeover of the Company and, thus, the removal of
incumbent management.
The Company's Senior Indebtedness may contain prohibitions of certain events
which would constitute a Change of Control. In addition, the exercise by the
holders of the Notes of their right to require the Company to repurchase the
Notes could cause a default under such other indebtedness even if the Change
of Control itself does not. Finally, the Company's ability to pay cash to the
holders of the Notes upon a repurchase may be limited by the Company's then
existing financing resources.
ABSENCE OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFERS
The New Notes are being offered to Holders of the Old Notes. The Old Notes
were issued on February 27, 1997 to a small number of institutional investors
and are eligible for trading in the Private Offering, Resale and Trading
through Automated Linkages (PORTAL) Market, the National Association of
Securities Dealers' screenbased, automated market for trading of securities
eligible for resale under Rule 144A. The New Notes are new securities for
which there currently is no market. Although the Initial Purchasers have
advised the Company that they currently intend to make a market in the New
Notes, they are not obligated to do so and may discontinue such market making
at any time without notice. The Company does not intend to list the Notes on
any national securities exchange or to seek the admission thereof to trading
in the National Association of Securities Dealers Automated Quotation System.
Accordingly, no assurance can be given that an active market will develop for
any of the Notes or as to the liquidity of the trading market for any of the
Notes. If a trading market does not develop or is not maintained, holders of
the Notes may experience difficulty in reselling such Notes or may be unable
to sell them at all. If a market for the Notes develops, any such market may
be discontinued at any time. If a trading market develops for the Notes,
future trading prices of such Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition of the Company, the Notes may trade at a discount from
their principal amount.
FRAUDULENT TRANSFER CONSIDERATIONS
Under fraudulent transfer law, if a court were to find, in a lawsuit by an
unpaid creditor or representative of creditors of the Company, that the
Company received less than fair consideration or reasonable equivalent value
for incurring the indebtedness represented by the Notes, and, at the time of
such incurrence, the Company (i) was insolvent or was rendered insolvent by
reason of such incurrence, (ii) was engaged or about to engage in a
18
<PAGE>
business or transaction for which its remaining property constituted
unreasonably small capital or (iii) intended to incur, or believed it would
incur, debts beyond its ability to pay as such debts mature, such court could,
among other things, (a) void all or a portion of the Company's obligations to
the holders of the Notes and/or (b) subordinate the Company's obligations to
the holders of the Notes to other existing and future indebtedness of the
Company, the effect of which would be to entitle such other creditors to be
paid in full before any payment could be made on the Notes. The measure of
insolvency for purposes of determining whether a transfer is avoidable as a
fraudulent transfer varies depending upon the law of the jurisdiction which is
being applied. Generally, however, a debtor would be considered insolvent if
the sum of all of its liabilities were greater than the value of all of its
property at a fair valuation, or if the present fair salable value of the
debtor's assets were less than the amount required to repay its probable
liability on its debts as they become absolute and mature. There can be no
assurance as to what standard a court would apply in order to determine
solvency. To the extent that proceeds from the sale of the Notes are used to
repay Existing Indebtedness, a court may find that the Company did not receive
fair consideration or reasonably equivalent value for the incurrence of the
Indebtedness represented thereby.
ENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Company's obligations under the Notes will be fully and unconditionally
guaranteed, jointly and severally, on a senior subordinated basis (the "Note
Guarantees"), by all of the Company's future Restricted Subsidiaries (the
"Guarantors"). The Company believes that the Note Guarantees, when incurred,
will be incurred for proper purposes and in good faith. Notwithstanding the
Company's belief however, if a court of competent jurisdiction in a suit by an
unpaid creditor or representative of creditors (such as a trustee in
bankruptcy or debtor-in-possession) were to find that, at the time of the
incurrence of a Note Guarantee, a Guarantor (i) was insolvent or was rendered
insolvent by reason of such issuance, (ii) was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, (iii) intended to incur, or believe that it would incur, debts beyond
its ability to pay such debts as they matured, or (iv) intended to hinder,
delay or defraud its creditors, and that the indebtedness was incurred for
less than reasonably equivalent value, then such court could among other
things: (a) void all or a portion of such Guarantor's obligations to the
holders of the Notes, the effect of which would be that the holders of the
Notes may not be repaid in full or at all and/or (b) subordinate such
Guarantor's obligations to the holders of the Notes to other existing and
future indebtedness of such Guarantor, the effect of which would be to entitle
such other creditors to be paid in full before any payment could be made on
the Notes. Among other things, a legal challenge of a Note Guarantee on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
the Guarantor as a result of the issuance by the Company of the Notes.
SATISFACTION AND DISCHARGE
The Indenture contains provisions which would allow the Company to terminate
all of its and any future Guarantors obligations under the Notes, any Note
Guarantees and the Indenture, including the covenants contained in the
Indenture, except for certain specified obligations. In order to exercise this
option with respect to the Notes outstanding, the Company must irrevocably
deposit in trust with the trustee money or U.S. Government obligations (as
defined in the indenture) for the payment of principal of and premium and
unpaid interest and Liquidated Damages, if any, on the Notes then outstanding
to redemption or maturity, as the case may be, and must comply with certain
other conditions. See "Description of Notes--Satisfaction and Discharge of the
Indenture."
DEPENDENCE UPON LICENSING ARRANGEMENTS
The Company's business is dependent, in part, upon licensing agreements
pursuant to which the Company is granted the right to use certain names,
logos, emblems and other proprietary marks of licensors on the Company's
products. In fiscal 1996, the Company had 262 active licensing agreements with
licensors. Products manufactured and sold under the Company's licensing
agreements represented approximately 14% of the Company's total net sales in
fiscal 1996.
19
<PAGE>
The length of the Company's license agreements vary, but typically are one
to three years. In addition, under the licensing agreements with certain
licensors such as MLB, the NBA and the NHL, the licensor may terminate the
agreement in the event of a change in control of the Company. To the extent
that the Company is unable to renew licenses scheduled to expire or to obtain
the consent of certain licensors to the change of control in connection with
the Acquisition, the loss of such licenses could have a material adverse
effect on the business, operating results, cash flows and financial condition
of the Company. See "Business--Licenses."
COMPETITION
The sportswear and activewear industry is highly competitive with respect to
price, product quality and speed and convenience of service. The Company's
ability to compete in each of its market depends, in part, on its ability to
source quality blanks from suppliers and to recruit and maintain a high
quality sales force. There can be no assurance that the Company will be able
to maintain its current network of suppliers or its sales force or continue to
compete successfully with other competitors, some of which may have greater
resources, including financial resources, than the Company. To the extent that
any of the Company's competitors offer higher quality products, better service
or more attractive pricing, it could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Sales Divisions" and "--Design, Manufacturing and Materials
Sourcing."
SEASONALITY
Historically, Company sales have been seasonal with higher sales during the
first half of its fiscal year (July to December) primarily due to increased
sales in the Company's College Bookstore division during this period. In
fiscal 1996, net sales of the Company during the first and second half of the
fiscal year were approximately 57% and 43%, respectively. As a result, the
Company is required to predict appropriate inventory levels for the upcoming
seasonal demand. To the extent that the Company under-orders inventories,
sales and profits could be lost. To the extent that the Company over-orders
inventories, the Company may be forced to sell the inventory at reduced prices
or to write off the excess inventory as obsolete which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Any seasonality problems experienced by the Company in the past did
not have a material adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Results of Operation and Financial Condition--Seasonality and Inflation"
and "Description of Certain Indebtedness--New Credit Agreement."
FOREIGN SOURCING
The Company currently sources approximately 85% of its blanks through its
foreign suppliers located in China, Taiwan, Korea, Malaysia, Hong Kong,
Singapore, Indonesia, Pakistan, Honduras, Israel, Fiji and Mexico. Honduras
supplies 16% of the blanks sourced by foreign suppliers, while concentrations
from other countries are insignificant. These foreign suppliers provide
supplies to the Company through short term purchase orders supported by
letters of credit. The majority of these foreign suppliers do not supply such
services exclusively to the Company and there are no contracts between any of
the foreign suppliers and the Company. As a result, the Company may be
adversely affected by political instability resulting in (i) the disruption of
trade from foreign countries in which the Company's suppliers are located,
(ii) the imposition of additional regulations relating to imports, duties,
taxes and other charges on imports, (iii) decreases in the value of the dollar
against foreign currencies or (iv) restrictions on the transfer of funds.
These and other factors could result in the interruption of production by the
Company's foreign suppliers or a delay in the receipt of the products by the
Company in the United States. There have been no material problems encountered
with these foreign suppliers in the past. The Company's future performance may
be subject to such factors, which are beyond the Company's control, and there
can be no assurance that such factors would not have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Design, Manufacturing and Materials Sourcing."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent on the abilities
and experience of its senior management team. The loss of services of one or
more of these senior executives could adversely affect the Company's ability
to retain quality suppliers of blanks, maintain tight inventory controls and
effectively manage
20
<PAGE>
the overall operations of the Company, any of which could adversely affect the
financial performance of the Company. In addition, the Company believes that
its continued success depends upon its ongoing ability to attract and retain
qualified management and employees, particularly in its sales and customer
service areas. The loss of a key manager could also adversely affect the
financial performance of the Company. The Company does not currently maintain
key man life insurance for any key personnel. The Company has entered into an
employment agreement with Robert M. Wolff, the Chairman of the Company. See
"Management," "Business--Employees" and "Certain Transactions--Wolff
Employment Agreement."
ENVIRONMENTAL MATTERS
The Company's facilities are subject to a broad range of federal, state and
local environmental laws and requirements, including those governing
discharges to the air and water, the handling of disposal of solid and
hazardous substances and wastes and remediation of contamination associated
with the release of hazardous substances at the Company's facilities and
offsite disposal locations. The Company has made, and will continue to make,
expenditures to comply with such laws and requirements. The Company believes,
based upon information currently available to management, that it is currently
in compliance with all applicable environmental laws and requirements and that
the Company will not require material capital expenditures to maintain its
environmental compliance during fiscal 1997 or in the foreseeable future.
However, future events, such as changes in existing laws and regulations or
the discovery of contamination at the Company's facilities, may give rise to
additional compliance or remediation costs which could have a material adverse
effect on the Company's results of operations or financial condition.
Moreover, the nature of the Company's business exposes it to some risk of
claims with respect to environmental matters, and there can be no assurance
that material costs or liabilities will not be incurred in connection with any
such claims.
FACTORS AFFECTING OPERATIONS
The financial performance of the Company is dependent, in part, on the
overall health of the markets it serves. A future downturn in any one market
could reduce demand for, and prices of, customized sportswear and activewear
products, including those manufactured by the Company. As a result, a
significant downturn in any one market could have a material adverse effect on
the Company's business, results of operations and financial conditions.
The Company's College Bookstore division sells sportswear and activewear
primarily through on-campus bookstores, most of which also offer sportswear
and activewear products distributed by one or more of the Company's major
competitors. Historically, on-campus bookstores have been owned and operated
by the colleges and universities. During the last several years, however, an
increasing number of campus bookstores have been leased to companies engaged
in retail bookstore operations, primarily Barnes & Noble College Bookstores
Inc., Follett Corporation and Nebraska Book Co. If any of these operators of
campus bookstores were to grant exclusive rights to one of the Company's
competitors, or if for any other reason the Company were unable to continue
selling its products through these college bookstore operators, the Company
would be forced to establish alternative distribution channels such as direct
marketing and off-campus bookstores, which could have a material adverse
effect on the operating results of the Company.
NEW MANAGEMENT INFORMATION SYSTEM
The Company is currently upgrading its existing management information
system ("MIS") with a new system designed to improve the overall efficiency of
the Company's operations and to enable management to more closely track the
financial performance of each of its sales and operating areas. Any difficulty
with the installation or initial operation of the new MIS could interfere with
the Company's inventory purchasing and control, sales or customer service,
which could adversely affect the Company's business, results of operations and
financial condition.
21
<PAGE>
THE TRANSACTIONS
Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by
affiliates of The Jordan Company and management to effect the acquisition of
Winning Ways. Pursuant to the Acquisition Agreement, Holdings and GFSI
acquired all of the issued and outstanding capital stock of Winning Ways, and
Winning Ways immediately thereafter merged with and into GFSI.
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 the Company's Existing
Indebtedness including a $2.4 million prepayment penalty. To finance the
Acquisition, including approximately $11.5 million of related fees and
expenses: (i) the Jordan Investors and Management Investors invested $52.2
million in Holdings and Holdings contributed $51.4 million of this amount in
cash to the Company; (ii) the Company consummated the Offering; and (iii) the
Company entered into the New Credit Agreement providing for borrowings of up
to $115.0 million, of which $68.0 million was outstanding and $22.9 million
was utilized to cover outstanding letters of credit at Closing. The Equity
Contribution is 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. Consummation of the Offering was conditioned upon the
concurrent consummation of the Acquisition, the Equity Contribution and the
initial borrowings under the New Credit Agreement.
Consummation of the Acquisition was subject to the satisfaction or waiver of
the following conditions set forth in the Acquisition Agreement, including:
(i) obtaining financing for the Acquisition; (ii) the absence of any material
adverse change in the business of the Company; (iii) the receipt of certain
third party consents and approvals; and (iv) other customary conditions, of
which (i), (ii) and (iii) represented all of the material conditions. None of
these material conditions were waived.
The Company's predecessor, Winning Ways, terminated its income tax reporting
status as an S-Corporation immediately prior to the Closing of the
Transactions on February 27, 1997. Immediately prior to the Closing, Winning
Ways distributed to its shareholders $26.1 million, representing the
accumulated and undistributed S-Corporation earnings of the Company as of
February 27, 1997. The Company recognized with a post-closing adjustment $1.0
million in net deferred income tax liabilities upon the conversion from S-
Corporation to C-Corporation status for income tax reporting purposes. The
Company does not anticipate any future material adverse tax liabilities
arising from this distribution and conversion.
The Equity Contribution, the consummation of the Offering, the execution of
the New Credit Agreement, the consummation of the Acquisition and the
repayment of the Company's Existing Indebtedness are collectively referred to
herein as the "Transactions."
The following chart depicts the organizational structure and common equity
interest in Holdings and the Company following consummation of the
Transactions.
[CHART DEPICTING THE ORGANIZATIONAL STRUCTURE
AND COMMON EQUITY INTEREST IN HOLDINGS]
22
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds in connection with the Exchange
Offer. The gross proceeds from the Old Notes Offering of approximately $125.0
million, together with the Equity Contribution of approximately $51.4 million
and borrowings by the Company of approximately $68.0 million under the New
Credit Agreement, were used by the Company to: (i) fund the cash portion of
the purchase price payable in connection with the Acquisition; (ii) repay in
full certain Existing Indebtedness; and (iii) pay fees and expenses in
connection with the Transactions.
The following table sets forth the sources and uses of funds in connection
with the Transactions (in millions).
<TABLE>
<S> <C>
SOURCES OF FUNDS:
New Credit Agreement(1)......................................... $ 68.0
New Senior Subordinated Notes due 2007.......................... 125.0
Equity Contribution from GFSI Holdings, Inc.(2)................. 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(3)........................... 59.2
Fees and expenses(4)............................................ 11.5
------
Total uses.................................................... $253.8
======
</TABLE>
- ---------------------
(1) At Closing, the Company entered into the New Credit Agreement which
provides for a Term Loan A (as defined) in the principal amount of $40.0
million, a Term Loan B (as defined) in the principal amount of $25.0
million and a Revolver (as defined) in the principal amount of $50.0
million. At Closing, the Company borrowed approximately $68.0 million,
consisting of $65.0 million under the term loans and $3.0 million under
the Revolver. The undrawn amount of $47.0 million under the Revolver is
available for working capital and general corporate purposes, including
the issuance of approximately $22.9 million of letters of credit at
Closing, subject to the achievement of certain financial ratios and
compliance with certain conditions. See "Description of Certain
Indebtedness--New Credit Agreement."
(2) The Equity Contribution is 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 the Holdings
Subordinated Notes. Approximately $0.8 million of the contribution from
the Management Investors will be financed by loans from Holdings.
(3) See "Description of Certain Indebtedness--Existing Indebtedness."
(4) Includes estimated discounts, commissions and fees and expenses incurred
in connection with the Transactions, including fees payable to TJC. See
"Certain Transactions--The Jordan Company."
23
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the capitalization of the Company as of March
28, 1997. The table should be read in conjunction with the financial
statements of the Company and related notes thereto included elsewhere in this
Prospectus. See "The Transactions," "Selected Historical Financial Data," the
unaudited pro forma financial statements of the Company and the historical
financial statements of the Company and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 28,
1997
---------
<S> <C>
Cash and cash equivalents........................................ $ 5,569
=========
Short-term debt.................................................. $ 3,000
=========
Long-term debt (including current portion):
New Credit Agreement(1)........................................ 65,000
Senior Subordinated Notes due 2007............................. 125,000
---------
Total long-term debt......................................... 190,000
Stockholders' equity (deficit):
Common stock................................................... --
Additional paid in capital..................................... 49,939
Retained earnings (accumulated deficit)(2)..................... (171,547)
---------
Total net capital deficiency(2).............................. (121,608)
---------
Total capitalization......................................... $ 68,392
=========
</TABLE>
- ---------------------
For additional information, see "Description of Certain Indebtedness--Existing
Indebtedness."
(1) At Closing, the Company entered into the New Credit Agreement which
provides for a Term Loan A in the principal amount of $40.0 million, a
Term Loan B in the principal amount of $25.0 million and a Revolver in the
principal amount of $50.0 million. At Closing, the Company borrowed
approximately $68.0 million, consisting of $65.0 million under the term
loans and $3.0 million under the Revolver, and utilized $22.9 million of
the Revolver to cover outstanding letters of credit. Term Loan A matures
in 2002, Term Loan B matures in 2004 and the Revolver matures in 2002. For
additional information, see "Description of Certain Indebtedness--New
Credit Agreement."
(2) The net capital deficiency of $121.6 million is a result of the adjustment
to stockholders' equity for the difference between the book value of the
net assets of the Company at Closing and the $242.3 million purchase price
paid for the Company. For additional information, see "The Transactions"
and the unaudited pro forma financial statements and related notes thereto
included elsewhere in this Prospectus.
24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents selected: (i) historical operating and other
data of the Company for fiscal 1992, 1993, 1994, 1995 and 1996, and the nine
months ended March 31, 1996 and March 28, 1997; and (ii) historical balance
sheet data of the Company for the fiscal years ended June 30, 1992, 1993,
1994, 1995 and 1996, and as of March 28, 1997. The historical financial
statements for the Company for fiscal 1992, 1993, 1994 and 1995 have been
audited by Donnelly Meiners Jordan Kline, and the historical financial
statements for fiscal 1996 have been audited by Deloitte & Touche LLP. The
historical data of the Company at and for the nine months ended March 31, 1996
and March 28, 1997 have been derived from, and should be read in conjunction
with, the unaudited financial statements of the Company and the related notes
thereto, which are included elsewhere in this Prospectus. In the opinion of
management, such interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary to fairly present
the information presented for such periods. The results of operations for the
nine months ended March 28, 1997 are not necessarily indicative of the results
of operations to be expected for the full year. The selected financial data
set forth below should be read in conjunction with "The Transactions,"
"Summary Financial Data," "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the unaudited pro forma financial
statements and the historical financial statements of the Company and the
related notes thereto included elsewhere in this Prospectus.
Effective February 27, 1997, Winning Ways, Inc. merged with and into GFSI,
Inc., a new entity with no previous operations, with GFSI, Inc. as the
surviving entity. The statements of income data and other data presented below
includes historical information of Winning Ways, Inc. through the merger date
and the merged entity subsequent, thereto.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30, NINE MONTHS ENDED
------------------------------------------------ --------------------
MARCH 31, MARCH 28,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DA-
TA:
Net sales.............. $118,187 $121,131 $128,171 $148,196 $169,321 $132,068 $144,182
Gross profit........... 47,079 50,936 53,724 63,327 72,013 57,347 64,060
Operating expenses..... 25,949 28,201 29,151 34,428 39,179 30,030 33,835
-------- -------- -------- -------- -------- -------- --------
Operating income....... 21,130 22,735 24,573 28,899 32,834 27,317 30,225
Other income (ex-
pense)................ (3,053) (2,680) (2,468) (2,679) (2,608) (2,047) (3,279)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes and extraordi-
nary item............. 18,077 20,055 22,105 26,220 30,226 25,270 26,946
Pro forma income tax
expense(1)............ 7,412 8,223 9,063 10,750 12,393 10,361 12,034
Extraordinary item, net
of tax benefit(6)..... 1,484
-------- -------- -------- -------- -------- -------- --------
Pro forma net in-
come(1)............... $ 10,665 $ 11,832 $ 13,042 $ 15,470 $ 17,833 $ 14,909 $ 13,428
======== ======== ======== ======== ======== ======== ========
PRO FORMA DATA(7):
Operating Income....... $ 32,980 $ 30,155
Net income............. 8,368 9,618
BALANCE SHEET DATA (AS
OF PERIOD END):
Cash and cash equiva-
lents ................ $ 527 $ 219 $ 132 $ 112 $ 140 $ 5,569
Total assets........... 64,520 67,510 70,176 76,938 78,711 98,446
Long-term debt, includ-
ing current portion... 22,760 19,157 27,242 24,915 22,276 190,000
Total stockholders' eq-
uity (deficiency)..... 27,489 27,502 29,429 32,106 34,479 (121,608)
OTHER DATA:
Cash flows from operat-
ing activities........ $ 11,138 $ 20,985 $ 24,431 $ 23,905 $ 34,000 $ 28,424 $ 25,821
Cash flows from invest-
ing activities........ (2,149) (2,163) (2,597) (4,255) (2,480) (1,238) (1,566)
Cash flows from financ-
ing activities........ (8,995) (19,130) (21,921) (19,669) (31,493) (25,277) (18,826)
EBITDA(2).............. 22,960 24,733 26,876 31,759 36,035 29,696 32,769
Depreciation and amor-
tization.............. 1,830 1,998 2,303 2,860 3,201 2,379 2,544
Capital expenditures... 2,149 2,304 2,856 4,989 2,611 1,360 2,512
EBITDA margin(3)....... 19.4% 20.4% 21.0% 21.4% 21.3% 22.5% 22.7%
Ratio of earnings to
fixed charges(4)...... 7.6x 9.1x 10.0x 11.4x 12.6x 13.4x 9.1x
Distributions to
shareholders per
share(5).............. $ 10.10 $ 16.91 $ 16.70 $ 19.82 $ 23.37 $ 15.37 $ 167.23
</TABLE>
(footnotes on the following page)
25
<PAGE>
- ---------------------
(1) Prior to the Acquisition, the Company was an S-Corporation and therefore
was not subject to federal and certain state income taxes. The statements
of income data presented includes an unaudited adjustment for income taxes
which represents the approximate income tax expense that would have been
recorded if the Company had been a C-Corporation, assuming a combined
federal and state income tax rate of 41%. Subsequent to the Acquisition,
the Company's combined federal and state income tax rate was 40%.
(2) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with 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.
(3) EBITDA margin represents EBITDA as a percentage of net sales.
(4) The ratio of earnings to fixed charges computed on a pro forma basis would
have been 1.8x and 2.1x for the fiscal year ended June 30, 1996 and the
nine months ended March 28, 1997, respectively. Adjustments to pro forma
fixed charges include the additional interest expense related to the new
indebtedness incurred upon completion of the Acquisition. See "The
Transactions." Adjustments to pro forma pretax income from operations
include a reduction in depreciation expense related to the sale of the
corporate aircraft and reduction of insurance expense due to the
liquidation of officer life insurance policies.
(5) On July 10, 1992, the Company declared a 5-for-1 stock split. All
distributions per share information has been restated to reflect this
stock split.
(6) The statement of income data presented for the nine months ended March 28,
1997 includes an extraordinary loss related to the early extinguishment of
debt in the amount of $2,474 ($1,484 on an after-tax basis). See the
unaudited statements of income and the related notes thereto included
elsewhere in this prospectus.
(7) See "GFSI, Inc. Unauditied Pro Forma Statements of Income."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The discussions set forth within may contain forward-looking comments based
on current expectations that involve a number of risks and uncertainties.
Actual results could differ materially from those projected or suggested in
the forward-looking comments. Factor's that could cause the Company's actual
results in future periods to differ materially include, but are not limited
to, those which may be discussed herein, as well as those discussed or
identified from time to time in the Company's filings with the Commission.
OVERVIEW
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. 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 13,000 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.
The Company markets its products primarily through four separate divisions,
each of which serves distinct distribution channels and utilizes a salesforce
with a specialized knowledge of its particular markets and customers. The
Company's four divisions include: (i) the Resort division (40.0% of fiscal
1996 net sales); (ii) the Corporate division (27.9% of fiscal 1996 net sales);
(iii) the College Bookstore division (22.3% of fiscal 1996 net sales); and
(iv) the Sport Specialty division (3.7% of fiscal 1996 net sales).
The Company believes that it has been able to compete successfully because
of its ability to create diverse and innovative designs, provide excellent
customer service, leverage its GEAR brand name and differentiate its products
on the basis of quality. From fiscal 1991 to fiscal 1996, the Company's net
sales increased from $94.7 million to $169.3 million from internal growth,
representing a CAGR of 12.3% and an actual annual growth rate of 24.8%, 2.5%,
5.8%, 15.6% and 14.3% for the fiscal years of 1992, 1993, 1994, 1995, and
1996, respectively. During the same period, the Company's EBITDA (as defined)
grew from $17.9 million to $36.0 million, representing a CAGR of 15.0% and an
actual annual growth rate of 28.5%, 7.7%, 8.7%, 18.2% and 13.5% for the fiscal
years of 1992, 1993, 1994, 1995, and 1996, respectively. The Company's EBITDA
margin for the period increased from 18.9% to 21.3% with an actual annual
growth rate of 2.6%, 5.2%, 2.9%, 1.9% and (0.5%) for the fiscal years of 1992,
1993, 1994, 1995, and 1996, respectively. At the same time,the Company's net
income increased from $14.5 million to $30.2 million, representing a CAGR of
15.8% and an actual annual growth rate of 24.4%, 10.9%, 10.2%, 18.6% and 15.3%
for the fiscal years of 1992, 1993, 1994, 1995, and 1996, respectively. The
Company's cash flows from operating activities increased form $14.4 million to
$34.0 million for the same periods, representing a CAGR of 18.7% and an actual
annual growth rate of (22.6%), 88.4%, 16.4%, 2.2% and 42.2% for the fiscal
years of 1992, 1993, 1994, 1995, and 1996, respectively.
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.
27
<PAGE>
SALES DIVISIONS
The Company markets its products, which include custom designed fleecewear,
jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and
sports luggage, through four sales divisions (dollars in millions):
<TABLE>
<CAPTION>
FISCAL 1996 NET SALES
----------------------
% OF
DIVISION CUSTOMERS SALES TOTAL
----------------- ---------------------------------- ----------- ----------
<C> <S> <C> <C>
Resort Destination resorts, family $ 67.7 40.0%
entertainment companies, hotel
chains, golf clubs, cruise lines,
and casinos
Corporate Large and small companies serving 47.2 27.9
a variety of industries
College Bookstore Major colleges and universities as 37.7 22.3
well as college bookstore lease
operators
Sports Specialty Sports specialty stores and 6.3 3.7
catalogues, stadium stores, and
professional sports teams and
their staffs
Other Various institutions, 10.3 6.1
organizations and individuals
------ -----
$169.3 100.0%
====== =====
</TABLE>
The following sets forth the amount and percentage of net sales for each of
the periods indicated (dollars in millions):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED
---------------------------------------- --------------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Resort.................. 50,228 39.2% 60,047 40.5% 67,739 40.0% 50,076 37.9% 50,836 35.3%
Corporate............... 30,241 23.6% 38,316 25.9% 47,167 27.9% 36,098 27.3% 42,318 29.4%
Bookstore............... 35,982 28.1% 37,823 25.5% 37,733 22.3% 34,240 25.9% 34,001 23.6%
Sports Specialty........ 1,458 1.1% 3,154 2.1% 6,342 3.7% 4,715 3.6% 7,899 5.5%
Other................... 10,262 8.0% 8,794 5.9% 10,192 6.0% 6,939 5.3% 9,128 6.3%
------- ------- ------- ------- -------
Total................... 128,171 148,134 169,173 132,068 144,182
======= ======= ======= ======= =======
</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 1994, 1995 and
1996 and the nine months ended March 31, 1996, and March 28, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED
---------------------------- -------------------
MARCH 31, MARCH 28,
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................. 41.9 42.7 42.5 43.4 44.4
EBITDA........................ 21.0 21.4 21.3 22.5 22.7
Operating income.............. 19.2 19.5 19.4 20.7 21.0
</TABLE>
NINE MONTHS ENDED MARCH 28, 1997 COMPARED TO NINE MONTHS ENDED MARCH 31, 1996
Net Sales. Net sales for the nine months ended March 28, 1997 increased 9.2%
to $144.2 million from $132.1 million in the nine months ended March 31, 1996.
The increase in net sales primarily reflects increases in net sales at each of
the Company's Resort, Corporate and Sports Specialty divisions of 1.5%, 17.2%,
and 67.5%, respectively, and was partially offset by a slight decrease in the
net sales at the College Bookstore division. These increases were driven
primarily by volume increases due to continued account expansion and the
introduction of new product lines through each distribution channel.
28
<PAGE>
Gross Profit. Gross profit for the nine months ended March 28, 1997
increased 11.9% to $64.1 million from $57.3 million in the nine months ended
March 31, 1996, primarily as a result of the net sales increase described
above. Gross profit as a percentage of net sales increased to 44.4% in the
nine months ended March 28, 1997, from 43.4% in the nine months ended March
31, 1996. The increase in margin reflects a decrease in the cost of materials
sold, as a percentage of net sales, from 49.7% in the nine months ended March
31, 1996 to 48.3% in the nine months ended March 28, 1997. These changes were
driven primarily by growth in the Resort and Corporate divisions, which focus
on higher margin, production intensive embroidered products.
Operating Expenses. Operating expenses for the nine months ended March 28,
1997 increased 12.7% to $33.8 million from $30.0 million in the nine months
ended March 31, 1996. Operating expenses as a percentage of net sales
increased to 23.5% for the nine months ended March 28, 1997, from 22.7% in the
nine months ended March 31, 1996. The increase in operating expenses, as a
percentage of net sales, is primarily due to an increase in non-recurring MIS
consulting charges associated with the installation of the Company's new MIS
system which increased from $438,000 in the nine months ended March 31, 1996
to $1.8 million in the nine months ended March 28, 1997.
EBITDA. EBITDA for the nine months ended March 28, 1997 increased 10.4% to
$32.8 million from $29.7 million in the nine months ended March 31, 1996,
primarily as a result of the net sales increase described above. EBITDA as a
percentage of net sales increased slightly to 22.7% in the nine months ended
March 28, 1997 from 22.5% in the nine months ended March 31, 1996. This
increase in margin reflects the change in gross profit described above
partially offset by an increase in selling and general and administrative
expenses.
Operating Income. Operating income for the nine months ended March 28, 1997
increased 10.6% to $30.2 million from $27.3 million in the nine months ended
March 31, 1996, primarily as a result of the net sales increase described
above. Operating income as a percentage of net sales increased to 21.0% in the
nine months ended March 28, 1997, from 20.7% in the nine months ended March
31, 1996. This increase in operating income reflects the change in EBITDA
described above.
Other Income (Expense). Other expense for the nine months ended March 28,
1997 increased 65.0% to $3.3 million from $2.0 million in the nine months
ended March 31, 1996, primarily as a result of increased interest expense
associated with the Company's recapitalization and subsequent issuance of the
$125 million Senior Subordinated Notes and borrowings of $68.0 million under
the New Credit Agreement. The effect of derivative financial instruments serve
to minimize savings in interest rates on floating rate debt. Interest rate
fluctuations and their effect were immaterial for the periods presented. A
reasonable likely change in the underlying rate, price or index would not have
a material impact on the financial position of the Company.
Income Taxes. An income tax provision of $1,319,000 was recorded for the
nine months ended March 28, 1997 due to the Company's change in tax status
from an S-Corporation to a C-Corporation for income tax reporting purposes
which was effective February 27, 1997. Company earnings subsequent to February
27, 1997 are subject to corporate income taxes. The effect of the change in
income tax reporting status from an S-Corporation to a C-Corporation was
$993,621 and $325,379 of the income tax provision was related to operations,
subsequent to the change in tax status.
Extraordinary Item. The Company recognized an extraordinary loss for the
nine months ended March 28, 1997 of $2.5 million ($1.5 million on an after-tax
basis) which consisted of a penalty incurred in the prepayment of the
Company's mortgage and a write-off of previously capitalized deferred
financing costs.
Net Income. Net income for the nine months ended March 28, 1997 was $24.1
million compared to $25.3 million in the nine months ended March 31, 1996. The
decrease in net income is primarily the result of interest expense, income
taxes, and the extraordinary item as all mentioned above.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Net Sales. Net sales for fiscal 1996 increased 14.2% to $169.3 million from
$148.2 million in fiscal 1995. The increase in net sales primarily reflects
sales increases in the Resort, Corporate and Sport Specialty divisions
29
<PAGE>
of 12.8%, 23.1% and 101.1%, respectively, and was offset in part by a slight
decrease in net sales in the College Bookstore division. These increases were
primarily driven by unit volume increases resulting from account expansion,
further penetration of existing accounts and certain new product
introductions.
Gross Profit. Gross profit for fiscal 1996 increased 13.7% to $72.0 million
from $63.3 million in fiscal 1995 primarily as a result of the net sales
increase described above. Gross profit as a percentage of net sales decreased
slightly to 42.5% in fiscal 1996 from 42.7% in fiscal 1995. This moderate
decline in margin reflects slight increases in the cost of materials sold, as
a percentage of net sales, from 49.9% in fiscal 1995 to 50.0% in fiscal 1996
and the cost of production, as a percentage of net sales, from 7.4% in fiscal
1995 to 7.5% in fiscal 1996. These slight changes reflect a relatively
consistent product mix from fiscal 1995 to fiscal 1996.
Operating Expenses. Operating expenses for fiscal 1996 increased 14.0% to
$39.2 million from $34.4 million in fiscal 1995. Since certain of these costs
are fixed in nature, operating expenses as percentage of net sales decreased
to 23.1% for fiscal 1996, from 23.2% for fiscal 1995.
EBITDA. EBITDA for fiscal 1996 increased 13.2% to $36.0 million from $31.8
million in fiscal 1995 primarily as a result of the net sales increase
described above. EBITDA as a percentage of net sales decreased slightly to
21.3% in fiscal 1996 from 21.4% in fiscal 1995. This moderate decline in
margin reflects the change in gross profit described above and increased
operating expenses, which included $625,000 of non-recurring MIS consulting
charges associated with the installation of the Company's new MIS system.
Operating Income. Operating income for fiscal 1996 increased 13.5% to $32.8
million from $28.9 million in fiscal 1995 primarily as a result of the net
sales increase described above. Operating income as a percentage of net sales
decreased slightly to 19.4% in fiscal 1996 from 19.5% in fiscal 1995. This
moderate decline in margin reflects the change in EBITDA described above.
Other Income (Expense). Other expense for fiscal 1996 decreased 3.7% to $2.6
million from $2.7 million in fiscal 1995. The decrease in expense reflects a
4% increase in interest expense from $2.5 million in fiscal 1995 to $2.6
million in fiscal 1996 offset by gains on disposals of fixed assets in fiscal
1996 as opposed to losses on disposals of fixed assets in fiscal 1995. The
effect of derivative financial instruments serve to minimize savings in
interest rates on floating rate debt. 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. Due to the Company's tax status during the period as an
S-Corporation under provisions of the Internal Revenue Code, no corporate income
taxes were recorded as the shareholders were taxed individually on the
Company's taxable income.
Net Income. Net income for fiscal 1996 increased 15.3% to $30.2 million from
$26.2 million in fiscal 1995, primarily as a result of the increase in net
operating results described above.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Net Sales. Net sales for fiscal 1995 increased 15.6% to $148.2 million from
$128.2 million in fiscal 1994. The increase in net sales reflects sales
increases at the Company's College Bookstore, Resort, Corporate and Sport
Specialty divisions of 5.5%, 19.7%, 27.0% and 91.3%, respectively. These
increases were primarily driven by unit volume increases at each of the
Company's three existing sales divisions resulting from account expansion,
further penetration of existing accounts and certain new product
introductions. In addition, net sales increased as a result of the completion
of the first full fiscal year of the Sports Specialty division.
Gross Profit. Gross profit for fiscal 1995 increased 17.9% to $63.3 million
from $53.7 million in fiscal 1994 primarily as a result of the net sales
increase described above. Gross profit as a percentage of net sales increased
to 42.7% in fiscal 1995 from 41.9% in fiscal 1994. This increase in profit
reflects a decrease in the cost of materials sold, as a percentage of net
sales, to 49.9% in fiscal 1995 from 51.6% in fiscal 1994. This decrease
30
<PAGE>
was offset by an increase in the cost of production, as a percentage of net
sales, to 7.4% in fiscal 1995 from 6.5% in fiscal 1994. These changes were
driven primarily by growth in the Resort and Corporate divisions, which focus
on higher margin, production intensive embroidered products.
Operating Expenses. Operating expenses for fiscal 1995 increased 17.8% to
$34.4 million from $29.2 million in fiscal 1994. Operating expenses as a
percentage of net sales increased to 23.2% for fiscal 1995, from 22.7% for
fiscal 1994. The increase in operating expenses reflects an increase in
selling expenses due to the Company's continued focus on the Corporate
division, offset by a decrease in general and administrative expenses as a
percentage of net sales.
EBITDA. EBITDA for fiscal 1995 increased 18.2% to $31.8 million from $26.9
million in fiscal 1994 primarily as a result of the net sales increase
described above. EBITDA as a percentage of net sales increased to 21.4% in
fiscal 1995 from 21.0% in fiscal 1994. This increase in margin reflects the
changes in gross profit described above, offset by a slight increase in
operating expenses as a percent of net sales. The increase in operating
expenses reflects an increase in selling expenses due to the Company's
continued focus on the Corporate division, offset by a decrease in general and
administrative expenses as a percentage of net sales.
Operating Income. Operating income for fiscal 1995 increased 17.6% to $28.9
million from $24.6 million in fiscal 1994 primarily as a result of the net
sales increase described above. Operating income as a percentage of net sales
increased to 19.5% in fiscal 1995 from 19.2% in fiscal 1994. This increase in
margin reflects the change in EBITDA described above.
Other Income (Expense). Other expense for fiscal 1995 increased 8.0% to $2.7
million from $2.5 million in fiscal 1994. The increase in expense reflects
increases in both interest expense and losses on disposals of fixed assets
from fiscal 1995 to fiscal 1996. The effect of derivative financial
instruments serve to minimize savings in interest rates on floating rate debt.
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. Due to the Company's tax status during the period as an S-
Corporation under provisions of the Internal Revenue Code, no corporate income
taxes were recorded as the shareholders were taxed individually on the
Company's taxable income.
Net Income. Net income for fiscal 1995 increased 18.6% to $26.2 million from
$22.1 million in fiscal 1994, primarily as a result of the increase in
operating results described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine months ended March 28,
1997 was $25.8 million compared to cash provided of $28.4 million for the nine
months ended March 31, 1996. The decrease in net cash provided by operating
activities was principally the result of a decrease in net income, as
previously discussed, in addition to higher accounts receivable balances
resulting from increased sales. Cash provided by operating activities in
fiscal 1996, 1995 and 1994 was $34.0 million, $23.9 million and $24.4 million,
respectively. Changes in working capital resulted in cash sources (uses) of
$0.9 million, $(4.8) million and $0.7 million in fiscal 1996, 1995 and 1994,
respectively. The increase in cash provided by operating activities to fiscal
1996 from fiscal 1995 resulted from increases in net income and accounts
payable and accrued expenses, coupled with a decrease in inventories which
were offset by an increase in accounts receivable. The increase in cash
provided by operating activities to fiscal 1995 from fiscal 1994 resulted from
increased net income.
Cash used in investing activities for the nine months ended March 28, 1997
was $1.6 million compared to cash used of $1.2 million for the nine months
ended March 31, 1996. The increase in cash used was a result of an increase in
capital expenditures to $2.5 million in the nine months ended March 28, 1997,
compared to $1.4 million for the nine months ended March 31, 1996, partially
offset by proceeds from the sale of the corporate aircraft to a shareholder of
the Company for its fair value of approximately $900,000. The increase in
capital
31
<PAGE>
expenditures relates to the purchase of software related to the Company's new
MIS system in the amount of $1.0 million during the nine months ended March
28, 1997 of which no purchases were made in the prior year comparative period.
The Company typically makes capital expenditures related to the maintenance
and improvement of manufacturing facilities and processing equipment. Capital
expenditures in fiscal 1996, 1995 and 1994 were $2.6 million, $5.0 million and
$2.9 million, respectively. Capital expenditures in fiscal 1995 include the
$1.6 million purchase of a corporate aircraft from a non-affiliate of the
Company and were therefore in excess of the Company's normal capital
expenditure requirements.
Cash used in financing activities for the nine months ended March 28, 1997
was $18.8 million compared to cash used of $25.3 million for the nine months
ended March 31, 1996. The cash used in financing activities at March 28, 1997
resulted from the cash used to complete the recapitalization transactions as
previously described net of new borrowings under the New Credit Agreement. See
the "Transactions". Cash used in financing activities in the prior year period
was primarily used to make Subchapter S distributions to the Company's
stockholders and scheduled loan principal payments. Net cash used in financing
activities in fiscal 1996, 1995 and 1994 was $31.5 million, $19.7 million and
$21.9 million, respectively. The cash was used primarily to make Subchapter S
distributions to the Company's stockholders in each of fiscal 1996, 1995 and
1994.
The Company believes that cash flow from operating activities and borrowings
under the New Credit Agreement will be adequate to meet the Company's short-
term and long-term liquidity requirements prior to the maturity of its credit
facilities in 2007, although no assurance can be given in this regard. The
Company has no material capital commitments over the next twelve months. Under
the New Credit Agreement, the Revolver provides $50 million of revolving
credit availability (of which $3 million was borrowed as of March 28, 1997 and
approximately $36.7 million was utilized for outstanding commercial and stand-
by letters of credit).
Pursuant to the terms of the acquisition agreement, the purchase price paid
for the Company was subject to a closing date balance sheet adjustment. As a
result of this closing date balance sheet adjustment, the Company paid its
former owners approximately $10.0 million on April 30, 1997, which was paid to
members of current management. The members of current management, including
beneficial owners, who received this payment are Robert Wolff, John Menghini,
Robert Shaw, Larry Graveel, Mike Gary, Barry Golden, Tony Gagliano, Kirk
Kowalewski, Mark Schimpf, Terry Glenn, David Churchman, David Geenens, Steve
Arnold, Lee Ann Stevens, Bill DiRocco, Mary Cimpl, and Jason Krakow. The
closing date balance sheet adjustment was partially funded with proceeds
received by the Company from the surrender value of officer's life insurance
of $5.3 million with the difference funded by a $3.0 million borrowing under
the Revolver and the balance from existing cash in the business.
Following the Closing, the Company anticipates paying dividends to Holdings
to enable Holdings to pay corporate income taxes, interest on Holdings
Subordinated Notes, fees payable under the TJC Agreement and certain other
ordinary course expenses incurred on behalf of the Company. Holdings is
dependent upon the cash flows of the Company to provide funds to service the
indebtedness represented by $25.0 million of Holdings Subordinated Notes. The
annual cash flow requirements to service Holdings Subordinated Notes is $3
million (principal due in balloon payment in 2008). Additionally, Holdings'
cumulative non-cash preferred stock dividends will total $3.2 million
annually. Holdings Preferred Stock may be redeemed at stated value ($27.0
million) plus accrued dividends with mandatory redemption in 2009.
The Company monitors market risk with respect to the derivative instruments
entered into by the Company, including the value of such instruments, by
regularly consulting with its senior financial managers. The Company enters
into such agreements for hedging purposes and not with a view toward
speculating in the underlying instruments. Accordingly, any reasonably likely
change in the level of the underlying rate, price or index would not be likely
to have either a favorable or adverse impact on the Company's business,
operations or financial condition, including with respect to interest expense.
32
<PAGE>
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," was implemented on July 1, 1996. The adoption of this statement
did not have a material impact on the Company's financial position or results
of operations.
SFAS No. 128, "Earnings per Share," was issued in February 1997. This
Statement establishes standards for computing and presenting earnings per
share by replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. This Statement is effective for the
Company's fiscal 1998 financial statements, including interim periods; earlier
application is not permitted. The Company does not expect the implementation
of this Statement to have a material impact on the Company's financial
statements.
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997.
This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This Statement
is effective for the Company's fiscal 1998 financial statements. The Company
does not expect the implementation of this Statement to have a material impact
on its financial position or results of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This Statement is effective for the Company's fiscal 1998 financial
statements. The Company does not expect the implementation of the disclosure
requirements of this Statement to have a material impact on the Company's
financial statements.
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 1996, 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 Resorts,
Corporate and Sports Specialty divisions typically show no significant
seasonal variations. As the Company continues to expand into other markets in
its Resorts, Corporate and Sports Specialty divisions, seasonal fluctuations
in sales and profitability are expected to decline.
The impact of inflation on the Company's operations has not been significant
to date. However, there can be no assurance that a high rate of inflation in
the future would not have an adverse effect on the Company's operating
results.
33
<PAGE>
BUSINESS
The Company, which operates primarily under the brand name GEAR For
Sports(R), 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, 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
13,000 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. The Company
believes that it has been able to compete successfully because of its ability
to create diverse and innovative designs, provide excellent customer service,
leverage its GEAR brand name and differentiate its products on the basis of
quality. For the nine months ended March 28, 1977, the Company generated net
sales and Adjusted EBITDA of $144.2 million and $32.8 million, respectively.
From fiscal 1991 to fiscal 1996, the Company's net sales increased from
$94.7 million to $169.3 million from internal growth, representing a CAGR of
12.3% and an actual annual growth rate of 24.8%, 2.5%, 5.8%, 15.6% and 14.3%
for the fiscal years of 1992, 1993, 1994, 1995, and 1996, respectively. During
the same period, the Company's EBITDA (as defined) grew from $17.9 million to
$36.0 million, representing a CAGR of 15.0% and an actual annual growth rate
of 28.5%, 7.7%, 8.7%, 18.2% and 13.5% for the fiscal years of 1992, 1993,
1994, 1995, and 1996, respectively. The Company's EBITDA margin for the period
increased from 18.9% to 21.3% with an actual annual growth rate of 2.6%, 5.2%,
2.9%, 1.9% and (0.5%) for the fiscal years of 1992, 1993, 1994, 1995, and
1996, respectively. At the same time, the Company's net income increased from
$14.5 million to $30.2 million, representing a CAGR of 15.8% and an actual
annual growth rate of 24.4%, 10.9%, 10.2%, 18.6% and 15.3% for the fiscal
years of 1992, 1993, 1994, 1995, and 1996, respectively. The Company's cash
flows from operating activities increased from $14.4 million to $34.0 million
for the same periods, representing a CAGR of 18.7% and an actual annual growth
rate of (22.6%), 88.4%, 16.4%, 2.2% and 42.2% for the fiscal years of 1992,
1993, 1994, 1995, and 1996, respectively. The Company believes it has achieved
a record of strong sales and EBITDA growth and stable operating margins
primarily due to its: (i) leading positions in niche markets; (ii) diversified
and stable customer base; (iii) superior product quality and customer service;
(iv) broad product portfolio; (v) value-added design and manufacturing
capabilities; and (vi) innovative management. The Company expects to continue
to grow by leveraging the strength of the GEAR brand name to expand its
product lines and access underpenetrated segments of its markets. The Company
believes that it is less vulnerable to earnings fluctuations than typical
apparel manufacturers and marketers because: (i) the Company designs and
custom manufactures basic, classic products with low fashion risk; (ii)
consumer demand for sportswear and activewear continues to increase; and (iii)
the Company's products are customized based on firm customer orders,
minimizing its risk of excess inventory.
The Company markets its products primarily through four separate divisions,
each of which serves distinct distribution channels and utilizes a salesforce
with a specialized knowledge of its particular markets and customers. The
Company's network of approximately 140 independent sales representatives and
over 70 in-house artists and graphic designers work directly with the
Company's customers to create innovative sportswear and activewear products to
meet customer specifications.
FINANCIAL CHARACTERISTICS
The Company's business has the following financial characteristics:
[] Diverse and Stable Customer Base. The Company sells to its niche markets
through a diverse base of over 13,000 active customer accounts. In
fiscal 1996, no single account represented more than 2.5% of net sales,
and the Company's top ten customers which include various large
corporations, major universities and destination resorts, accounted for
less than 13% of net sales. Accordingly, the Company believes that the
loss of any single customer would not have a material adverse effect on
the Company and that none of its customers is, individually, material to
the Company's operations. The
34
<PAGE>
number of active customer accounts increased from approximately 5,600 in
fiscal 1991 to over 13,000 in fiscal 1996. New potential end-users of
the Company's products are added each year as new customers visit
resorts and participate in other leisure activities, corporations
continue to expand their identity and promotional programs and new
students enroll at colleges and universities.
[] Strong Sales and EBITDA Growth. From fiscal 1991 to fiscal 1996, the
Company's net sales increased from $94.7 million to $169.3 million from
internal growth, representing a CAGR of 12.3% and an actual growth rate
of 24.8%, 2.5%, 5.8%, 15.6% and 14.3% for the fiscal years of 1992,
1993, 1994, 1995, and 1996, respectively. During the same period, the
Company's EBITDA (as defined) grew from $17.9 million to $36.0 million,
representing a CAGR of 15.0% and an actual annual growth rate of 28.5%,
7.7%, 8.7%, 18.2% and 13.5% for the fiscal years of 1992, 1993, 1994,
1995, and 1996, respectively. The Company's EBITDA margin for the period
increased from 18.9% to 21.3% with an actual annual growth rate of 2.6%,
5.2%, 2.9%, 1.9% and (0.5%) for the fiscal years of 1992, 1993, 1994,
1995, and 1996, respectively. The Company believes that this growth can
be attributed to: (i) its focus on niche markets where competition is
generally based on product and service quality rather than price; (ii)
operating leverage resulting from the introduction of new products in
established distribution channels; and (iii) its focus on manufacturing
efficiencies.
[] Low Capital Expenditures. The Company concentrates on the high value-
added production processes of custom design, embroidery, silk-screening
and other finishing elements at its state-of-the-art manufacturing
facilities. The capital intensive process of manufacturing unfinished
garments ("blanks") and other items is outsourced to a network of
foreign and domestic independent manufacturers who comply with the
Company's stringent specifications. As a result, the Company maintains
low fixed costs and requires limited annual capital expenditures. From
fiscal 1992 to fiscal 1996, total annual capital expenditures averaged
approximately $3 million, or an average of 2.2% of net sales and 10.5%
of EBITDA for such years.
[] Historically Non-Cyclical Business. The Company has not experienced a
reduction of its business as a result of past general economic
downturns. The Company believes that its record of consistent growth is
a result of the relatively non-cyclical nature of its primary market
segments as well as its competitive position as a supplier of high
quality, customized products that are less susceptible to consumer price
sensitivity. The Company believes that the diversity of its products,
distribution channels and markets also minimizes its exposure to
particular customers, economic cycles and geographic concentration.
BUSINESS STRATEGY
The Company's objective is to continue to increase sales, EBITDA and
operating margins, and is based upon the following strategic elements:
[] Superior Product Quality and Customer Service. Each of the Company's
divisions focuses on high-end, customized sportswear, activewear and
related products. The Company's products uniquely address each account's
specific requirements, while providing the end-user with a high quality
product. The Company's ability to maintain consistency in product
quality and customer service, regardless of order size, enables it to
effectively service a broad range of customers. With over 70 in-house
artists and graphic designers and state-of-the-art manufacturing and
distribution facilities, the Company believes that it provides products
and service that are superior to those of its competitors in each of its
markets.
[] Leading Position in Multiple Niche Markets. The Company has a leading
position in the resort, corporate and college bookstore markets. The
Company's superior service and product customization enable it to more
effectively serve the particular needs of these customers. As a result,
the Company believes that: (i) it is one of the few national competitors
in the highly fragmented resort and leisure market; (ii) it has a
leading share of the corporate identity market, where it competes
primarily with smaller local and regional companies as well as a few
national competitors; and (iii) it has the second largest share of the
college bookstore market.
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<PAGE>
[] Leveraging the GEAR For Sports(R) Brand Name. The Company leverages its
GEAR brand name by introducing new products through its established
distribution channels. For example, the Company recently introduced new
headwear, sports luggage and Baby GEAR product lines. The Company
believes that the GEAR brand name is widely recognized by customers and
end-users in each of its markets and enjoys a reputation for high
quality products. The Company intends to continue to leverage this brand
name recognition through its existing distribution channels as well as
through alternative distribution channels and markets.
[] Efficient Operations. The Company uses its state-of-the-art facilities
to design, embroider and screenprint a significant portion of its
products. In addition, the Company uses independent contractors to
manufacture its blanks and, where appropriate, to provide other value-
added manufacturing services in order to maximize sourcing flexibility
while minimizing overhead costs and fixed charges. Only one of these
independent contractors supplies such services exclusively to the
Company. The Company does not have a contract with this independent
contractor. The Company minimizes the risk of excess inventory by
designing and manufacturing its products against firm customers orders.
[] Experienced Management Team with Significant Equity Ownership. The
Company's management team has extensive experience in the sportswear and
activewear business. The top five senior executives have each been with
the Company for at least 13 years and have combined industry experience
of over 115 years. Approximately 20 members of the senior management
team contributed an aggregate of $13.6 million in exchange for 50% of
the capital stock of the Company's parent, Holdings. The management team
will have significant incentive to continue to increase the Company's
sales and EBITDA as a result of their substantial equity ownership and
performance based incentive compensation programs that the Company
intends to implement.
SALES DIVISIONS
The Company markets its products, which include custom designed fleecewear,
jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and
sports luggage, through four sales divisions (dollars in millions):
<TABLE>
<CAPTION>
FISCAL 1996 NET SALES
----------------------
% OF
DIVISION CUSTOMERS SALES TOTAL
----------------- ---------------------------------- ----------- ----------
<C> <S> <C> <C>
Resort Destination resorts, family $ 67.7 40.0%
entertainment companies, hotel
chains, golf clubs, cruise lines,
and casinos
Corporate Large and small companies serving 47.2 27.9
a variety of industries
College Bookstore Major colleges and universities as 37.7 22.3
well as college bookstore lease
operators
Sports Specialty Sports specialty stores and 6.3 3.7
catalogues, stadium stores, and
professional sports teams and
their staffs
Other Various institutions, 10.3 6.1
organizations and individuals
----- -----
$169.3 100.0%
====== =====
</TABLE>
The following sets forth the amount and percentage of net sales for each of
the periods indicated (dollars in millions):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, NINE MONTHS ENDED
---------------------------------------- --------------------------
MARCH 31, MARCH 31,
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Resort.................. 50,228 39.2% 60,047 40.5% 67,739 40.0% 50,076 37.9% 50,836 35.3%
Corporate............... 30,241 23.6% 38,316 25.9% 47,167 27.9% 36,098 27.3% 42,318 29.4%
Bookstore............... 35,982 28.1% 37,823 25.5% 37,733 22.3% 34,240 25.9% 34,001 23.6%
Sports Specialty........ 1,458 1.1% 3,154 2.1% 6,342 3.7% 4,715 3.6% 7,899 5.5%
Other................... 10,262 8.0% 8,794 5.9% 10,192 6.0% 6,939 5.3% 9,128 6.3%
------- ------- ------- ------- -------
Total................... 128,171 148,134 169,173 132,068 144,182
======= ======= ======= ======= =======
</TABLE>
36
<PAGE>
The Company believes that it enjoys distinct competitive advantages in each
of its sales divisions 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
sportswear and activewear to over 6,100 active customer accounts, including
destination resorts, family entertainment companies, hotel chains, golf clubs,
cruise lines, casinos and United States military bases. The division's
customers include widely recognized names such as The Walt Disney Company,
Universal Studios, The Ritz Carlton, Pebble Beach, Princess Cruise Lines and
The Mirage.
The Resort division, with fiscal 1996 net sales of $67.7 million, accounted
for 40.0% of total net sales. The Resort division's net sales have grown from
$50.2 million in fiscal 1994 to $67.7 million in fiscal 1996, representing a
CAGR of 16.1%. The division's net sales have remained relatively constant as a
percentage of total net sales, increasing slightly from 38.9% in fiscal 1994
to 40.0% in fiscal 1996. In fiscal 1996, the top ten accounts of the Resort
division combined for approximately 22% of the division's net sales.
The Company distributes its Resort division products through its national
sales force of approximately 70 independent sales agents, of which
approximately 5% represent the Company on an exclusive basis. There are no
contracts with any of the independent sales agents who represent the Company
on an exclusive basis. The Company believes that it is well known and
respected in the resort and leisure industry because of its quick turnaround
for new orders and re-orders along with its product innovation and quality and
high level of service.
The Company believes that future growth in its Resort division will come
from increased penetration of the golf, military, hotel and gaming segments of
the industry, and through new product introductions such as headwear, sports
luggage and Baby GEAR products for infants and toddlers.
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 3,500 active customer
accounts, including Toyota, Hershey, Dr Pepper/7Up, Anheuser-Busch, MCI and
Exxon. In addition, the Company recently formed 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 1996 net sales of $47.2 million,
accounted for 27.9% of total net sales. The Corporate division's net sales
have grown from $30.2 million in fiscal 1994 to $47.2 million in fiscal 1996,
representing a CAGR of 25.0%. The division's net sales as a percentage of
total net sales have increased from 23.4% in fiscal 1994 to 27.9% in fiscal
1996, primarily as a result of the increased penetration of the underserved
corporate identity market and increased sales by Tandem Marketing.
The Company believes that it has an advantage over its competitors because
it is one of the few brand name suppliers of sportswear and activewear focused
on the corporate market. The Corporate division markets its products to
various segments within the corporate market. Products are sold by the
Company's national sales force of over 50 independent sales agents, of which
approximately 10% represent the Company on an exclusive basis, 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 who represent the
Company
37
<PAGE>
on an exclusive basis. In fiscal 1996, approximately 85% of the division's
sales were directly to corporations and the remaining 15% were to jobbers, who
then resold the Company's products to corporations. Jobbers are people who buy
goods in quantity from manufacturers and sell them directly to dealers.
The Company, through Tandem Marketing, leverages its existing corporate
customer base to market a full line of products, including articles of
merchandise imprinted or otherwise customized with the corporation's name,
logo or message. These products include sportswear and activewear designed and
manufactured by the Company, as well as other premium merchandise such as
glassware and stationary items. Currently, Tandem Marketing has active
catalogue programs with Lexus, Visa, Pirelli Tire, State Farm, Principal
Financial and Shelter Insurance. In fiscal 1996, Tandem Marketing accounted
for approximately $3.0 million, or 6.4%, of the Corporate division's net
sales, of which approximately 65% were derived from products designed and
manufactured by the Company.
The Company believes that significant opportunity for future growth exists
within the Corporate division through: (i) further penetration of its existing
corporate customers; (ii) targeting the thousands of unserved corporations
located in the division's key markets; and (iii) growth in the sales of Tandem
Marketing. In addition, the Company believes a specific opportunity exists
within the uniform market, as corporations switch from traditional uniforms to
more casual, higher quality sportswear and activewear.
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., as well as high volume,
university managed bookstores, such as the University of Notre Dame, the
University of Southern California, Yale University, the University of Michigan
and the United States Air Force and Naval academies. The National Association
of College Stores has selected the Company as "Vendor of the Year" three
times, an honor no other supplier has won more than once.
The College Bookstore division, with fiscal 1996 net sales of $37.7 million,
accounted for 22.3% of total net sales. The College Bookstore division's net
sales have grown from $35.9 million in fiscal 1994 to $37.7 million in fiscal
1996, representing a CAGR of 2.5%. As the Company has expanded into other
markets, the College Bookstore division's net sales as a percent of total net
sales has decreased from 28.0% in fiscal 1994 to 22.3% in fiscal 1996.
The Company believes that the top five competitors in the College Bookstore
division are Champion Sports, Jansport VF Corp., Cotton Exchange, Russell
Athletic and MV Sports and that they constitute approximately 20.0%, 9.5%
8.6%, 7.6% and 7.1%, respectively, of the market share in the College
Bookstore division in fiscal 1996.
The Company believes that future growth in its College Bookstore division
will come primarily from new product introductions such as headwear, sports
luggage and Baby GEAR products as well as from general demographic trends. The
U.S. Department of Education projects significant growth in the number of
college and university students through 2006, following a modest decline in
enrollment from 1992 to 1996. The Company believes that the projected increase
in college and university enrollment, in the event such increase does in fact
occur, may have a positive effect on the Company's business, results of
operations and financial condition. However, there can be no assurance that
any such projected growth will occur, and, if so, at such rates.
Sports Specialty Division. The Sports Specialty division, with fiscal 1996
net sales of $6.3 million, accounted for 3.7% of total net sales. Established
in 1994, the division has entered into licensing agreements to design,
manufacture and market sportswear and activewear bearing the names, logos and
insignia of professional sports leagues and teams as well as major sporting
events. The Company's licensors include, among others, MLB, the NBA, the NHL,
NASCAR and the Breeder's Cup. The division targets the upscale adult sports
enthusiast through the Company's existing distribution channels as well as
through new channels such as stadium
38
<PAGE>
stores and team retail outlets. The division markets its products to over 600
active customer accounts, including the Indianapolis Motor Speedway, the
Chicago Bulls, the Cleveland Indians, the Boston Bruins and Madison Square
Garden.
INDUSTRY OVERVIEW
The sportswear industry in which the Company participates encompasses a
broad assortment of merchandise, including activewear and outerwear products
such as sweatshirts and jackets. While activewear products have traditionally
been associated with athletic-related activities, over the past two decades
such products have been increasingly accepted by consumers for a variety of
leisure and work-related activities. Activewear products have experienced
significant sales growth over this time period due to both this increased
acceptance and consumers' increased pursuit of physical fitness and active
lifestyles. Moreover, activewear products have registered a number of
significant improvements in product characteristics that have contributed to
enhanced consumer appeal, including improvements in fabric weight, blends,
quality of construction, size, style and color availability.
The sportswear and activewear market is characterized by a low fashion risk
as compared to other apparel markets. While substantial opportunity exists for
product innovation and differentiation, basic garment styles are not driven by
trends or fads. In those market segments where products have a lower relative
labor cost content, such as fleecewear and outerwear, the industry is also
characterized by barriers to entry as larger capital requirements, sourcing
relationships, brand-name recognition and established customer relationships
limit the entry of new competitors. Foreign competition is limited due to the
short delivery times required for inventory control by retail customers.
Sportswear and activewear is distributed through a wide variety of channels,
including department stores, chain stores, mass merchandisers, discount
retailers and specialty retailers. The Company, however, has avoided many of
these larger mass distribution channels and has instead focused on the
following niche markets, where the competition has been highly fragmented and
generally based more on quality of service and product rather than on price.
Resort Market. The Company has defined the resort market to include products
sold through niche market retailers at destination resorts, family
entertainment companies, hotel chains, cruise lines, casinos and United States
military bases. Products sold in this market are typically adorned with the
name of the resort and include a full range of activewear and related items.
The Company believes that this market is highly fragmented and served
primarily by local and regional competitors. In addition, the Company has
found that national competitors in this market generally focus on specific
market segments, offering a limited range of products.
Corporate Market. The corporate identity market is represented by companies
or large organizations which purchase articles of merchandise imprinted or
otherwise customized with the organization's name, logo or message. These
products are used for building corporate identity, marketing, employee
incentives or development of goodwill for a targeted audience. The Company
believes that future growth in this market will be fueled, in part, by the
continued acceptance of activewear products in the workplace. The Company
believes that it is one of the few brand name suppliers of sportswear and
activewear focused on the corporate market.
39
<PAGE>
College Bookstore Market. The Company believes that the college bookstore
apparel market is relatively mature and stable. The Company estimates that the
top five suppliers to this market have an aggregate market share of
approximately 50%, with the share of each such competitor remaining relatively
constant over the last five years. Demand in this market is driven primarily
by demographic trends such as the number of entering college and university
students. As the following table illustrates, the U.S. Department of Education
projects significant growth in the numbers of college and university students
through 2006, following a modest decline in enrollment from 1992 to 1996.
However, there can be no assurance that any such projected growth will occur,
and, if so, at such rates.
HISTORICAL AND PROJECTED COLLEGE AND UNIVERSITY ENROLLMENT
[BAR GRAPH SHOWING HISTORICAL AND PROJECTED COLLEGE AND UNIVERSITY ENROLLMENT
FROM 1987 TO 2006]
(STUDENTS IN MILLIONS)
Source: U.S. Department of
Education, National Center for
Education Statistics, Fall
Enrollment in Colleges and
Universities surveys and
Integrated Postsecondary
Education Data System surveys.
(November, 1995)
Professional Sports Licensed Apparel Market. Most of the North American
professional sports leagues, including MLB, the NBA, the NFL and the NHL, as
well as other sports organizations and events, license the right to sell
products adorned with the insignia of its leagues, teams or events. These
licensed product sales have grown significantly since the mid-1980's through
aggressive management of the licensing programs and increased marketing
efforts. Much of the growth in demand for licensed sports apparel has been
advanced by increased television programming and sporting event attendance, as
well as introduction of a wide variety of products and styles. Although demand
has been impacted in recent years by labor disputes in the professional sports
leagues, the Company expects this growth to continue with the resolution of
the labor disputes and continued expansion of the professional sports leagues
to new geographic markets.
The number of competitors in the licensed apparel market has expanded with
an increase in the number of licenses granted by the professional sports
leagues in recent years. These licenses represent significant barriers to
entry as the professional leagues appear less likely to enter into licensing
agreements with new entrants. The industry has also been experiencing
consolidation in recent years as larger companies have been acquiring smaller
competitors.
40
<PAGE>
PRODUCTS
The Company's extensive product offerings include: (i) fleecewear; (ii)
outerwear; (iii) polo shirts, woven shirts and sweaters; (iv) T-shirts and
shorts; and (v) other apparel items and accessories. These products are sold
in each of the Company's four markets and are currently offered in over 400
combinations of style and color. While its products are generally
characterized by a low fashion risk, the Company attempts to incorporate the
latest trends in style, color and fabrics with a heavy emphasis on innovative
graphics to create leading-edge fashion looks.
The Company believes that the quality and breadth of its product lines and
its innovative logo designs represent significant competitive advantages in
its markets. In order to further capitalize on these advantages, the Company
intends to continue to expand both the depth and breadth of its product lines.
Currently, the Company has major product introductions in headwear, sports
luggage and Baby GEAR products for infants and toddlers.
The following illustrates the attributes of the Company's current product
lines:
Fleecewear. The Company's fleecewear products represented approximately 34%
of net sales for fiscal 1996. 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 27% of
net sales for fiscal 1996. 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 22% of net sales for
fiscal 1996. 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 15% of net sales for fiscal 1996. 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, a line of children's
products and a number of other miscellaneous apparel items. In addition,
through its Tandem Marketing division, the Company distributes a full line of
corporate fulfillment products. Sales of "Other" items represented
approximately 2% of net sales for fiscal 1996.
DESIGN, MANUFACTURING AND MATERIALS SOURCING
The Company operates state-of-the-art design, embroidery and screenprint
manufacturing and distribution facilities in Lenexa, Kansas.
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 screenprinting
applications to Company-designed non-decorative apparel ("blanks").
Substantially all of the
41
<PAGE>
screenprinting and a significant portion of the embroidery operations are
performed by the Company in its Lenexa, Kansas 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. See "Certain Transactions." The Company maintains
the most updated machinery and equipment available in order to ensure superior
product quality and consistency.
All of the Company's blanks are sourced and manufactured to the Company's
specifications by third party vendors. The Company closely monitors each of
its vendors in order to ensure that its specifications and quality standards
are met. A significant portion of the Company's blanks are contract
manufactured in various off-shore plants. The Company's imported items are
currently manufactured in China, Taiwan, Korea, Malaysia, Hong Kong,
Singapore, Indonesia, Pakistan, Honduras, Israel, Fiji and Mexico. No foreign
country has a manufacturing concentration above 20%. Approximately 16% 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. See "Risk Factors--Foreign Sourcing."
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:
<TABLE>
<CAPTION>
MARKET PRIMARY COMPETITORS
----------------- --------------------------------------------------------
<C> <S>
Resort Highly fragmented--primarily local and regional
competitors
Corporate HA-LO Marketing, Hermann Marketing, Swingster (American
Marketing Industries)
College Bookstore Champion Products, Jansport (VF Corp.), Cotton Exchange,
Russell Athletic, M.V. Sports
Sports Specialty Champion Products, Russell Corporation, Starter
</TABLE>
Competition in each of the Company's markets generally is based on product
design and decoration, customer service and overall product quality. The
Company believes that it has been able to compete successfully because of its
ability to create diverse and innovative designs, provide excellent customer
service, leverage its GEAR brand name and differentiate its products on the
basis of quality.
EMPLOYEES
The Company employs over 640 people at its two facilities in Lenexa, Kansas,
of which approximately 30 are members of management, 280 are involved in
either product design, customer service, sales support or administration and
330 are involved in 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.
42
<PAGE>
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 two 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 1998, on
terms comparable to those under the Softwear License Agreement.
LICENSES
The Company markets its products, in part, under licensing agreements,
primarily in its College Bookstore and Sports Specialty divisions. In fiscal
1996, net sales under the Company's 262 active licensing agreements totalled
$23.8 million, or approximately 14% of the Company's net sales. In fiscal
1996, $20.4 million of College Bookstore division net sales, representing
approximately 54% of the division's net sales and 12% of total net sales, were
recorded under this division's 214 licensing agreements. In addition, in
fiscal 1996, $1.6 million of Sports Specialty division net sales, representing
approximately 25% of the division's net sales and 1% 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.
PROPERTIES
The Company owns each of its two properties: its 250,000 square foot
headquarters and manufacturing facility in Lenexa, Kansas and its 100,000
square foot manufacturing and distribution facility located approximately two
miles from its headquarters. Approximately 200,000 square feet and 100,000
square feet of the headquarter/manufacturing facility and
manufacturing/distribution facility, respectively, are devoted to the design
and manufacture of the Company's products and to customer service. The Company
believes that the two facilities (along with the embroidery facilities used by
the two affiliate companies) provide the Company with sufficient space to
support its expected expansion over the next several years.
LITIGATION
From time to time, the Company is involved in routine litigation incidental
to its business. The Company is not a party to any pending or threatened legal
proceeding which would have a material adverse effect on the Company's results
of operations, cash flows or financial condition.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the names and ages of the Company's directors and
executive officers and the positions they hold as of the date of this
Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Robert M. Wolff......... 62 Chairman
John L. Menghini........ 47 President, Chief Operating Officer and Director
Robert G. Shaw.......... 46 Senior Vice President, Finance and Human Resources and Director
Larry D. Graveel........ 48 Senior Vice President, Merchandising and Director
Michael H. Gary......... 44 Senior Vice President, Sales Administration
A. Richard Caputo, Jr... 31 Director
John W. Jordan II....... 49 Director
David W. Zalaznick...... 43 Director
</TABLE>
Set forth below is a brief description of the business experience of each
director and executive officer of the Company including each person's
principal occupations and employment during the past five years, the name and
principal business of any corporation or other organization in which such
occupations and employment were carried on and whether such corporation or
organization is a parent, subsidiary or other affiliate of the registrant.
Also set forth below are any other directorships held by each director in any
company with a class of securities registered pursuant to Section 12 of the
Exchange Act or subject to the requirements of Section 15(d) of the Exchange
Act.
Robert M. Wolff has served as Chairman of the Company since its inception in
1974.
John L. Menghini 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 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.
A. Richard Caputo, Jr. has served as a director of the Company since
February 1997. Mr. Caputo is a managing partner of TJC, a private merchant
banking firm, with which he has been associated since 1990. Mr. Caputo is also
a director of AmeriKing, 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 is a managing partner of TJC, which he founded in 1982. Mr.
Jordan is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc.,
American Safety Razor Company, Apparel Ventures, Inc., AmeriKing, Inc., Motors
and Gears, 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 partner 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., Motors and Gears, Inc. and The Great American Cookie
Company as well as other privately held companies.
44
<PAGE>
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 and, indirectly, GFSI.
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 Holdings.
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 Holdings or GFSI. The provisions described
under "Stockholders Agreement" represent all of the material provisions of
such agreement.
BOARD OF DIRECTORS
Liability Limitation. The Certificate of Incorporation provides that a
director of the Company 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, 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
45
<PAGE>
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
interests of the Company.
Director Compensation. After the consummation of the Offering, each director
of the Company will receive $20,000 per year for serving as a director of the
Company. In addition, the Company reimburses directors for their travel and
other expenses incurred in connection with attending meetings of the Board of
Directors.
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........................ 1996 $240,000 $ 0 $40,019
Chairman 1995 240,000 288,000 41,518
1994 240,000 600,000 49,337
John L. Menghini....................... 1996 225,000 300,000 31,136
President and Chief 1995 225,000 300,000 32,502
Operating Officer 1994 200,000 300,000 41,244
Robert G. Shaw......................... 1996 150,000 120,000 31,353
Senior Vice President and 1995 125,000 100,000 32,558
Chief Financial Officer 1994 108,000 100,000 37,723
Larry D. Graveel....................... 1996 170,000 120,000 27,416
Senior Vice President 1995 145,000 120,000 28,915
1994 120,000 120,000 37,734
Michael H. Gary........................ 1996 150,000 120,000 28,579
Senior Vice President 1995 125,000 100,000 30,078
1994 100,000 100,000 34,526
</TABLE>
- ----------
(1) Other annual compensation consists of car allowances, profit sharing,
group medical benefits and individual beneficiary life insurance premiums
paid by the Company.
EMPLOYMENT/NONCOMPETITION AGREEMENTS
Wolff Employment Agreement. Effective upon the consummation of the
Transactions, 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.
46
<PAGE>
Wolff Noncompetition Agreement. Effective upon the consummation of the
Transactions, 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.
COMPENSATION PHILOSOPHY
The Board of Directors is responsible for making decisions concerning the
salaries and the annual bonus plan that governs the compensation paid to all
executive officers of the Company. The Board of Directors has devoted
considerable attention to developing the Company's compensation philosophy
which embodies four primary objectives:
1. to provide incentives based on value delivered to the Company's
stockholders and customers;
2. to clearly connect individual executive pay action with performances;
3. to maintain a system of rewards that is competitive with industry
standards and
4. to attract, motivate and retain executives of the highest quality.
The Company's compensation programs reflect the commitment to the mission,
values and performance of the Company. Continuous review and refinement of the
Company's compensation practices in response to the changing business
environment will serve to reinforce this commitment.
The most important performance yardstick in the Company's compensation
program is the Company's ability to deliver long-term value to stockholders
through appreciation in share price, cash flow and earnings. On an ongoing
basis, the compensation program is tested and refined to ensure a high
correlation between the level of compensation and these measures. Achieving
desirable stockholder returns over a sustained period of time requires
management's attention to a number of financial, operational and strategic
elements which enables the Company to focus on the on-going requirements of
the customer. The Company's compensation program, therefore, focuses
executives on actions that directly impact stockholder return in the long-term
and serve the needs of the Company's customers.
Multiple sources of information are used to evaluate and establish
appropriate compensation practices, including data from benchmark companies
within the industry to assess the Company's relative performance and
compensation levels. Benchmark companies are selected by meeting multiple
criteria including product lines, markets served revenue size, revenue source
and comparable operations. Consistent with the Company's compensation
philosophy, the Board of Directors will position its executive compensation
targets competitive with the benchmark companies. Annual executive
compensation will be below, at or above the competitive target depending on
individual and Company performance.
The Company's executive compensation program has two components--base salary
and annual incentives, each of which are primary designed to reward current
performance.
47
<PAGE>
DESCRIPTION OF COMPENSATION PROGRAMS
The following briefly describes the role of each element of compensation:
Base Salary
Base Salary are at levels sufficient to attract and retain qualified
executives. To accomplish these goals, the base salaries are generally
targeted within a competitive range of average base salaries for similar
positions in benchmark companies within the industry. Aggregate base salary
increases are intended to parallel increases in the pay levels of industry as
a whole. Individual executive salary increases will strongly reflect the
individual's level of performance and, to a lesser extent, trends with the
industry.
Annual Incentive
The Company's executive annual incentive plan serves to recognize and reward
executives for taking actions that build the value of the Company, by
generating competitive total returns to stockholders, and providing value-
added services to the Company's customers. The annual incentive awards are
awarded in December of each year and are based on the Company's achievement of
certain operating objectives including, among others, sales, net income and
return on equity. The annual incentive for the Chairman of the Company is
based on the above factors and the discretion of the Board of Directors.
COMPENSATION ADMINISTRATION
The Company follows an annual cycle to administer each of the components of
executive compensation. The integrity of the Company's compensation program
relies on a rigorous annual performance evaluation process.
Certain executive officers also serve as Management Directors. The Company
does not believe that this gives rise to conflicts of interest as the Chairman
is responsible for suggesting compensation decisions for the Company's
executive officers, other than himself. At the same time, a majority of the
Board of Directors, which includes three directors who are not executive
officers and whose compensation is not influenced by the Chairman or the other
executive officers, is responsible for making compensation decisions for the
Chairman.
INCENTIVE COMPENSATION PLAN
The Company will adopt on or prior to January 1, 1998, an incentive
compensation plan (the "Incentive Plan"), which will provide for annual cash
bonuses payable based on a percentage of EBITA (as defined in the Incentive
Plan), if certain EBITA targets are met.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
All of the outstanding common stock of the Company is owned by Parent. The
table below sets forth as of February 27, 1997 certain information regarding
beneficial ownership of the common stock of Parent held by (i) each of its
directors and executive officers who own shares of common stock of Parent,
(ii) all directors and executive officers of Parent as a group and (iii) each
person known by Parent 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 Parent indicated as
beneficially owned by them, except as otherwise noted.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL
OWNERSHIP(1)
--------------------
NUMBER OF PERCENTAGE
SHARES OWNED
--------- ----------
<S> <C> <C>
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)................................................ 978.625 48.9%
OTHER PRINCIPAL STOCKHOLDERS:
MCIT PLC(10)............................................. 500.0 25.0%
Leucadia Investors, Inc.(11)............................. 125.0 6.3%
</TABLE>
- --------
(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 February 27, 1997,
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, 9 West 57th Street, New York, NY 10019.
(9) All shares are held by the John W. Jordan II Revocable Trust, of which Mr.
Jordan is trustee.
(10) The principal address of MCIT PLC is c/o The Jordan Company, 9 West 57th
Street, New York, NY 10019.
(11) The principal address of Leucadia Investors, Inc. is 315 Park Avenue
South, New York, NY 10010.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement, which requires the Company to
use its best efforts to effect the Exchange Offer. See "--Registration
Rights."
The Company is making the Exchange Offer in reliance upon the position of
the staff of the Commission set forth in certain no-action letters addressed
to other parties in other transactions. However, the Company has not sought
its own no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Based on these interpretations by the
staff of the Commission, the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by holders thereof
(other than (i) any such holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act, (ii) an Initial Purchaser
who acquired the Old Notes directly from the Company solely in order to resell
pursuant to Rule 144A of the Securities Act or any other available exemption
under the Securities Act, or (iii) a broker-dealer who acquired the Old Notes
as a result of market making or other trading activities) without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not participating and has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes. By tendering, each Holder
which is not a broker dealer will represent to the Company that, among other
things, the person receiving the New Notes, whether or not such person is the
Holder, (i) will acquire the New Notes in the ordinary course of such person's
business, (ii) has no arrangement or understanding with any person to
participate in a distribution of the New Notes and (iii) is not engaged in and
does not intend to engage in a distribution of the New Notes. If any Holder or
any such other person has an arrangement or understanding with any person to
participate in a distribution of such New Notes, is engaged in or intends to
engage in a distribution of such New Notes, is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company, or acquired the Old
Notes as a result of market making or other trading activities, then such
Holder or any such other person (i) can not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless such sale is made
pursuant to an exemption from such requirements.
Holders of Old Notes not tendered will not have any further registration
rights and the Old Notes not exchanged will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the markets for the
Old Notes could be adversely affected.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD
NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION
AND REQUIREMENTS.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
In connection with the issuance of the Old Notes, the Company entered into
the Registration Rights Agreement with the Initial Purchasers of the Old
Notes.
Holders of New Notes (other than as set forth below) are not entitled to any
registration rights with respect to the New Notes. Pursuant to the
Registration Rights Agreement, Holders of Old Notes are entitled to certain
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registration rights. Under the Registration Rights Agreement, the Company has
agreed, for the benefit of the Holders of the Old Notes, that it will, at its
cost, (i) within 90 days after the date of the original issue of the Old
Notes, file the Registration Statement with the Commission and (ii) within 150
days after the date of original issuance of the Old Notes, use its best
efforts to cause such Registration Statement to be declared effective under
the Securities Act. The Registration Statement of which this Prospectus is a
part constitutes the Registration Statement. If (i) the Company is not
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of Transfer
Restricted Securities (as defined) notifies the Company within the specified
time period that (A) due to a change in law or policy it is not entitled to
participate in the Exchange Offer, (B) due to a change in law or policy it may
not resell the New Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the Registration
Statement is not appropriate or available for such resales by such holder or (C)
it is a broker-dealer and acquired the Notes directly from the Company or an
affiliate of the Company, the Company will file with the Commission a Shelf
Registration Statement to cover resales of the Transfer Restricted Securities by
the Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
will use its best efforts to cause the applicable registration statement to be
declared effective as promptly as possible by the Commission. For purposes of
the foregoing, "Transfer Restricted Securities" means each Note, until (i) the
date of which such Transfer Restricted Security has been exchanged in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of a Transfer Restricted Security for a New Note, the date on which such
New Note is sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of the Prospectus contained in the Registration
Statement, (iii) the date on which such security has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such security is distributed
pursuant to Rule 144 under the Act.
The Registration Rights Agreement also provides that, (i) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 business days after the date on which the Registration
Statement was declared effective by the Commission, New Securities in exchange
for all Transfer Restricted Securities tendered prior thereto in the Exchange
Offer and (ii) if obligated to file the Shelf Registration Statement, the
Company will file the Shelf Registration Statement with the Commission on or
prior to 60 days after such filing obligation arises and use its best efforts
to cause the Shelf Registration to be declared effective by the Commission on
or prior to 120 days after such obligation arises. The Company shall use its
best efforts to keep such Shelf Registration Statement continuously effective,
supplemented and amended until the third anniversary of the Closing Date or
such shorter period that will terminate when all the Senior Notes covered by
the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement. If (a) the Company fails to file any of the
registration statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such registration
statements are not declared effective by the Commission on or prior to the
date specified for such effectiveness (the "Effectiveness Target Date"), (c)
the Company fails to consummate the Exchange Offer within 30 business days of
the Effectiveness Target Date with respect to the Registration Statement, or
(d) the Shelf Registration Statement or the Registration Statement is declared
effective but thereafter, subject to certain exceptions, ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (d) above a "Registration
Default"), then the Company will pay Liquidated Damages to each Holder of
Transfer Restricted Securities, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week for each $1,000 principal amount of Senior Notes held
by such Holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.40 per week for each $1,000 principal amount of Senior
Notes, as applicable. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
Holders of Transfer Restricted Securities will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the
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time periods set forth in the Registration Rights Agreement in order to have
their Transfer Restricted Securities included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set
forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration
Rights Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means the earlier
of (i) 5:00 p.m., New York City time, on August 22, 1997 or (ii) the date when
all Old Notes have been tendered; provided, however, that if the Company, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended; provided further that in no event will
the Exchange Offer be extended beyond September 5, 1997. The Company may
extend the Exchange Offer at any time and from time to time by giving oral or
written notice to the Exchange Agent and by timely public announcement.
Without limiting the manner in which the Company may choose to make any public
announcement and subject to applicable law, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
During any extension of the Exchange Offer, all Old Notes previously tendered
pursuant to the Exchange Offer will remain subject to the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the
applicable requirements of the Exchange Act and the rules and regulations
thereunder.
As of the date of this Prospectus, $125,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about July 28, 1997, to all Holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions
as set forth under "--Certain Conditions to the Exchange Offer" below.
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and rights to receive Liquidated Damages. See "--
Registration Rights; Liquidated Damages." The Old Notes were, and the New
Notes will be, issued under the Indenture and all such Notes are entitled to
the benefits of the Indenture.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering Holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified below under "--Certain Conditions to the Exchange Offer". The
Company will give oral or written notice of any amendment, nonacceptance or
termination to the Holders of the Old Notes as promptly as practicable. Any
amendment to the Exchange Offer will not limit the right of Holders to
withdraw tendered Old Notes prior to the Expiration Date. See "--Withdrawal
Rights."
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the
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terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to Fleet National Bank (the "Exchange Agent") at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along, with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent prior to the Expiration Date, or (iii) the Holder must
comply with the guaranteed delivery procedures described below. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered Holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust
company having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than the signer of the Letter of Transmittal, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered Holder with
the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, all defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification. The
Exchange Agent intends to use reasonable efforts to give notification of such
defects and irregularities.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders that appear on the
Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or
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<PAGE>
representatives capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder and such person has no
arrangement or understanding with any person to participate in the
distribution of the New Notes. If any Holder or any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company,
is engaged in or intends to engage in or has an arrangement or understanding
with any person to participate in a distribution of such New Notes to be
acquired pursuant to the Exchange Offer, or acquired the Old Notes as a result
of market making or other trading activities, such Holder or any such other
person (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer." For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent, with written confirmation of any
oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered Holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid on the Old Notes, or, if no interest has been
paid on the Old Notes, from February 27, 1997. Old Notes accepted for exchange
will cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders of Old Notes whose Old Notes are accepted for exchange
will not receive any payment in respect of accrued interest on such Old Notes
otherwise payable on any interest payment date the record date for which
occurs on or after consummation of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of (i) certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, (ii) a properly completed and duly executed
Letter of Transmittal and (iii) all other required documents. If any tendered
Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer, or if Old Notes are submitted for a greater
amount than the Holder desires to exchange, such unaccepted or nonexchanged
Old Notes will be returned without expense to the tendering Holder thereof
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such nonexchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility)
designated by the tendering Holder as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this
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Prospectus, and any financial institution that is a participant in the Book-
Entry Transfer Facility's systems may make book-entry delivery of Old Notes by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedures for transfer. However,
although delivery of Old Notes may be effected through book-entry transfer at
the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile
thereof, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "--Exchange Agent" on or
prior to the Expiration Date or the guaranteed delivery procedures described
below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if
(i) the tender is made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent has received from such Eligible
Institution a properly completed and duly executed Letter of Transmittal (or a
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the
form of the corresponding exhibit to the Registration Statement of which this
Prospectus constitutes a part (by telegram, telex, facsimile transmission,
mail or hand delivery), setting forth the name and address of the Holder of
Old Notes and the amount of Old Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, the certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within three
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
Holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the Holder thereof without cost to such Holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account with
such Book-Entry Transfer Facility specified by the Holder) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.
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CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer, if at any time
before the acceptance of such Old Notes for exchange or the exchange of the New
Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
sole judgment of the Company, is or may be adverse to the Company, or the
Company shall have become aware of facts that, in the sole judgment of the
Company, have or may have an adverse effect on the value of the Old Notes
or the New Notes.
Holders of Old Notes will have registration rights and the right to Liquidated
Damages as described under "--Registration Rights; Liquidated Damages" if the
Company fails to consummate the Exchange Offer.
To the Company's knowledge as of the date of this Prospectus, none of the
above events has occurred.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time. In the event the Company
asserts or waives a condition to the Exchange Offer which constitutes a
material change to the terms of the Exchange Offer, the Company will disclose
such change in a manner reasonably calculated to inform prospective investors
of such change, and will extend the period of the Exchange Offer by five
business days.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939.
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EXCHANGE AGENT
Fleet National Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal and Notices of Guaranteed
Delivery should be directed to the Exchange Agent at the addresses
set forth below. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
Deliver to: Fleet National Bank, Exchange Agent:
BY MAIL: By Overnight Courier: By Hand:
Fleet National Bank Fleet National Bank Fleet National Bank
Mail Code: CTOPT06D Mail Code: CTOPT06D Corporate Trust
Corporate Trust Corporate Trust Operations Operations
Operations Department Department
Department 1 Talcott Plaza, 6th Floor Customer Service
P.O. Box 1440 Hartford, Connecticut 06120 Window
Hartford, 1 Talcott Plaza,
Connecticut 06143 5th Floor
By Facsimile:
Hartford,
Connecticut 06120
(860) 986-7908
DELIVERY OF A LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The Company will, however, pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Old Notes, and in handling tenders for
their customers. The expenses to be incurred in connection with the Exchange
Offer, including the fees and expenses of the Exchange Agent and printing,
accounting, registration, and legal fees, will be paid by the Company and are
estimated to be approximately $60,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
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CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the
Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based upon no-action letters issued by the staff of the Commission to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer in exchange for the Old Notes may be offered for resale, resold or
otherwise transferred by a Holder thereof (other than any (i) Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), (ii) an Initial Purchaser who acquired the Old Notes directly from the
Company solely in order to resell pursuant to Rule 144A of the Securities Act or
any other available exemption under the Securities Act, or (iii) a broker-dealer
who acquired the Old Notes as a result of market making or other trading
activities) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and such holder is not
participating and has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of such
New Notes. However, the Company has not sought its own no-action letter and
there can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
Each Holder, other than a broker-dealer, must acknowledge that it is not engaged
in, and does not intend to engage in, a distribution of New Notes, and has no
arrangement or understanding to participate in a distribution of New Notes. If
any Holder is an affiliate of the Company, is engaged in or intends to engage in
or has any arrangement or understanding with respect to the distribution of the
New Notes to be acquired pursuant to the Exchange Offer, or required the Old
Notes as a result of market making or other trading activities, such Holder (i)
could not rely on the relevant determinations of the staff of the Commission and
(ii) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any secondary resale transaction. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities and that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and is complied
with. The Company has agreed to register or qualify the sale of the New Notes in
such jurisdictions only in limited circumstances and subject to certain
conditions.
ACCOUNTING TREATMENT
The exchange of the New Notes for the Old Notes will have no impact on the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. Expenses of the Exchange
Offer and expenses related to the Old Notes will be amortized, pro rata, over
the term of the New Notes.
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DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to the Indenture between the Company and
Fleet National Bank, as trustee (the "Trustee"), in a private transaction that
is not subject to the registration requirements of the Securities Act. See
"Notice to Investors." The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), as in effect on
the date of original issuance of the Notes. The Notes are subject to all such
terms, and holders of the Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Indenture does not purport to be complete and is qualified
in its entirety by reference to the Indenture, including the definitions
therein of certain terms used below. Copies of the proposed form of Indenture
and Registration Rights Agreement are available as set forth below under "--
Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
The Company's obligations under the Indenture and the Notes will be fully
and unconditionally guaranteed jointly and severally, on a senior subordinated
basis (the "Note Guarantees") by any future Restricted Subsidiaries (the
"Guarantors"). See "--Note Guarantees." As of the date of the Indenture, the
Company will not have any Subsidiaries. Under certain circumstances, the
Company will be able to designate any Subsidiaries formed by the Company or
acquired by the Company after the original issuance of the Notes as Non-
Restricted Subsidiaries. Non-Restricted Subsidiaries will not be Guarantors
and will not be subject to many of the restrictive covenants set forth in the
Indenture.
The Notes will be limited to $125,000,000 in aggregate principal amount and
will mature on March 1, 2007. The Notes will bear interest at the rate set
forth on the front cover of this Offering Memorandum. Interest on the Notes is
payable semi-annually in cash in arrears on March 1 and September 1 in each
year, commencing September 1, 1997, to holders of record of Notes at the close
of business on February 15 or August 15 immediately preceding such interest
payment date. Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date
of original issuance. Interest will be computed on the basis of a 360-day year
of twelve 30-day months. The Notes will be issued in denominations of $1,000
and integral multiples thereof.
Principal of and premium, interest and Liquidated Damages, if any, on the
Notes will be payable, and the Notes may be presented for registration of
transfer or exchange, at the office of the Paying Agent and Registrar. Holders
of Notes must surrender their Notes to the Paying Agent to collect principal
payments, and the Company may pay principal and interest by check and may mail
checks to a holder's registered address; provided that all payments with
respect to Global Notes and with respect to Certificated Notes, the holders of
which have given wire transfer instructions to the Company, will be required
to be made by wire transfer of immediately available funds to the accounts
specified by the holders thereof. The Registrar may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection with certain transfers or exchanges. See "--Transfer and Exchange."
The Trustee will initially act as Paying Agent and Registrar. The Company may
change the Paying Agent or Registrar without prior notice to holders of Notes,
and the Company or any of its Subsidiaries may act as Paying Agent or
Registrar.
SUBORDINATION
The payment of principal of and premium, interest and Liquidated Damages, if
any, on the Notes will be subordinated in right of payment, as set forth in
the Indenture, to the prior payment in full in cash or Marketable Securities
of all Senior Indebtedness, whether outstanding on the date of the Indenture
or thereafter incurred. The Indenture will permit the incurrence of additional
Senior Indebtedness in the future.
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Upon any acceleration of the maturity of the Notes or upon any payment or
distribution of assets of the Company to creditors upon any liquidation,
dissolution, winding up, reorganization, assignement for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceeding of the Company, the holders of all Senior Indebtedness will be
first entitled to receive payment in full in cash or Marketable Securities (as
defined) of all Obligations (as defined) due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the
Holders of Notes will be entitled to receive any payment with respect to the
Notes, and until all Obligations with respect to Senior Indebtedness are paid
in full in cash or Marketable Securities, any distribution to which the
Holders of Notes would be entitled shall be made to the holders of Senior
Indebtedness (except that Holders of Notes may receive Permitted Junior
Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of
the principal of or premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior Indebtedness
as to which such default relates to accelerate its maturity and the Trustee
receives a written notice (with a copy to the Company) of such other default
(a "Payment Blockage Notice") from the Company or the holders of any
Designated Senior Indebtedness. Payments on the Notes may and shall be resumed
(a) in the case of a payment default, upon the date on which such default is
cured or waived and (b) in case of a nonpayment default, the earlier of the
date on which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received by the
Trustee, unless the maturity of any Designated Senior Indebtedness has been
accelerated. No new period of payment blockage may be commenced unless and
until 360 days have elapsed since the date of receipt by the Trustee of the
immediately prior Payment Blockage Notice. No nonpayment default that existed
or was continuing on the date of delivery of any Payment Blockage Notice to
the Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice (it being understood that any subsequent action, or any breach of any
covenant for a period commencing after the date of receipt by the Trustee of
such Payment Blockage Notice, that, in either case, would give rise to such a
default pursuant to any provisions under which a default previously existed or
was continuing shall constitute a new default for this purpose).
The Indenture will further require that the Company promptly notify holders
of Senior Indebtedness if payment of the Notes is accelerated because of an
Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Indebtedness. As of March
28, 1997, the aggregate principal amount of Senior Indebtedness of the Company
to which the Notes would have been subordinated would have been approximately
$68.0 million. The Indenture will limit, subject to certain financial tests,
the amount of additional Indebtedness, including Senior Indebtedness, that the
Company and its subsidiaries can incur. See "--Certain Covenants--Limitation
on Incurrence of Indebtedness."
NOTE GUARANTEES
The Company's payment obligations under the Notes will be fully and
unconditionally guaranteed jointly and severally, on a senior subordinated
basis, (the "Note Guarantees"), by the Company's future Restricted
Subsidiaries (the "Guarantors"). The Note Guarantees will be subordinated to
the prior payment in full in cash or Marketable Securities of all Senior
Indebtedness of each Guarantor (including such Guarantor's guarantee of the
New Credit Agreement) to the same extent that the Notes are subordinated to
Senior Indebtedness of the Company. The obligations of any Guarantor under its
Note Guarantee will be limited so as not to constitute a fraudulent conveyance
under applicable law.
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any
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such consolidation or merger (if other than such Guarantor) assumes all the
obligations of such Guarantor pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; (iii) such Guarantor, or any Person formed
by or surviving any such consolidation or merger, would have Consolidated Net
Worth (immediately after giving effect to such transaction), equal to or
greater than the Consolidated Net Worth of such Guarantor immediately
preceding the transaction; and (iv) the Company would be permitted by virtue
of the Company's pro forma Cash Flow Coverage Ratio, immediately after giving
effect to such transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Cash Flow Coverage test set forth in the covenant described
below under the caption "Limitation on Incurrence of Indebtedness." The
requirements of clauses (iii) and (iv) of this paragraph will not apply in the
case of a consolidation with or merger with or into the Company or another
Guarantor.
The Indenture will provide that (a) in the event of a sale or other
disposition of all of the assets of any Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Guarantor, or (b) in the event that the Company
designates a Guarantor to be a Non-Restricted Subsidiary, then such Guarantor
(in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the capital stock of such Guarantor or
any such designation) or the corporation acquiring the property (in the event
of a sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Note Guarantee; provided
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "Mandatory
Offers to Purchase Notes."
REDEMPTION OF NOTES
Optional Redemption. Except as set forth below, the Notes may not be
redeemed at the option of the Company prior to March 1, 2002. During the 12-
month period beginning on March 1 of the years indicated below, the Notes will
be redeemable, at the option of the Company, in whole or in part, on at least
30 but not more than 60 days' notice to each holder of Notes to be redeemed,
at the redemption prices (expressed as percentages of the principal amount)
set forth below, plus any accrued and unpaid interest and Liquidated Damages,
if any, to the redemption date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002......................................................... 104.813%
2003......................................................... 103.208%
2004......................................................... 101.604%
2005 and thereafter.......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to March 1, 2000, the Company may (but
shall not have the obligation to) redeem up to 40% of the original aggregate
principal amount of the Notes at a redemption price of 110% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, to the redemption date, with the net proceeds of one or more Equity
Offerings of the Company or Holdings (to the extent contributed to the
Company); provided that at least 60% of the aggregate principal amount of
Notes originally issued remain outstanding immediately after the occurrence of
any such redemption; and provided, further, that any such redemption shall
occur within 60 days of the date of the closing of any such Equity Offering.
The restrictions on optional redemptions contained in the Indenture do not
limit the Company's right to separately make open market, privately negotiated
or other purchases of Notes from time to time.
Mandatory Redemption. Except as set forth below under "--Mandatory Offers to
Purchase Notes--Change of Control" and "--Asset Sales," the Company is not
required to make any mandatory redemption, purchase or sinking fund payments
with respect to the Notes.
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MANDATORY OFFERS TO PURCHASE NOTES
Change of Control. Upon the occurrence of a Change of Control (such date
being the "Change of Control Trigger Date"), each holder of Notes shall have
the right to require the Company to purchase all or any part (equal to $1,000
or an integral multiple thereof) of such holder's Notes pursuant to an Offer
(as defined) at a purchase price in cash equal to 101% of the aggregate
principal amount thereof, plus any accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase. The Company shall furnish to the
Trustee, at least two Business Days before notice of an Offer is mailed to all
holders of Notes pursuant to the procedures described below under "--
Procedures for Offers," notice that the Offer is being made. Transactions
constituting a Change of Control are not limited to hostile takeover
transactions not approved by the current management of the Company. Except as
described under "--Change of Control," the Indenture does not contain
provisions that permit the holders of Notes to require the Company to purchase
or redeem the Notes in the event of a takeover, recapitalization or similar
restructuring, including an issuer recapitalization or similar transaction
with management. Consequently, the Change of Control provisions will not
afford any protection in a highly leveraged transaction, including such a
transaction initiated by the Company, management of the Company or an
affiliate of the Company, if such transaction does not result in a Change of
Control. In addition, because the obligations of the Company with respect to
the Notes are subordinated to all Senior Indebtedness of the Company and all
obligations of the Company's future subsidiaries, existing or future Senior
Indebtedness of the Company or obligations of the Company's future
subsidiaries may prohibit the Company from repurchasing the Notes upon a
Change of Control. Moreover, the ability of the Company to repurchase Notes
following a Change of Control will be limited by the Company's then-available
resources. The Change of Control provisions may not be waived by the Board of
Directors of the Company or the Trustee without the consent of holders of at
least a majority in principal amount of the Notes. See "--Amendment,
Supplement and Waiver."
The Company expects that prepayment of the Notes following a Change of
Control would, and the exercise by holders of Notes of the right to require
the Company to purchase Notes may, constitute a default under the New Credit
Agreement or other indebtedness of the Company. The Indenture will provide
that, prior to the mailing of the notice referred to below, but in any event
within 30 days following any Change of Control Trigger Date, the Company is
required to (i) repay in full and terminate all commitments under Indebtedness
under the New Credit Agreement and all other Senior Indebtedness the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the New Credit
Agreement and all other such Senior Indebtedness and to repay the Indebtedness
owed to each lender which has accepted such offer or (ii) obtain the requisite
consents under the New Credit Agreement and all such other Senior Indebtedness
to permit the repurchase of the Notes as provided below. The Company shall
first comply with the covenant in the immediately preceding sentence before it
shall be required to repurchase Notes pursuant to the provisions described
below. The Company's failure to comply with this covenant shall constitute an
Event of Default described in clause (c) and not in clause (b) under "--Events
of Default and Remedies" below. In the event a Change of Control occurs, the
Company will likely be required to refinance the Indebtedness outstanding
under the New Credit Agreement and the Notes. If there is a Change of Control,
any Indebtedness under the New Credit Agreement could be accelerated. There is
no limitation in the Indenture which prohibits the Company from using the
proceeds from the offering of the Notes to finance mandatory purchases of
Notes upon a Change of Control. Moreover, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to
repay Senior Indebtedness and make any required repurchases of the Notes given
the Company's high leverage. The financing of the purchases of Notes could
additionally result in a default under the New Credit Agreement or other
indebtedness of the Company. The occurrence of a Change of Control may also
have an adverse impact on the ability of the Company to obtain additional
financing in the future. The ability of holders of Notes to require that the
Company purchase Notes upon a Change of Control may deter persons from
effecting a takeover of the Company. Except as described above with respect to
a Change of Control, the Indenture will not contain provisions that permit the
holders of Notes to require that the Company purchase or redeem the Notes in
the event of a takeover, recapitalization or similar restructuring. See "Risk
Factors--Leverage and Debt Service. "
Asset Sales. The Indenture provides that the Company may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, consummate an
Asset Sale (including the sale of any of the Capital Stock of
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any Restricted Subsidiary) providing for Net Proceeds in excess of $2.5
million unless at least 75% of the Net Proceeds from such Asset Sale are
applied (in any manner otherwise permitted by the Indenture) to one or more of
the following purposes in such combination as the Company shall elect: (a) an
investment in another asset or business in the same line of business as, or a
line of business similar to that of, the line of business of the Company and
its Restricted Subsidiaries at the time of the Asset Sale or the making of a
capital expenditure otherwise permitted by the Indenture; provided that such
investment occurs within 365 days of the date of such Asset Sale (the "Asset
Sale Disposition Date"), (b) to reimburse the Company or its Restricted
Subsidiaries for expenditures made, and costs incurred, to repair, rebuild,
replace or restore property subject to loss, damage or taking to the extent
that the Net Proceeds consist of insurance proceeds received on account of
such loss, damage or taking, (c) to cash collateralize letters of credit;
provided any such cash collateral released to the Company or its Restricted
Subsidiaries upon the expiration of such letters of credit shall again be
deemed to be Net Proceeds received on the date of such release, (d) the
permanent purchase, redemption or other prepayment or repayment of outstanding
Senior Indebtedness of the Company or Indebtedness of the Company's Restricted
Subsidiaries (with a corresponding reduction in any commitment relating
thereto) on or prior to the 365th day following the Asset Sale Disposition
Date or (e) an Offer expiring on or prior to the Purchase Date (as defined
herein). The Indenture also provides that the Company may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, consummate an
Asset Sale unless at least 75% of the consideration thereof received by the
Company or such Restricted Subsidiary is in the form of cash or Marketable
Securities; provided that, solely for purposes of calculating such 75% of the
consideration, the amount of (x) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet or in the notes
thereto, excluding contingent liabilities and trade payables) of the Company
or any Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee of any such
assets and (y) any notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are promptly, but in no
event more than 90 days after receipt, converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received), shall be
deemed to be cash and cash equivalents for purposes of this provision. Any Net
Proceeds from any Asset Sale that are not applied or invested as provided in
the first sentence of this paragraph shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million (such
date being an "Asset Sale Trigger Date"), the Company shall make an Offer to
all holders of Notes to purchase the maximum principal amount of the Notes
then outstanding that may be purchased out of Excess Proceeds, at an offer
price in cash in an amount equal to 100% of principal amount thereof plus any
accrued and unpaid interest and Liquidated Damages, if any, to the Purchase
Date in accordance with the procedures set forth in the Indenture.
Notwithstanding the foregoing, to the extent that any or all of the Net
Proceeds of an Asset Sale is prohibited or delayed by applicable local law
from being repatriated to the United States, the portion of such Net Proceeds
so affected will not be required to be applied as described in this or the
preceding paragraph, but may be retained for so long, but only for so long, as
the applicable local law prohibits repatriation to the United States.
To the extent that any Excess Proceeds remain after completion of an Offer,
the Company may use such remaining amount for general corporate purposes. If
the aggregate principal amount of Notes surrendered by holders thereof exceeds
the amount of Excess Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis. Upon completion of an Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
Procedures for Offers. Within 30 days following any Change of Control
Trigger Date or Asset Sale Trigger Date, subject to the provisions of the
Indenture, the Company shall mail a notice to each holder of Notes at such
holder's registered address a notice stating: (a) that an offer (an "Offer")
is being made pursuant to a Change of Control or an Asset Sale Trigger Date,
as the case may be, the length of time the Offer shall remain open and the
maximum principal amount of Notes that will be accepted for payment pursuant
to such Offer, (b) the purchase price, the amount of accrued and unpaid
interest as of the purchase date, and the purchase date (which shall be no
earlier than 30 days and no later than 40 days from the date such notice is
mailed (the "Purchase Date")), and (c) such other information required by the
Indenture and applicable law and regulations.
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On the Purchase Date for any Offer, the Company will, to the extent required
by the Indenture and such Offer, (1) in the case of an Offer resulting from a
Change of Control, accept for payment all Notes or portions thereof tendered
pursuant to such Offer and, in the case of an Offer resulting from an Asset
Sale Trigger Date, accept for payment the maximum principal amount of Notes or
portions thereof tendered pursuant to such Offer that can be purchased out of
Excess Proceeds, (2) deposit with the Paying Agent the aggregate purchase
price of all Notes or portions thereof accepted for payment and any accrued
and unpaid interest on such Notes as of the Purchase Date, and (3) deliver or
cause to be delivered to the Trustee all Notes tendered pursuant to the Offer.
The Paying Agent shall promptly mail to each holder of Notes or portions
thereof accepted for payment an amount equal to the purchase price for such
Notes plus any accrued and unpaid interest thereon, and the Trustee shall
promptly authenticate and mail (or cause to be transferred by book-entry) to
such holder of Notes accepted for payment in part a new Note equal in
principal amount to any unpurchased portion of the Notes and any Note not
accepted for payment in whole or in part shall be promptly returned to the
holder thereof. The Company will publicly announce the results of the Offer on
or as soon as practicable after the Purchase Date.
The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with an
offer required to be made by the Company to repurchase the Notes as a result
of a Change of Control or an Asset Sale Trigger Date. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
the Indenture, the Company shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
the Indenture by virtue thereof.
Selection and Notice. In the event of a redemption or purchase of less than
all of the Notes, the Notes to be redeemed or purchased will be chosen by the
Trustee pro rata, by lot or by any other method that the Trustee considers
fair and appropriate and, if the Notes are listed on any securities exchange,
by a method that complies with the requirements of such exchange; provided
that, if less than all of a holder's Notes are to be redeemed or accepted for
payment, only principal amounts of $1,000 or multiples thereof may be selected
for redemption or accepted for payment. On and after any redemption or
purchase date, interest shall cease to accrue on the Notes or portions thereof
called for redemption or accepted for payment. Notice of any redemption or
offer to purchase will be mailed at least 30 days but not more than 60 days
before the redemption or purchase date to each holder of Notes to be redeemed
or purchased at such holder's registered address.
CERTAIN COVENANTS
The Indenture contains, among other things, the following material
covenants:
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on
account of the Company's or any Restricted Subsidiary's Equity Interests
(other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company and dividends or distributions payable by a
Restricted Subsidiary pro rata to its shareholders; (ii) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the Company or
any of its Restricted Subsidiaries, other than any such Equity Interests
purchased from the Company or any Restricted Subsidiary for fair market value
determined by the Board of Directors in good faith; (iii) make any payment on
or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value any Subordinated Indebtedness, except a payment of interest
or principal at Stated Maturity; or (iv) make any Restricted Investment (all
such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), if, at the time of
such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving effect
thereto on a Pro Forma Basis, the Company shall not be able to issue $1.00
of additional Indebtedness pursuant to the first sentence of the
"Limitation on Incurrence of Indebtedness" covenant; or
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(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after the date of original issuance of the Notes,
without duplication, exceeds the sum of: (1) 50% of the aggregate
Consolidated Net Income (including, for this purpose, gains from Asset
Sales and, to the extent not included in Consolidated Net Income, any gain
from a sale or disposition of a Restricted Investment) of the Company (or,
in case such aggregate is a loss, 100% of such loss) for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing immediately after the date of original issuance of the Notes and
ended as of the Company's most recently ended fiscal quarter at the time of
such Restricted Payment; plus (2) 100% of the aggregate net cash proceeds
and the fair market value of any property or securities, as determined by
the Board of Directors in good faith, received by the Company from the
issue or sale of Equity Interests of the Company or Holdings (to the extent
contributed to the Company) subsequent to the date of original issuance of
the Notes (other than (x) Equity Interests issued or sold to a Restricted
Subsidiary and (y) Disqualified Stock); plus (3) $5.0 million; plus (4) the
amount by which the principal amount of and any accrued interest on either
Senior Indebtedness of the Company or any Restricted Subsidiary is reduced
on the Company's consolidated balance sheet upon the conversion or exchange
(other than by a Restricted Subsidiary) subsequent to the date of original
issuance of the Notes of any Indebtedness of the Company or any Restricted
Subsidiary (not held by the Company or any Restricted Subsidiary) for
Equity Interests (other than Disqualified Stock) of the Company (less the
amount of any cash, or the fair market value of any other property or
securities (as determined by the Board of Directors in good faith),
distributed by the Company or any Restricted Subsidiary (to persons other
than the Company or any other Restricted Subsidiary) upon such conversion
or exchange); plus (5) if any Non-Restricted Subsidiary is redesignated as
a Restricted Subsidiary, the value of the Restricted Payment that would
result if such Subsidiary were redesignated as a Non-Restricted Subsidiary
at such time, as determined in accordance with the second sentence of the
"Designation of Restricted and Non-Restricted Subsidiaries" covenant;
provided, however, that for purposes of this clause (5), the value of any
redesignated Non-Restricted Subsidiary shall be reduced by the amount that
any such redesignation replenishes or increases the amount of Restricted
Investments permitted to be made pursuant to clause (ii) of the next
sentence.
Notwithstanding the foregoing, the Indenture shall not prohibit as
Restricted Payments:
(i) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration, such payment would comply with all
covenants of such Indenture (including, but not limited to, the "Limitation on
Restricted Payments" covenant);
(ii) making Restricted Investments at any time, and from time to time, in an
aggregate outstanding amount of $10.0 million after the date of original
issuance of the Notes (it being understood that if any Restricted Investment
after the date of original issuance of the Notes pursuant to this clause (ii)
is sold, transferred or otherwise conveyed to any person other than the
Company or a Restricted Subsidiary, the portion of the net cash proceeds or
fair market value of securities or properties paid or transferred to the
Company and its Restricted Subsidiaries in connection with such sale, transfer
or conveyance that relates or corresponds to the repayment or return of the
original cost of such a Restricted Investment will replenish or increase the
amount of Restricted Investments permitted to be made pursuant to this clause
(ii), so that up to $10.0 million of Restricted Investments may be outstanding
under this clause (ii) at any given time); provided that, without otherwise
limiting this clause (ii), any Restricted Investment in a Subsidiary made
pursuant to this clause (ii) is made for fair market value (as determined by
the Board of Directors in good faith);
(iii) the repurchase, redemption, retirement or acquisition of Equity
Interests of the Company or Holdings from the executives, management,
employees or consultants of the Company or its Restricted Subsidiaries in an
aggregate amount not to exceed $7.5 million;
(iv) any loans, advances, distributions or payments from the Company to its
Restricted Subsidiaries, or any loans, advances, distributions or payments by
a Restricted Subsidiary to the Company or to another Restricted Subsidiary, in
each case pursuant to intercompany Indebtedness, intercompany management
agreements and other intercompany agreements and obligations;
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(v) the purchase, redemption, retirement or other acquisition of the Notes
pursuant to the "--Change of Control" or "--Asset Sales" provisions of the
Indenture;
(vi) the payment of (a) consulting, financial and investment banking fees
under the TJC Agreement, provided, that no Default or Event of Default shall
have occurred and be continuing or shall occur as a consequence thereof, and
the Company's Obligations to pay such fees under the TJC Agreement shall be
subordinated expressly to the Company's Obligations in respect of the Notes,
and (b) indemnities, expenses and other amounts under the TJC Agreement;
(vii) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Company or any Restricted Subsidiary in exchange for,
or out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of other Equity Interests of the Company (other
than any Disqualified Stock) or the redemption, repurchase, retirement or
other acquisition of any Equity Interests of any Restricted Subsidiary in
exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to the Company or a Subsidiary of the Company) of other Equity
Interests of such Restricted Subsidiary; provided that, in each case, any net
cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition, and any Net Income resulting therefrom, shall
be excluded from clauses (c)(1) and (c)(2) of the preceding paragraph;
(viii) the defeasance, redemption or repurchase of Subordinated Indebtedness
of the Company or any Restricted Subsidiary with the net cash proceeds from an
issuance of permitted Refinancing Indebtedness or the substantially concurrent
sale (other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock) or the defeasance, redemption or
repurchase of Subordinated Indebtedness of any Restricted Subsidiary with the
net cash proceeds from the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of such Restricted Subsidiary
(other than Disqualified Stock); provided that, in each case, any net cash
proceeds that are utilized for any such defeasance, redemption or repurchase,
and any Net Income resulting therefrom, shall be excluded from clauses (c)(1)
and (c)(2) of the preceding paragraph;
(ix) Restricted Investments made or received in connection with the sale,
transfer or disposition of any business, properties or assets of the Company
or any Restricted Subsidiary, provided, that if such sale, transfer or
disposition constitutes an Asset Sale, the Company complies with the "Asset
Sale" provisions of the Indenture;
(x) any Restricted Investment constituting securities or instruments of a
person issued in exchange for trade or other claims against such person in
connection with a financial reorganization or restructuring of such person;
(xi) payments to Holdings in an amount sufficient to permit Holdings to make
required payments on the Holdings Subordinated Notes;
(xii) payments in connection with the Transactions as described under "The
Transactions" and "Use of Proceeds";
(xiii) payments of fees, expenses and indemnities to the directors of
Holdings, the Company and its Restricted Subsidiaries;
(xiv) payments to Holdings in respect of accounting, legal or other
professional or administrative expenses or reimbursements or franchise or
similar taxes and governmental charges incurred by it relating to the
business, operations or finances of the Company and its Restricted
Subsidiaries and in respect of fees and related expenses associated with any
registration statements relating to the Notes filed with the Commission and
subsequent ongoing public reporting requirements with respect to the Notes;
(xv) so long as Holdings files consolidated income tax returns that include
the Company, payments to Holdings pursuant to the Tax Sharing Agreement;
(xvi) payments, if any, relating to any purchase price adjustment pursuant
to the terms of the Acquisition Agreement;
(xvii) payments in respect of the Wolff Noncompetition Agreement; and
(xviii) shareholder loans in an aggregate principal amount not to exceed
$1.0 million.
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In addition, Holdings has agreed, for the benefit of the holders of the
Senior Indebtedness under the New Credit Agreement and the holders of the
Notes, under certain circumstances to repay to the Company amounts received
from the Company in violation of the restricted payments covenants set forth
in the New Credit Agreement and the Indenture.
Limitation on Incurrence of Indebtedness. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, issue any
Indebtedness (other than the Indebtedness represented by the Notes) unless the
Company's Cash Flow Coverage Ratio for its four full fiscal quarters next
preceding the date such additional Indebtedness is issued would have been at
least 2.0 to 1 determined on a Pro Forma Basis (including, for this purpose,
any other Indebtedness incurred since the end of the applicable four quarter
period) as if such additional Indebtedness and any other Indebtedness issued
since the end of such four quarter period had been issued at the beginning of
such four quarter period.
The foregoing limitations will not apply to the issuance of:
(i) Indebtedness of the Company and/or its Restricted Subsidiaries under
the New Credit Agreement in an aggregate principal amount outstanding on
such date of issuance not to exceed the greater of (A) $115.0 million and
(B) the sum of: (1) 85% of the book value of accounts receivable of the
Company and its Restricted Subsidiaries on a consolidated basis and (2) 65%
of the book value of the inventories of the Company and its Restricted
Subsidiaries; provided that the aggregate principal amount of Indebtedness
outstanding under this clause (i) together with the aggregate principal
amount of Indebtedness outstanding under clause (iii) below shall not
exceed $140.0 million at any one time outstanding (less the amount of any
permanent reductions as set forth under "Asset Sales");
(ii) Indebtedness of the Company and its Restricted Subsidiaries in
connection with capital leases, sale and leaseback transactions, purchase
money obligations, capital expenditures or similar financing transactions
relating to: (A) their properties, assets and rights as of the date of
original issuance of the Notes not to exceed $7.5 million in aggregate
principal amount at any one time outstanding, or (B) their properties,
assets and rights acquired after the date of original issuance of the
Notes, provided that the aggregate principal amount of such Indebtedness
under this clause (ii)(B) does not exceed 100% of the cost of such
properties, assets and rights;
(iii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount up to $25.0 million (all or
any portion of which may be issued as additional Indebtedness under the New
Credit Agreement) provided that the aggregate principal amount of
Indebtedness outstanding under this clause (iii) together with the
aggregate principal amount of Indebtedness outstanding under clause
(i) above shall not exceed $140.0 million at any one time outstanding (less
the amount of any permanent reductions as set forth under "Asset Sales");
and
(iv) Other Permitted Indebtedness.
No Senior Subordinated Debt. The Indenture will provide that (i) the Company
will not incur, create, issue, assume, guarantee or otherwise become liable
for any Indebtedness that is subordinate or junior in right of payment to any
Senior Indebtedness and senior in any respect in right of payment to the
Notes, and (ii) no Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to any Senior Indebtedness and senior in any respect in right
of payment to the Note Guarantees.
Limitation on Liens. The Indenture will provide that the Company shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien, other than
Permitted Liens, upon any property or asset now owned or hereafter acquired by
them, or any income or profits therefrom, or assign or convey any right to
receive income therefrom unless all payments due under the Indenture and the
Notes are secured on an equal and ratable basis with the obligations so
secured until such time as such obligations are no longer secured by a Lien.
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Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture will provide that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective, any
encumbrance or restriction on the ability of any Restricted Subsidiary to: (a)
pay dividends or make any other distributions on its Capital Stock or any
other interest or participation in, or measured by, its profits, owned by the
Company or any Restricted Subsidiary, or pay any Indebtedness owed to, the
Company or any Restricted Subsidiary, (b) make loans or advances to the
Company, or (c) transfer any of its properties or assets to the Company,
except for such encumbrances or restrictions existing under or by reason of:
(i) applicable law,
(ii) Indebtedness permitted (A) under the first sentence of the first
paragraph of the "Limitation on Incurrence of Indebtedness" covenant and
(B) under clauses (i), (ii) and (iii) of the second paragraph of the
"Limitation on Incurrence of Indebtedness" covenant and clauses (iv), (vii)
and (x) of the definition of "Other Permitted Indebtedness," provided that
such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive with respect to the items set forth in clauses (a), (b) and (c)
of the first paragraph of this covenant than those contained in the New
Credit Agreement as in effect on the date of the Indenture,
(iii) customary provisions restricting subletting or assignment of any
lease or license of the Company or any Restricted Subsidiary,
(iv) customary provisions of any franchise, distribution or similar
agreement,
(v) any instrument governing Indebtedness or preferred stock or any other
encumbrance or restriction of a person acquired by the Company or any
Restricted Subsidiary at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of
any person, other than the person, or the property or assets of the person,
so acquired,
(vi) Indebtedness or other agreements existing on the date of original
issuance of the Notes,
(vii) any Refinancing Indebtedness permitted under the "Limitation on
Incurrence of Indebtedness" covenant, provided that the restrictions
contained in the agreements governing such Refinancing Indebtedness are no
more restrictive in any material respect with regard to the interests of
the holders of the Notes than those contained in the agreements governing
the Indebtedness being refinanced,
(viii) any restrictions, with respect to a Restricted Subsidiary, imposed
pursuant to an agreement that has been entered into for the sale or
disposition of the stock, business, assets or properties of such Restricted
Subsidiary,
(ix) the terms of purchase money or capital lease obligations, but only
to the extent such purchase money obligations restrict or prohibit the
transfer of the property so acquired, or
(x) any instrument governing the sale of assets of the Company or any
Restricted Subsidiary, which encumbrance or restriction applies solely to
the assets of the Company or such Restricted subsidiary being sold in such
transaction.
Nothing contained in this covenant shall prevent the Company from entering
into any agreement or instrument providing for the incurrence of Permitted
Liens or restricting the sale or other disposition of property or assets of
the Company or any of its Restricted Subsidiaries that are subject to
Permitted Liens.
Limitation on Transactions With Affiliates. The Indenture will provide that
neither the Company nor any of its Restricted Subsidiaries may make any loan,
advance, guarantee or capital contribution to, or for the benefit of, or sell,
lease, transfer or dispose of any properties or assets to, or for the benefit
of, or purchase or lease any property or assets from, or enter into any or
amend any contract, agreement or understanding with, or for the benefit of, an
Affiliate (each such transaction or series of related transactions that are
part of a common plan are referred to as an "Affiliate Transaction"), except
in good faith and on terms that are no less favorable to the
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Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction on an arm's length basis from an
unrelated person.
The Indenture will further provide that the Company will not, and will not
permit any Restricted Subsidiary to, engage in any Affiliate Transaction
involving aggregate payments or other transfers by the Company and its
Restricted Subsidiaries in excess of $5.0 million (including cash and non-cash
payments and benefits valued at their fair market value by the Board of
Directors of the Company in good faith) unless the Company delivers to the
Trustee:
(i) a resolution of the Board of Directors of the Company stating that
the Board of Directors (including a majority of the disinterested
directors, if any) has, in good faith, determined that such Affiliate
Transaction complies with the provisions of the Indenture, and
(ii) (A) with respect to any Affiliate Transaction involving the
incurrence of Indebtedness, a written opinion of a nationally recognized
investment banking or accounting firm experienced in the review of similar
types of transactions, (B) with respect to any Affiliate Transaction
involving the transfer of real property, fixed assets or equipment, either
directly or by a transfer of 50% or more of the Capital Stock of a
Restricted Subsidiary which holds any such real property, fixed assets or
equipment, a written appraisal from a nationally recognized appraiser,
experienced in the review of similar types of transactions or (C) with
respect to any Affiliate Transaction not otherwise described in (A) and (B)
above, a written certification from a nationally recognized professional or
firm experienced in evaluating similar types of transactions, in each case,
stating that the terms of such transaction are fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of view.
Notwithstanding the foregoing, this Affiliate Transactions covenant will not
apply to:
(1) transactions between the Company and any Restricted Subsidiary or
between Restricted Subsidiaries;
(2) payments under the TJC Agreement;
(3) any other payments or transactions permitted pursuant to the
"Limitation on Restricted Payments" covenant;
(4) (A) payments and transactions under Incentive Arrangements and (B)
reasonable compensation paid to officers, employees or consultants of the
Company or any Restricted Subsidiary as determined in good faith by the
Company's Board of Directors or executives;
(5) payments and transactions in connection with the Transactions and the
application of the net proceeds therefrom as described under "The
Transactions" and "Use of Proceeds;"
(6) the sale of the corporate aircraft owned by the Company on the date
of issuance of the Notes to Robert M. Wolff or his designee; or
(7) the sale, transfer and/or termination of the officers' life insurance
policies in effect on the date of issuance of the Notes.
In addition, notwithstanding the foregoing, any Affiliate Transaction
between the Company and Affiliated Embroiderers relating to the provision of
embroidery services in the ordinary course of business shall not be subject to
the provisions of clause (ii) above.
Subsidiary Guarantees. The Indenture will provide that if the Company or any
of its Restricted Subsidiaries shall acquire or create another Restricted
Subsidiary after the date of the Indenture, then such newly acquired or
created Subsidiary shall execute a Subsidiary Guarantee and deliver an opinion
of counsel in accordance with the terms of the Indenture.
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Designation of Restricted and Non-Restricted Subsidiaries. The Indenture
will provide that, subject to the exceptions described below, from and after
the date of original issuance of the Notes, the Company may designate any
existing or newly formed or acquired Subsidiary as a Non-Restricted
Subsidiary; provided that (i) either (A) the Subsidiary to be so designated
has total assets of $1.0 million or less or (B) immediately before and after
giving effect to such designation on a Pro Forma Basis: (1) the Company could
incur $1.00 of additional Indebtedness pursuant to the first sentence of the
"Limitation on Incurrence of Indebtedness" covenant determined on a Pro Forma
Basis; and (2) no Default or Event of Default shall have occurred and be
continuing, and (ii) all transactions between the Subsidiary to be so
designated and its Affiliates remaining in effect are permitted pursuant to
the "Limitation on Transactions with Affiliates" covenant. Any Investment made
by the Company or any Restricted Subsidiary which is redesignated from a
Restricted Subsidiary to a Non-Restricted Subsidiary shall be considered a
Restricted Payment (to the extent not previously included as a Restricted
Payment) made on the day such Subsidiary is designated a Non-Restricted
Subsidiary in the amount of the greater of (i) the fair market value (as
determined by the Board of Directors of the Company in good faith) of the
Equity Interests of such Subsidiary held by the Company and its Restricted
Subsidiaries on such date, and (ii) the amount of the Investments determined
in accordance with GAAP made by the Company and any of its Restricted
Subsidiaries in such Subsidiary.
A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary.
The Company may not, and may not permit any Restricted Subsidiary to, take any
action or enter into any transaction or series of transactions that would
result in a Person becoming a Restricted Subsidiary (whether through an
acquisition, the redesignation of a Non-Restricted Subsidiary or otherwise,
but not including through the creation of a new Restricted Subsidiary) unless,
immediately before and after giving effect to such action, transaction or
series of transactions on a Pro Forma Basis, (a) the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first sentence of
"Limitation on Incurrence of Indebtedness" and (b) no Default or Event of
Default shall have occurred and be continuing.
The designation of a Subsidiary as a Restricted Subsidiary or the removal of
such designation is required to be made by a resolution adopted by a majority
of the Board of Directors of the Company stating that the Board of Directors
has made such designation in accordance with the Indenture, and the Company is
required to deliver to the Trustee such resolution together with an Officers'
Certificate certifying that the designation complies with the Indenture. Such
designation will be effective as of the date specified in the applicable
resolution, which may not be before the date the applicable Officers'
Certificate is delivered to the Trustee.
MERGER OR CONSOLIDATION
The Indenture will provide that the Company shall not consolidate or merge
with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets to, any person (any such consolidation, merger
or sale being a "Disposition") unless: (a) the successor corporation of such
Disposition or the corporation to which such Disposition shall have been made
is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (b) the successor corporation
of such Disposition or the corporation to which such Disposition shall have
been made expressly assumes the Obligations of the Company, pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, under
the Indenture and the Notes; (c) immediately after such Disposition, no
Default or Event of Default shall exist; and (d) the corporation formed by or
surviving any such Disposition, or the corporation to which such Disposition
shall have been made, shall (i) have Consolidated Net Worth (immediately after
the Disposition but prior to giving any pro forma effect to purchase
accounting adjustments or Restructuring Charges resulting from the
Disposition) equal to or greater than the Consolidated Net Worth of the
Company immediately preceding the Disposition, (ii) be permitted immediately
after the Disposition by the terms of the Indenture to issue at least $1.00 of
additional Indebtedness determined on a Pro Forma Basis, and (iii) have a Cash
Flow Coverage Ratio for the four fiscal quarters immediately preceding the
applicable Disposition, determined on a Pro Forma Basis, equal to or greater
than the actual Cash Flow Coverage Ratio of the Company for such four quarter
period. The limitations in the Indenture on the Company's ability to make a
Disposition described in this paragraph do not restrict the
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Company's ability to sell less than all or substantially all of its assets,
such sales being governed by the "Asset Sales" provisions of the Indenture as
described herein.
Prior to the consummation of any proposed Disposition, the Company shall
deliver to the Trustee an Officers' Certificate to the foregoing effect and an
opinion of counsel stating that the proposed Disposition and such supplemental
indenture comply with the Indenture.
PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF NOTES
So long as the Notes are outstanding, whether or not the Company is subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company and the Guarantors shall file with the Commission (unless the
Commission will not accept such filing) the annual reports, quarterly reports
and other documents relating to the Company and its Restricted Subsidiaries
that the Company would have been required to file with the Commission pursuant
to Section 13 or 15(d) if the Company were subject to such reporting
requirements. The Company and the Guarantors will also provide to all holders
of Notes and file with the Trustee copies of such annual reports, quarterly
reports and other documents required to be furnished to stockholders generally
under the Exchange Act. In addition, the Company and the Guarantors have
agreed that, for so long as any Notes remain outstanding, they will furnish to
the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that an Event of Default is: (a) a default for 30
days in payment of interest on or Liquidated Damages, if any, with respect to
the Notes (whether or not prohibited by the subordination provisions of the
Indenture); (b) a default in payment when due of principal or premium, if any,
with respect to the Notes (whether or not prohibited by the subordination
provisions of the Indenture); (c) the failure of the Company to comply with
any of its other agreements or covenants in, or provisions of, such Indenture
or the Notes outstanding under such Indenture and the Default continues for
the period, if applicable, and after the notice specified in the next
paragraph; (d) a default by the Company or any Restricted Subsidiary under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any Restricted Subsidiary (or the payment of which is guaranteed by
the Company or any Restricted Subsidiary), whether such Indebtedness or
guarantee now exists or shall be created hereafter, if (1) either (A) such
default results from the failure to pay principal of or interest on any such
Indebtedness (after giving effect to any extensions thereof) or (B) as a
result of such default the maturity of such Indebtedness has been accelerated
prior to its expressed maturity, and (2) the principal amount of such
Indebtedness, together with the principal amount of any other such
Indebtedness in default for failure to pay principal or interest thereon, or,
because of the acceleration of the maturity thereof, aggregates in excess of
$10.0 million; (e) a failure by the Company or any Restricted Subsidiary to
pay final judgments (not covered by insurance) aggregating in excess of $5.0
million which judgments a court of competent jurisdiction does not rescind,
annul or stay within 45 days after their entry; (f) certain events of
bankruptcy or insolvency involving the Company or any Significant Subsidiary
and (g) except as permitted by the Indenture, any Note Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall cease for
any reason to be in full force and effect or any Guarantor, or any Person
acting on behalf of any Guarantor, shall deny or disaffirm its obligations
under its Note Guarantee. In the case of any Event of Default pursuant to
clause (a) or (b) above occurring by reason of any willful action (or
inactions) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have to
pay pursuant to a redemption of Notes as described under "--Redemption of
Notes--Optional Redemption," an equivalent premium shall also become and be
immediately, due and payable to the extent permitted by law.
A Default or Event of Default under clause (c) (other than an Event of
Default arising under the "Merger or Consolidation" covenant which shall be an
Event of Default with the notice but without the passage of time specified in
this paragraph) is not an Event of Default under the Indenture until the
Trustee or the holders of at
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least 25% in principal amount of the Notes then outstanding notify the Company
of the Default and the Company does not cure the Default within 30 days after
receipt of the notice. A Default or Event of Default under clause (f) of the
preceding paragraph will result in the Notes automatically becoming due and
payable without further action or notice.
Upon the occurrence of an Event of Default, the Trustee or the holders of at
least 25% in principal amount of the then outstanding Notes may declare all
Notes to be due and payable by notice in writing to the Company and the
Trustee specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice") and the same shall become
immediately due and payable or, if there are any amounts outstanding under the
New Credit Agreement, shall become immediately due and payable upon the first
to occur of acceleration of the New Credit Agreement or five business days
after receipt by the Company of such Acceleration Notice, but only if such
Event of Default is then continuing. The holders of a majority in principal
amount of the Notes then outstanding under the Indenture, by notice to the
Trustee, may rescind any declaration of acceleration of such Notes and its
consequences (if the rescission would not conflict with any judgment or
decree) if all existing Events of Default (other than the nonpayment of
principal of or interest on such Notes that shall have become due by such
declaration) shall have been cured or waived. Subject to certain limitations,
holders of a majority in principal amount of the Notes then outstanding under
the Indenture may direct the Trustee in its exercise of any trust or power.
Holders of the Notes may not enforce the Indenture, except as provided
therein. The Trustee may withhold from holders of Notes notice of any
continuing Default or Event of Default (except a Default or an Event of
Default in payment of principal, premium, if any, or interest) if the Trustee
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may on behalf of all holders of such Notes waive any existing
Default or Event of Default under the Indenture and its consequences, except a
continuing Default in the payment of the principal of, or premium, if any,
interest or Liquidated Damages, if any, on, such Notes, which may only be
waived with the consent of each holder of the Notes affected.
Upon any payment or distribution of assets of the Company and its
subsidiaries in a total or partial liquidation, dissolution, reorganization or
similar proceeding, including a Default under clause (f) above involving
certain events of bankruptcy or insolvency of the Company or a Significant
Subsidiary, there may not be sufficient assets remaining to satisfy the claims
of any Holders of Notes given the subordination of the Notes to the
obligations of the Company under Senior Indebtedness and to the obligations of
the Subsidiaries of the Company.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and upon an officer of the Company
becoming aware of any Default or Event of Default, a statement specifying such
Default or Event of Default.
NO PERSONAL LIABILITY OF OFFICERS, DIRECTORS, EMPLOYEES, STOCKHOLDERS AND
SUBSIDIARIES
No officer, employee, director, stockholder or Subsidiary of the Company
shall have any liability for any Obligations of the Company under the Notes or
the Indenture, or for any claim based on, in respect of, or by reason of, such
Obligations or the creation of any such Obligation, except, in the case of a
Subsidiary, for an express guarantee or an express creation of any Lien by
such Subsidiary of the Company's Obligations under the Notes issued in
accordance with the Indenture. Each holder of the Notes by accepting a Note
waives and releases all such liability, and such waiver and release is part of
the consideration for issuance of the Notes. The foregoing waiver may not be
effective to waive liabilities under the Federal securities laws and the
Commission is of the view that such a waiver is against public policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Company at any time may terminate all of its and the Guarantors'
obligations under the Notes, the Note Guarantees and the Indenture ("legal
defeasance option"), except for certain obligations (including those with
respect to the defeasance trust (as defined herein) and obligations to
register the transfer or exchange of the
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Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a
registrar and paying agent in respect of the Notes). The Company at any time
may terminate (1) its obligations under the "Change of Control" and "Asset
Sales" provisions described herein and the covenants described under "Certain
Covenants" and certain other covenants in the Indenture, (2) the operation of
clauses (c), (d) and (e) contained in the first paragraph of the "Events of
Default and Remedies" provisions described herein and (3) the limitations
contained in clauses (c) and (d) under the "Merger or Consolidation"
provisions described herein (collectively, a "covenant defeasance option").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes shall not be accelerated
because of an Event of Default specified in clauses (c), (d) or (e) in the
first paragraph under the "Events of Default and Remedies" provisions
described herein or because of the Company's failure to comply with clauses
(c) and (d) under the "Merger or Consolidation" provisions described herein.
To exercise either defeasance option with respect to the Notes outstanding,
the Company must irrevocably deposit in trust (the "defeasance trust") with
the Trustee money or U.S. Government Obligations (as defined in the Indenture)
for the payment of principal of and premium and unpaid interest and Liquidated
Damages, if any, on the Notes then outstanding to redemption or maturity, as
the case may be, and must comply with certain other conditions, including the
passage of 91 days and the delivery to the Trustee of an opinion of counsel to
the effect that holders of such Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and defeasance and
will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
opinion of counsel must be based on a ruling of the Internal Revenue Service
or other change in applicable federal income tax law).
TRANSFER AND EXCHANGE
Holders of Notes may transfer or exchange their Notes in accordance with the
Indenture, but the Registrar may require a holder, among other things, to
furnish appropriate endorsements and transfer documents, and to pay any taxes
and fees required by law or permitted by the Indenture, in connection with any
such transfer or exchange. Neither the Company nor the Registrar is required
to issue, register the transfer of, or exchange (i) any Note selected for
redemption or tendered pursuant to an Offer, or (ii) any Note during the
period between (a) the date the Trustee receives notice of a redemption from
the Company and the date the Notes to be redeemed are selected by the Trustee
or (b) a record date and the next succeeding interest payment date. The
registered holder of a Note will be treated as its owner for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the Notes then outstanding under the Indenture, and any existing Default or
Event of Default (other than a payment default) or compliance with any
provision may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding under the Indenture. Without
the consent of any holder of Notes, the Company and the Trustee may amend or
supplement the Indenture or the Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated Notes, to provide for the assumption by a successor
corporation of the Company's obligations to the holders of Notes in the case
of a Disposition, to comply with the Trust Indenture Act, or to make any
change that does not adversely affect the legal rights of any holder of Notes.
Without the consent of each holder of Notes affected, the Company may not
(i) reduce the principal amount of Notes whose holders must consent to an
amendment to the Indenture or a waiver under the Indenture; (ii) reduce the
rate of or change the interest payment time of the Notes, or alter the
redemption provisions
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with respect thereto (other than the provisions relating to the covenants
described above under the caption "--Mandatory Offers to Purchase Notes--
Change of Control" and "--Asset Sales") or the price at which the Company is
required to offer to purchase the Notes; (iii) reduce the principal of or
change the fixed maturity of the Notes; (iv) make the Notes payable in money
other than stated in the Notes; (v) make any change in the provisions
concerning waiver of Defaults or Events of Default by holders of the Notes, or
rights of holders of the Notes to receive payment of principal or interest; or
(vi) waive any default in the payment of principal of or premium, or unpaid
interest or Liquidated Damages, if any, on the Notes. In addition, any
amendment to the provisions of Article 10 of the Indenture (which relate to
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the Notes then outstanding if such amendment
would adversely affect the rights of Holders of Notes.
CONCERNING THE TRUSTEE
The Indenture will contain certain limitations on the rights of the Trustee,
if it becomes a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest (as
defined in the Trust Indenture Act) it must eliminate such conflict or resign.
The holders of a majority in principal amount of the Notes then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and has not been cured), the Trustee will be required, in the exercise of its
power, to use the degree of care and skill of a prudent person in similar
circumstances in the conduct of its own affairs. Subject to the provisions of
the Indenture, the Trustee will be under no obligation to exercise any of its
rights or powers under its Indenture at the request of any of the holders of
the Notes, unless such holders shall have offered to the Trustee security and
indemnity satisfactory to it.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes to be exchanged as
set forth herein will initially be issued in the form of one Global New Note
(the "Global New Note"). The Global New Note will be deposited on the
Expiration Date with, or on behalf of, the Depositary and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred
to herein as the "Global New Note Holder").
New Notes that are issued as described below under "--Certificated New
Notes" will be issued in the form of registered definitive certificates (the
"Certificated New Notes"). Such Certificated New Notes may, unless the Global
New Note has previously been exchanged for Certificated New Notes, be
exchanged for an interest in the Global New Note representing the principal
amount of New Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
So long as the Global New Note Holder is the registered owner of any New
Notes, the Global New Note Holder will be considered the sole holder under the
Indenture of any New Notes evidenced by the Global New
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Note. Beneficial owners of New Notes evidenced by the Global New Note will not
be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to the giving of any directions, instructions
or approvals to the Trustee thereunder. Neither the Company nor the Trustee
will have any responsibility or liability for any aspect of the records of the
Depositary or for maintaining, supervising or reviewing any records of the
Depositary relating to the New Notes.
Payments in respect of the principal of, premium, if any, and interest on
New Notes registered in the name of the Global New Note Holder on the
applicable record date will be payable by the Trustee to or at the direction
of the Global New Note Holder in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, the Company and the Trustee
may treat the persons in whose names New Notes, including the Global New Note,
are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of New Notes. The Company believes, however, that it is currently the
policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of New Notes will
be governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED NEW NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global New Note may, upon request to the Trustee, exchange such beneficial
interest for New Notes in the form of Certificated New Notes. Upon any such
issuance, the Trustee is required to register such Certificated New Notes in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). In addition, if (i) the Company notifies the
Trustee in writing that the Depositary is no longer willing or able to act as
a depositary and the Company is unable to locate a qualified successor within
90 days or (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of New Notes in the form of Certificated
New Notes under the Indenture, then, upon surrender by the Global New Note
Holder of its Global New Note, New Note in such form will be issued to each
person that the Global New Note Holder and the Depositary identify as being
the beneficial owner of the related New Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global New Note Holder or the Depositary in identifying the beneficial owners
of New Notes and the Company and the Trustee may conclusively rely on, and
will protected in relying on, instructions from the Global New Note Holder or
the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Notes represented
by the Global New Note (including principal, premium, if any, and interest) be
made by wire transfer of immediately available funds to the accounts specified
by the Global New Note Holder. With respect to Certificated New Notes, the
Company will make all payments of principal, premium, if any, and interest by
wire transfer of immediately available funds to the accounts specified by the
holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. Secondary trading in long-term notes
and debentures of corporate issuers is generally settled in clearinghouse or
next-day funds. In contrast, New Notes represented by the Global New Note are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such New Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated New Notes will also be settled in
immediately available funds.
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CERTAIN DEFINITIONS
Set forth below are certain of the defined terms used in the Indenture.
Reference is made to the Indenture for the definition of all other terms used
in the Indenture.
"Acquisition Agreement" means the agreement, dated as of January 24, 1997,
among Holdings, GFSI, Inc. and the shareholders party thereto, relating to the
purchase and sale of the stock of Winning Ways, Inc.
"Affiliate" means any of the following: (i) any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company, (ii) any spouse, immediate family member or other
relative who has the same principal residence as any person described in
clause (i) above, (iii) any trust in which any such persons described in
clause (i) or (ii) above has a beneficial interest and (iv) any corporation or
other organization of which any such persons described above collectively own
50% or more of the equity of such entity.
"Affiliated Embroiderers" means the affiliated entities that provide
embroidery services for the Company on the date of issuance of the Notes.
"Asset Sale" means the sale, lease, conveyance or other disposition by the
Company or a Restricted Subsidiary of assets or property whether owned on the
date of original issuance of the Notes or thereafter acquired, in a single
transaction or in a series of related transactions; provided that Asset Sales
will not include such sales, leases, conveyances or dispositions in connection
with (i) the sale or disposition of any Restricted Investment, (ii) any Equity
Offering by the Company, (iii) the surrender or waiver of contract rights or
the settlement, release or surrender of contract, tort or other claims of any
kind, (iv) the sale or lease of inventory equipment, accounts receivable or
other assets in the ordinary course of business, (v) a sale-leaseback of
assets within one year following the acquisition of such assets, (vi) the
grant of any license of patents, trademarks, registration therefor and other
similar intellectual property, (vii) a transfer of assets by the Company or a
Restricted Subsidiary to the Company or a Restricted Subsidiary, (viii) the
designation of a Restricted Subsidiary as a Non-Restricted Subsidiary pursuant
to the "--Designation of Restricted and Non-Restricted Subsidiaries" covenant,
(ix) the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company as permitted under "--Merger or
Consolidation," (x) the sale or disposition of obsolete equipment or other
obsolete assets, (xi) Restricted Payments permitted by the "Limitations on
Restricted Payments" covenant, (xii) the exchange of assets for other non-cash
assets that (a) are useful in the business of the Company and its Restricted
Subsidiaries and (b) have a fair market value at least equal to the fair
market value of the assets being exchanged (as determined by the Board of
Directors in good faith), (xiii) the sale of the corporate aircraft owned by
the Company on the date of issuance of the Notes to Robert M. Wolff or his
designees or (xiv) the sale, transfer and/or termination of the officers' life
insurance policies in effect on the date of issuance of the Notes.
"Board of Directors" means the Company's board of directors or any
authorized committee of such board of directors.
"Capital Stock" means any and all shares, interests, participations or other
equivalents (however designated) of corporate stock, including any preferred
stock.
"Cash Flow" means, for any given period and person, the sum of, without
duplication, Consolidated Net Income, plus (a) any provision for taxes based
on income or profits to the extent such income or profits were included in
computing Consolidated Net Income, plus (b) Consolidated Interest Expense, to
the extent deducted in computing Consolidated Net Income, plus (c) the
amortization of all intangible assets, to the extent such amortization was
deducted in computing Consolidated Net Income (including, but not limited to,
inventory write-ups, goodwill, debt and financing costs, and Incentive
Arrangements), plus (d) any non-capitalized transaction costs incurred in
connection with actual or proposed financings, acquisitions or divestitures
(including, but not limited to, financing and refinancing fees, including
those in connection with the Transactions), to the extent deducted in
computing Consolidated Net Income, plus (e) all depreciation and all other
non-cash charges (including, without limitation, those charges relating to
purchase accounting adjustments and LIFO adjustments),
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to the extent deducted in computing Consolidated Net Income, plus (f) any
interest income, to the extent such income was not included in computing
Consolidated Net Income, plus (g) all dividend payments on preferred stock
(whether or not paid in cash) to the extent deducted in computing Consolidated
Net Income, plus (h) any extraordinary or nonrecurring charge or expense
arising out of the implementation of SFAS 106 or SFAS 109 to the extent
deducted in computing Consolidated Net Income, plus (i) to the extent not
covered in clause (d) above, fees paid or payable in respect of the TJC
Agreement to the extent deducted in computing Consolidated Net Income, plus
(j) the net loss of any person, other than those of a Restricted Subsidiary,
to the extent deducted in computing Consolidated Net Income, plus (k) net
losses in respect of any discontinued operations as determined in accordance
with GAAP, to the extent deducted in computing Consolidated Net Income, minus
(l) the portion of Consolidated Net Income attributable to the minority
interests in other persons, except the amount of such portion received in cash
by the Company or its Restricted Subsidiaries; provided, however, that if any
such calculation includes any period during which an acquisition or sale of a
person or the incurrence or repayment of Indebtedness occurred, then such
calculation for such period shall be made on a Pro Forma Basis.
"Cash Flow Coverage Ratio" means, for any given period and person, the ratio
of: (i) Cash Flow to (ii) the sum of Consolidated Interest Expense and all
dividend payments on any series of preferred stock of such person (except
dividends paid or payable in additional shares of Capital Stock (other than
Disqualified Stock) and except for accrued and unpaid dividends with respect
to the Holdings Preferred Stock outstanding on the date of original issuance
of the Notes), in each case, without duplication; provided, however, that if
any such calculation includes any period during which an acquisition or sale
of a person or the incurrence or repayment of Indebtedness occurred, then such
calculation for such period shall be made on a Pro Forma Basis.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any "person" (as such term is used in Section 13(d)(3) of the
Exchange Act) other than the Principals or their Related Parties , (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as defined
above), other than the Principals and their Related Parties, becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is currently exercisable or is exercisable only upon the
occurrence of a subsequent condition), directly or indirectly, of more than
50% of the Voting Stock of the Company (measured by voting power rather than
number of shares), (iv) the consummation of the first transaction (including,
without limitation, any merger or consolidation) the result of which is that
any "person" (as defined above) becomes the "beneficial owner" (as defined
above), directly or indirectly, of more of the Voting Stock of the Company
(measured by voting power rather than number of shares) than is at the time
"beneficially owned" (as defined above) by the Principals and their Related
Parties in the aggregate or (v) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
For purposes of this definition, any transfer of an equity interest of an
entity that was formed following the date of issuance of the Notes for the
purpose of acquiring Voting Stock of the Company will be deemed to be a
transfer of such portion of such Voting Stock as corresponds to the portion of
the equity of such entity that has been so transferred.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the Company's assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Notes to require the Company to repurchase such Notes as a result of
a sale, lease, transfer, conveyance or other disposition of less than all of
the assets of the Company and its Subsidiaries to another person may be
uncertain.
"Commission" means the U.S. Securities and Exchange Commission.
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"Consolidated Interest Expense" means, for any given period and person, the
aggregate of the interest expense in respect of all Indebtedness of such
person and its Restricted Subsidiaries for such period, on a consolidated
basis, determined in accordance with GAAP (including amortization of original
issue discount on any such Indebtedness, all non-cash interest payments, the
interest portion of any deferred payment obligation and the interest component
of capital lease obligations, but excluding amortization of deferred financing
fees if such amortization would otherwise be included in interest expense);
provided, however, that for the purpose of the Cash Flow Coverage Ratio,
Consolidated Interest Expense shall be calculated on a Pro Forma Basis;
provided further that any premiums, fees and expenses (including the
amortization thereof) payable in connection with the Offering and the
Transactions or any other refinancing of Indebtedness will be excluded. For
purposes of this definition, the Consolidated Interest Expense of the Company
shall include the cash interest expense of Holdings paid in respect of the
Holdings Subordinated Notes.
"Consolidated Net Income" means, for any given period and person, the
aggregate of the Net Income of such person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that: (i) the Net Income of any person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded and (ii) Consolidated Net Income of any person
will not include, without duplication, any deduction for: (A) any increased
amortization or depreciation resulting from the write-up of assets pursuant to
Accounting Principles Board Opinion Nos. 16 and 17, as amended or supplemented
from time to time, (B) the amortization of all intangible assets (including
amortization attributable to inventory write-ups, goodwill, debt and financing
costs, and Incentive Arrangements), (C) any non-capitalized transaction costs
incurred in connection with actual or proposed financings, acquisitions or
divestitures (including, but not limited to, financing and refinancing fees),
(D) any extraordinary or nonrecurring charges relating to any premium or
penalty paid, write-off or deferred financing costs or other financial
recapitalization charges in connection with redeeming or retiring any
Indebtedness prior to its stated maturity and (E) any Restructuring Charges;
provided, however, that for purposes of determining the Cash Flow Coverage
Ratio, Consolidated Net Income shall be calculated on a Pro Forma Basis.
"Consolidated Net Worth" with respect to any person means, as of any date,
the consolidated equity of the common stockholders of such person (excluding
the cumulated foreign currency translation adjustment), all determined on a
consolidated basis in accordance with GAAP, but without any reduction in
respect of the payment of dividends on any series of such person's preferred
stock if such dividends are paid in additional shares of Capital Stock (other
than Disqualified Stock); provided, however, that Consolidated Net Worth shall
also include, without duplication: (a) the amortization of all write-ups of
inventory, (b) the amortization of all intangible assets (including
amortization of goodwill, debt and financing costs, and Incentive
Arrangements), (c) any non-capitalized transaction costs incurred in
connection with actual or proposed financings, acquisitions or divestitures
(including, but not limited to, financing and refinancing fees), (d) any
increased amortization or depreciation resulting from the write-up of assets
pursuant to Accounting Principles Board Opinion Nos. 16 and 17, as amended and
supplemented from time to time, (e) any extraordinary or nonrecurring charges
or expenses relating to any premium or penalty paid, write-off or deferred
financing costs or other financial recapitalization charges incurred in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity, (f) any Restructuring Charges and (g) any extraordinary or non-
recurring charge arising out of the implementation of SFAS 106 or SFAS 109;
provided, however, that Consolidated Net Worth shall be calculated on a Pro
Forma Basis.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding
under the New Credit Agreement and (ii) any other Senior Indebtedness
permitted under the Indenture the principal amount of which is $10.0 million
or more and that has been designated by the Company as "Designated Senior
Indebtedness."
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"Disqualified Stock" means any Capital Stock that by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part on, or
prior to, the maturity date of the Notes.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Equity Interests" means Capital Stock or partnership interests or warrants,
options or other rights to acquire Capital Stock or partnership interests (but
excluding (i) any debt security that is convertible into, or exchangeable for,
Capital Stock or partnership interests and (ii) any other Indebtedness or
Obligation); provided, however, that Equity Interests will not include any
Incentive Arrangements or obligations or payments thereunder.
"Equity Offering" means a public or private offering by the Company for cash
of Equity Interests and all warrants, options or other rights to acquire
Capital Stock, other than (i) an offering of Disqualified Stock or (ii)
Incentive Arrangements or obligations or payments thereunder.
"GAAP" means generally accepted accounting principles, consistently applied,
as of the date of original issuance of the Notes. All financial and accounting
determinations and calculations under the Indenture will be made in accordance
with GAAP.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantors" means each Restricted Subsidiary that executes a Note Guarantee
in accordance with the provisions of the Indenture, and their respective
successors and assigns.
"Hedging Obligations" means, with respect to any person, the Obligations of
such persons under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) foreign exchange
contracts, currency swap agreements or similar agreements and (iii) other
agreements or arrangements designed to protect such person against
fluctuations, or otherwise to establish financial hedges in respect of,
exchange rates, currency rates or interest rates.
"Holdings" means GFSI Holdings, Inc., a Delaware corporation.
"Holdings Preferred Stock" means the 12% cumulative preferred stock due 2009
of Holdings, as in effect on the date of issuance of the Notes.
"Holdings Subordinated Notes" means $25.0 million in aggregate principal
amount of Holdings 12% subordinated notes due 2008 as in effect on the date of
the issuance of the Notes or any Indebtedness of Holdings issued or given in
exchange for, or the proceeds of which are used to, extend, refinance, renew,
replace, substitute or refund such Holdings Subordinated Notes; provided that
any such Indebtedness (i) is issued in a principal amount not exceeding the
then outstanding principal amount of the Holdings Subordinated Notes, (ii) has
an interest rate not exceeding 12%, (iii) is subordinated to other
Indebtedness of Holdings to the same extent as the Holdings Subordinated Notes
and (iv) has a Weighted Average Life to Maturity no greater than the Holdings
Subordinated Notes.
"Incentive Arrangements" means any earn-out agreements, stock appreciation
rights, "phantom" stock plans, employment agreements, non-competition
agreements, subscription and stockholders agreements and other incentive and
bonus plans, including the Incentive Compensation Plan, and similar
arrangements made in connection with acquisitions of persons or businesses by
the Company or the Restricted Subsidiaries or the retention of consultants,
executives, officers or employees by Holdings, the Company or the Restricted
Subsidiaries.
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"Indebtedness" means, with respect to any person, any indebtedness, whether
or not contingent, in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or representing the deferred and unpaid balance
of the purchase price of any property (including pursuant to capital leases),
except any such balance that constitutes an accrued expense or a trade
payable, and any Hedging Obligations, if and to the extent such indebtedness
(other than a Hedging Obligation) would appear as a liability upon a balance
sheet of such person prepared on a consolidated basis in accordance with GAAP
and also includes, to the extent not otherwise included, the guarantee of
items that would be included within this definition; provided, however, that
"Indebtedness" will not include any Incentive Arrangements or obligations or
payments thereunder.
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy or similar case or proceeding, or any reorganization, receivership,
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, or (ii) any assignment for the benefit of creditors or any other
marshaling of assets and liabilities of the Company.
"Investment" means any capital contribution to, or other debt or equity
investment in, any Person.
"issue" means create, issue, assume, guarantee, incur or otherwise become
directly or indirectly liable for any Indebtedness or Capital Stock, as
applicable; provided, however, that any Indebtedness or Capital Stock of a
person existing at the time such person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition, redesignation of a Non-
Restricted Subsidiary or otherwise) shall be deemed to be issued by such
Restricted Subsidiary at the time it becomes a Restricted Subsidiary. For this
definition, the terms "issuing," "issuer," "issuance" and "issued" have
meanings correlative to the foregoing.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell and any filing of or
agreement to give any financing statement under the Uniform Commercial Code
(or equivalent statutes) of any jurisdiction).
"Marketable Securities" means (a) Government Securities, (b) any certificate
of deposit maturing not more than 270 days after the date of acquisition
issued by, or time deposit of, an Eligible Institution, (c) commercial paper
maturing not more than 270 days after the date of acquisition of an issuer
(other than an Affiliate of the Company) with a rating, at the time as of
which any investment therein is made, of "A-2" (or higher) according to S&P or
"P-2" (or higher) according to Moody's or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments, (d) any bankers acceptances or money
market deposit accounts issued by an Eligible Institution and (e) any fund
investing exclusively in investments of the types described in clauses (a)
through (d) above.
"Moody's" means Moody's Investors Service, Inc.
"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP excluding, however, any gain
or loss, together with any related provision for taxes, realized in connection
with any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate amount
of cash proceeds (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or
similar account established in connection with any such Asset Sale, but, in
either such case, only as and when so received) received by the Company or any
of its Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the
cash expenses of such Asset Sale (including, without limitation, the payment
of principal of, and premium, if any, and interest on, Indebtedness required
to be paid as a result of such Asset Sale (other than the Notes) and legal,
accounting, management and advisory and
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investment banking fees and sales commissions), (ii) taxes paid or payable as
a result thereof, (iii) any portion of cash proceeds that the Company
determines in good faith should be reserved for post-closing adjustments, it
being understood and agreed that on the day that all such post-closing
adjustments have been determined, the amount (if any) by which the reserved
amount in respect of such Asset Sale exceeds the actual post-closing
adjustments payable by the Company or any of its Restricted Subsidiaries shall
constitute Net Proceeds on such date, (iv) any relocation expenses and
pension, severance and shutdown costs incurred as a result thereof, and (v)
any deduction or appropriate amounts to be provided by the Company or any of
its Restricted Subsidiaries as a reserve in accordance with GAAP against any
liabilities associated with the asset disposed of in such transaction and
retained by the Company or such Restricted Subsidiary after such sale or other
disposition thereof, including, without limitation, pension and other post-
employment benefit liabilities and liabilities related to environmental
matters or against any indemnification obligations associated with such
transaction.
"New Credit Agreement" means that certain credit facility, dated as of
February 27, 1997, among the Company, as borrower, The First National Bank of
Chicago, as contractual representative, and the lenders party thereto,
together with all loan documents and instruments thereunder (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and
restatement thereof), supplemented or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing, replacing or
otherwise restructuring (including, without limitation, increasing the amount
of available borrowings, letters of credit or other financial accommodations
thereunder, all or any portion of the Obligations under any such agreement or
any successor or replacement agreement and whether by the same or any other
agent, lender or group of lenders).
"Non-Restricted Subsidiary" means any Subsidiary of the Company other than a
Restricted Subsidiary.
"Obligations" means, with respect to any Indebtedness, all principal,
interest, premiums, penalties, fees, indemnities, expenses (including legal
fees and expenses), reimbursement obligations and other liabilities payable to
the holder of such Indebtedness under the documentation governing such
Indebtedness, and any other claims of such holder arising in respect of such
Indebtedness.
"Other Permitted Indebtedness" means:
(i) Indebtedness of the Company and its Restricted Subsidiaries existing
as of the date of original issuance of the Notes and all related
Obligations as in effect on such date;
(ii) Indebtedness of the Company and its Restricted Subsidiaries in
respect of bankers acceptances and letters of credit (including, without
limitation, letters of credit in respect of workers' compensation claims)
issued in the ordinary course of business, or other Indebtedness in respect
of reimbursement-type obligations regarding workers' compensation claims;
(iii) Refinancing Indebtedness, provided that: (A) the principal amount
of such Refinancing Indebtedness shall not exceed the outstanding principal
amount of Indebtedness (including unused commitments) extended, refinanced,
renewed, replaced, substituted or refunded plus any amounts incurred to pay
premiums, fees and expenses in connection therewith, (B) the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being extended, refinanced, renewed, replaced, substituted or refunded;
provided, however, that this limitation in this clause (B) does not apply
to Refinancing Indebtedness of Senior Indebtedness, and (C) in the case of
Refinancing Indebtedness of Subordinated Indebtedness, such Refinancing
Indebtedness shall be subordinated to the Notes at least to the same extent
as the Subordinated Indebtedness being extended, refinanced, renewed,
replaced, substituted or refunded;
(iv) intercompany Indebtedness of and among the Company and its
Restricted Subsidiaries;
(v) Indebtedness of the Company and its Restricted Subsidiaries incurred
in connection with making permitted Restricted Payments under clauses
(iii), (iv) (but only to the extent that such Indebtedness is provided by
the Company or a Restricted Subsidiary) or (x) of the second sentence of
the "Limitation on
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Restricted Payments" covenant; provided that any Indebtedness incurred
pursuant to this clause (v) is expressly subordinate in right of payment to
the Notes;
(vi) Indebtedness of any Non-Restricted Subsidiary created after the date
of original issuance of the Notes, provided that such Indebtedness is
nonrecourse to the Company and its Restricted Subsidiaries and the Company
and its Restricted Subsidiaries have no Obligations with respect to such
Indebtedness;
(vii) Indebtedness of the Company and its Restricted Subsidiaries under
Hedging Obligations;
(viii) Indebtedness of the Company and its Restricted Subsidiaries
arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently (except in the case of
daylight overdrafts, which will not be, and will not be deemed to be,
inadvertent) drawn against insufficient funds in the ordinary course of
business;
(ix) Indebtedness of the Company and its Restricted Subsidiaries in
connection with performance, surety, statutory, appeal or similar bonds in
the ordinary course of business;
(x) Indebtedness of the Company and its Restricted Subsidiaries in
connection with agreements providing for indemnification, purchase price
adjustments and similar obligations in connection with the sale or
disposition of any of their business, properties or assets;
(xi) The guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of the covenant entitled
"Limitation on Incurrence of Indebtedness"; and
(xii) Indebtedness of any person at the time it is acquired as a
Restricted Subsidiary, provided that such Indebtedness was not issued by
such person in connection with or in anticipation of such acquisition.
"Permitted Junior Securities" means Equity Interests in the Company or
subordinated debt securities of the Company that (i) are subordinated to all
Senior Indebtedness (and any debt securities issued in exchange for Senior
Indebtedness) to at least the same extent as the Notes are subordinated to
Senior Indebtedness pursuant to Article 10 of the Indenture, (ii) have a
Weighted Average Life to Maturity no shorter than the Weighted Average Life to
Maturity of the Notes and (iii) if there are any amounts outstanding under the
New Credit Agreement, have a Weighted Average Life to Maturity at least as
long as the sum of (a) the Weighted Average Life to Maturity of the New Credit
Agreement or any debt securities issued in exchange therefor (whichever is
longer) plus (b) the positive difference, if any, between the Weighted Average
Life to Maturity of the Notes and the Weighted Average Life to Maturity of the
New Credit Agreement, in each case measured immediately prior to the issuance
of such Permitted Junior Securities.
"Permitted Liens" means:
(i) Liens securing Senior Indebtedness of the Company or any Guarantor
that was permitted by the terms of the Indenture to be incurred;
(ii) Liens for taxes, assessments, governmental charges or claims which
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
(iii) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings,
if a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made therefor;
(iv) Liens incurred on deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
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(v) Liens incurred on deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance and return of money bonds and other obligations of a
like nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money);
(vi) easements, rights-of-way, zoning or other restrictions, minor
defects or irregularities in title and other similar charges or
encumbrances not interfering in any material respect with the business of
the Company or any of its Restricted Subsidiaries incurred in the ordinary
course of business;
(vii) Liens (including extensions, renewals and replacements thereof)
upon property acquired (the "Acquired Property") after the date of original
issuance of the Notes, provided that: (A) any such Lien is created solely
for the purpose of securing Indebtedness representing, or issued to
finance, refinance or refund, the cost (including the cost of construction)
of the Acquired Property, (B) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of the cost of the Acquired
Property, (C) such Lien does not extend to or cover any property other than
the Acquired Property and any improvements on such Acquired Property, and
(D) the issuance of the Indebtedness to purchase the Acquired Property is
permitted by the "Limitation on Incurrence of Indebtedness" covenant;
(viii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(ix) judgment and attachment Liens not giving rise to an Event of
Default;
(x) leases or subleases granted to others not interfering in any material
respect with the business of the Company or any of its Restricted
Subsidiaries;
(xi) Liens securing Indebtedness under Hedging Obligations;
(xii) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements;
(xiii) Liens arising out of consignment or similar arrangements for the
sale of goods entered into by the Company or its Restricted Subsidiaries in
the ordinary course of business;
(xiv) any interest or title of a lessor in property subject to any
capital lease obligation or operating lease;
(xv) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xvi) Liens existing on the date of original issuance of the Notes and
any extensions, refinancings, renewals, replacements, substitutions or
refundings thereof;
(xvii) any Lien granted to the Trustee and any substantially equivalent
Lien granted to any trustee or similar institution under any indenture for
Senior Indebtedness permitted by the terms of the Indenture;
(xviii) Liens in favor of the Company or any Restricted Subsidiary;
(xix) additional Liens at any one time outstanding in respect of
properties or assets where aggregate fair market value does not exceed $2.0
million (the fair market value to be determined on the date such Lien is
granted on such properties or assets); and
(xx) Liens securing intercompany Indebtedness issued by any Restricted
Subsidiary to the Company or another Restricted Subsidiary.
"Principals" means (a) The Jordan Company, Jordan/Zalaznick Capital
Corporation and MCIT PLC, and their respective Affiliates, principals,
partners and employees, family members of any of the foregoing and trusts for
the benefit of any of the foregoing, including, without limitation, Leucadia
National Corporation and Jordan Industries, Inc., and their respective
Subsidiaries, (b) the officers, directors and employees of the Company on
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the date of issuance of the Notes and their respective Affiliates and family
members and trusts for the benefit of any of the foregoing. For the purpose of
the definition of "Principals," The Jordan Company, Jordan/Zalaznick Capital
Corporation and MCIT PLC shall be deemed to be Affiliates.
"Pro Forma Basis" means, for purposes of determining Consolidated Net Income
in connection with the Cash Flow Coverage Ratio (including in connection with
the "Limitation on Restricted Payments" covenant, the "Designation of
Restricted and Non-Restricted Subsidiaries" covenant, the "Merger or
Consolidation" covenant, the incurrence of Indebtedness pursuant to the first
sentence of the "Limitation on Incurrence of Indebtedness" covenant and
Consolidated Net Worth for purposes of the "Merger or Consolidation" covenant)
giving pro forma effect to (x) any acquisition or sale of a person, business
or asset, related incurrence, repayment or refinancing of Indebtedness or
other related transactions, including any Restructuring Charges which would
otherwise be accounted for as an adjustment permitted by Regulation S-X under
the Securities Act or on a pro forma basis under GAAP, or (y) any incurrence,
repayment or refinancing of any Indebtedness and the application of the
proceeds therefrom, in each case, as if such acquisition or sale and related
transactions, restructurings, consolidations, cost savings, reductions,
incurrence, repayment or refinancing were realized on the first day of the
relevant period permitted by Regulation S-X under the Securities Act or on a
pro forma basis under GAAP. Furthermore, in calculating the Cash Flow Coverage
Ratio, (1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the determination date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the determination date;
(2) if interest on any Indebtedness actually incurred on the determination
date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the determination date will be deemed to
have been in effect during the relevant period; and (3) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to interest rate swaps
or similar interest rate protection Hedging Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Redeemable Preferred Stock" means preferred stock that by its terms or
otherwise is required to be redeemed or is redeemable at the option of the
holder thereof on, or prior to, the maturity date of the Notes.
"Refinancing Indebtedness" means (i) Indebtedness of the Company and its
Restricted Subsidiaries issued or given in exchange for, or the proceeds of
which are used to, extend, refinance, renew, replace, substitute or refund any
Indebtedness permitted under this Indenture or any Indebtedness issued to so
extend, refinance, renew, replace, substitute or refund such Indebtedness,
(ii) any refinancings of Indebtedness issued under the New Credit Agreement,
and (iii) any additional Indebtedness issued to pay premiums and fees in
connection with clauses (i) and (ii).
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means any Investment in any person; provided that
Restricted Investments will not include: (i) Investments in Marketable
Securities and other negotiable instruments permitted by the Indenture; (ii)
any Incentive Arrangements; (iii) Investments in the Company; or (iv)
Investments in any Restricted Subsidiary (provided that any Investment in a
Restricted Subsidiary was made for fair market value (as determined by the
Board of Directors in good faith)). The amount of any Restricted Investment
shall be the amount of cash and the fair market value at the time of transfer
of all other property (as determined by the Board of Directors in good faith)
initially invested or paid for such Restricted Investment, plus all additions
thereto, without any adjustments for increases or decreases in value of or
write-ups, write-downs or write-offs with respect to, such Restricted
Investment.
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"Restricted Subsidiary" means: (i) any Subsidiary of the Company existing on
the date of original issuance of the Notes, and (ii) any other Subsidiary of
the Company formed, acquired or existing after the date of original issuance
of the Notes that is designated as a "Restricted Subsidiary" by the Company
pursuant to a resolution approved a majority of the Board of Directors,
provided, however, that the term Restricted Subsidiary shall not include any
Subsidiary of the Company that has been redesignated by the Company pursuant
to a resolution approved by a majority of the Board of Directors as a Non-
Restricted Subsidiary in accordance with the "Designation of Restricted and
Non-Restricted Subsidiaries" covenant unless such Subsidiary shall have
subsequently been redesignated a Restricted Subsidiary in accordance with
clause (ii) of this definition.
"Restructuring Charges" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any persons
or businesses either alone or together with the Company or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act.
"S&P" means Standard & Poor's Corporation.
"Senior Indebtedness" means, with respect to any person, (i) all
Indebtedness of such person outstanding under the New Credit Agreement and all
Hedging Obligations with respect thereto, (ii) any other Indebtedness of such
person permitted to be incurred under the terms of the Indenture, provided,
however, that Senior Indebtedness shall not include any Indebtedness which by
the terms of the instrument creating or evidencing the same is subordinated or
junior in right of payment to any other Senior Indebtedness in any respect,
and (iii) all Obligations (including any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the
documentation with respect thereto, whether or not such interest is an allowed
claim under applicable law) with respect to the foregoing, in each case
whether outstanding on the date of the Indenture or thereafter incurred.
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
will not include (w) any liability for federal, state, local or other taxes
owed or owing by the Company, (x) any Indebtedness of such person to any of
its Subsidiaries or other Affiliates (other than Indebtedness arising under
the New Credit Agreement), (y) any trade payables or other liability to trade
creditors arising in the ordinary course of business (including guarantees
thereof or instruments evidencing such liabilities) or (z) any Indebtedness
that is incurred in violation of the Indenture.
"SFAS 106" means Statement of Financial Accounting Standards No. 106.
"SFAS 109" means Statement of Financial Accounting Standards No. 109.
"Significant Subsidiary" means any Restricted Subsidiary of the Company that
would be a "significant subsidiary" as defined in clause (2) of the definition
of such term in Rule 1-02 of Regulation S-X under the Securities Act and the
Exchange Act.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subordinated Indebtedness" means all Obligations with respect to
Indebtedness if the instrument creating or evidencing the same, or pursuant to
which the same is outstanding, designates such Obligations as subordinated or
junior in right of payment to Senior Indebtedness.
"Subsidiary" of any person means any entity of which the Equity Interests
entitled to cast at least a majority of the votes that may be cast by all
Equity Interests having ordinary voting power for the election of directors or
other governing body of such entity are owned by such person (regardless of
whether such Equity Interests are owned directly by such person or through one
or more Subsidiaries).
"Tax Sharing Agreement" means the tax sharing agreement between the Company
and Holdings, as in effect on the date of issuance of the Notes.
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"TJC Agreement" means the Management Consulting Agreement, dated the Closing
Date, between the Company and TJC Management Corporation, as in effect on the
date of original issuance of the Notes.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect the board of directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the sum of the product(s)
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other requirement payment of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) which will elapse between such
date and the making of such payment.
"Wolff Noncompetition Agreement" means the agreement, dated the Closing
Date, between Holdings and Robert M. Wolff, relating to certain covenants not
to compete with the business of the Company, as in effect on the date of
issuance of the Notes.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of important terms of certain indebtedness of the
Company:
CERTAIN INDEBTEDNESS
The Company's indebtedness (the "Existing Indebtedness") at the closing of
the Transactions included: (i) a $40.0 million line of credit from Boatmen's
First National Bank ("Boatmen's") with floating interest (5.86% at February
27, 1997). Borrowings against this line totaled $23.5 million at February 27,
1997 while letters of credit against the line were $22.5 million at February
27, 1997; (ii) a $20.0 million line of credit from The First National Bank of
Chicago with floating interest (5.92% at February 27, 1997) maturing in July
1997; (iii) a $10.0 million credit agreement from Boatmen's with interest
accruing at 10.125%, payable in monthly installments of $119,048 plus interest
through July 1997 when the remaining unpaid principal and accrued interest is
due; (iv) a $9.5 million mortgage loan from Prudential Insurance Company of
America with interest accruing at 10.28%, payable in monthly installments of
$88,935 through February 2006 when the remaining unpaid principal and accrued
interest is due; and (v) $300,000 of industrial revenue bonds from the City of
Lexena, Kansas with interest accruing at 5.78%, payable in amounts equal to
the principal and interest payments due on the bonds through 1998. The Company
used the net proceeds from the Offering and the New Credit Agreement to repay
the Existing Indebtedness. See "The Transactions" and "Use of Proceeds."
NEW CREDIT AGREEMENT
Concurrently with the completion of the Offering, the Company entered into
the New Credit Agreement with The First National Bank of Chicago ("FNBC"), as
contractual representative, and other lenders thereunder. The New Credit
Agreement provides for borrowings of up to $115.0 million under three credit
facilities: a term loan ("Term Loan A") in the principal amount of $40.0
million which matures in 2002, a term loan ("Term Loan B") in the principal
amount of $25.0 million which matures in 2004 and a revolving credit facility
("Revolver") in the principal amount of up to $50.0 million (based upon
availability) which matures in 2002. At the completion of the Transactions,
$40.0 million, $25.0 million and approximately $3.0 million was outstanding
under Term Loan A, Term Loan B and the Revolver, respectively, leaving
approximately $47.0 million available under the Revolver for future borrowings
and letter of credit issuances. Approximately $22.9 million of letters of
credit were issued at Closing. See "The Transactions."
The Company will pay interest (i) under each of Term Loan A and the Revolver
based on, at the Company's option, either of FNBC's base rate plus 1.25% or
the Eurodollar Rate (as defined in the New Credit Agreement) plus 2.25% and
(ii) under Term Loan B based on, at the Company's option, either of FNBC's
base rate plus 1.75% or the Eurodollar Rate plus 2.75%. The interest rate
under each of Term Loan A, Term Loan B and the Revolver is subject to
reduction based upon the Company's Leverage Ratio (as defined in the New
Credit Agreement). A commitment fee of 0.50% will be paid by the Company for
unutilized commitments under the Revolver, subject to reduction based upon the
Company's Leverage Ratio. The Company's obligations under the New Credit
Agreement are secured by a security interest in all of the Company's assets.
In addition, the Company's obligations under the New Credit Agreement are
guaranteed by substantially all of the Company's future subsidiaries.
The New Credit Agreement contains customary covenants, including as material
covenants, covenants relating to minimum interest expense coverage ratio,
minimum fixed charge coverage ratio, maximum leverage ratio and maximum
rentals and restrictions on, among other things, granting of liens, asset
sales, mergers and consolidations, investments and acquisitions, prepayments
or redemptions of the Notes and incurring additional indebtedness. The New
Credit Agreement also contains customary events of default, including, as
material events of default, without limitation, change of control. The Company
was not in violation of any covenant under any agreement with respect to the
Existing Indebtedness and is currently in compliance with all of the covenants
contained in the New Credit Agreement.
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CERTAIN TRANSACTIONS
The Jordan Company. In connection with the Acquisition, on February 27,
1997, Holdings entered into an agreement (the "TJC Agreement") with TJC
Management Corporation ("JMC"), an affiliate of TJC. Messrs. Jordan, Zalaznick
and Caputo, directors of the Company, are also managing directors of TJC and
Messrs. Jordan and Zalaznick are the principals of JMC. Under the TJC
Agreement, Holdings retained JMC to render services to the Company, its
financial and business affairs, its relationships with its lenders and
stockholders, and the operation and expansion of its business. The TJC
Agreement expires in 2007, but is automatically renewed for successive one-
year terms, unless either party provides written notice of termination 60 days
prior to the scheduled renewal date. For the first two years, the TJC
Agreement provides for an annual consulting fee of $500,000 payable on a
quarterly basis. For the remaining term of the TJC Agreement, Holdings will
pay JMC an annual consulting fee payable on a quarterly basis equal to the
higher of (a) $500,000 or (b) 1.5% of EBITA (as defined in the TJC Agreement),
provided that in years three through five of the Agreement, the annual fee
does not exceed $750,000 and thereafter the annual fee does not exceed $1.0
million. In addition, the TJC Agreement provides for payment to JMC of (i) an
investment banking and sponsorship fee of up to 2.0% of the purchase price of
certain acquisitions or sales involving Holdings or the Company and (ii) a
financial consulting fee of up to 1.0% of any debt, equity or other financing
arranged by Holdings or the Company with the assistance of JMC. Both such fees
are subject to Board of Directors approval. In connection with the
Transactions, the Company paid JMC consulting and investment banking fees of
$3.25 million pursuant to the terms of the TJC Agreement. The parties involved
in the negotiation of the TJC Agreement included Mr. Caputo on behalf of JMC
and TJC and Mr. Shaw on behalf of the Company. A conflict of interest could be
deemed to exist in that Mr. Jordan and Mr. Zalaznick, the principals of JMC,
the recipient of the consulting and investment banking fees, are also
directors and stockholders of Holdings, the entity paying the consulting and
investment banking fees. This conflict was fully disclosed to the entire Board
of Directors of Holdings, which unanimously, including the disinterested
members, approved the TJC Agreement. Furthermore, the Company believes that
the terms of the TJC Agreement are comparable to the terms that it would
obtain from disinterested third parties for comparable services. See "Risk
Factors--Control by Principal Stockholders."
Tax Sharing Agreement. In connection with the Transactions, on February 27,
1997, the Company and Holdings entered into a tax sharing agreement (the "Tax
Sharing Agreement") for purposes of filing a consolidated federal income tax
return and paying federal income taxes on a consolidated basis. Pursuant to
the Tax Sharing Agreement, the Company and each of its consolidated
subsidiaries will pay to Holdings on an annual basis an amount determined by
reference to the separate tax liability of the Company as calculated pursuant
to Section 1552(a)(1) of the Code and applicable regulations thereunder.
The parties involved in the negotiation of the Tax Sharing Agreement
included Mr. Caputo, on behalf of Holdings and Mr. Shaw on behalf of the
Company. The Tax Sharing agreement does not give rise to any conflicts of
interest as the Company will only pay Holdings to the extent of Holdings' tax
liability attributable to the operations of the Company.
Embroidery Service. The Company has an ongoing relationship with Kansas
Custom Embroidery and Impact Design, Inc., which are affiliated companies (the
"Affiliates"). Mr. Graveel is a 50% owner and vice president of Kansas Custom
Embroidery and Mr. Menghini and his family own 100% of Impact Design, Inc.
This relationship was memorialized in a memorandum of understanding (the
"Memorandum") on July 1, 1996. The Memorandum has no set time limit or renewal
terms. The Memorandum allows the Company to outsource embroidery work to the
Affiliates in the event that demand for such work exceeds the Company's
manufacturing capacity. Over the past three fiscal years, the Company has
purchased $5.3 million of embroidered products under the Memorandum.
Embroidery work is outsourced only in response to firm customer orders. Under
the Memorandum, the Affiliate embroiders blanks according to designs provided
by the Company and under terms established by the Company with payment terms
based on a combination of the number of units ordered and the stitch range of
the embroidered items. The Memorandum could be deemed to give rise to a
conflict of interest in that Mr. Graveel and Mr. Meghini, who are principals
of Kansas Custom Embroidery and Impact Design, Inc., respectively, are also
directors of Holdings. Payments for embroidery services are made from the
Company to
88
<PAGE>
the Affiliates. The Company believes that the terms of the Memorandum are
comparable to the terms it would obtain from disinterested third parties for
comparable services. This conflict was fully disclosed to the entire Board of
Directors of Holdings, which unanimously, including all disinterested members,
approved the Memorandum. The Memorandum will be subject to the future review
of the Board of Directors of Holdings regarding affiliate transactions. See
"--Future Transactions."
Affiliate Loans. In March, 1996, the Company sold a portion of its
embroidery equipment to Impact Design, Inc. for $181,000. The purchase price
for the equipment was determined by reference to its book value and resulted
in no gain or loss to the Company. To finance the acquisition of embroidery
equipment by the Affiliate and to provide for working capital for both of the
Affiliates, the Company loaned $150,000 to Kansas City Embroidery (the "Kansas
Loan") and $700,000 to Impact Design, Inc. (the "Impact Loan") under separate
promissory notes. Each of the promissory notes is unsecured, has an interest
rate of 6.8% per annum and matures July 1, 2000. The Impact Loan, which was
executed on August 12, 1996, has a current outstanding balance of $613,500
while the Kansas Loan, which was executed on August 12, 1996, was paid off on
June 17, 1997. The Impact Loan is repayable through monthly installments of
interest, which commenced on August 31, 1996, and semiannual repayments of
principal of $87,500, which commenced on January 1, 1997, with a final
repayment of principal at maturity. The Kansas Loan was repaid in monthly
installments of interest, which commenced on August 31, 1996, a repayment of
principal on January 1, 1997 of $25,000, and a final repayment of principal of
$125,000 on June 17, 1997. The Company believes the terms of the loans and the
sale of the equipment were on terms as favorable as could have been received
from disinterested third parties.
Wolff Employment Agreement. Effective upon the consummation of the
Transactions, the Company entered into the Wolff Employment Agreement. See
"Management." 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. Effective upon the consummation of the
Transactions, Holdings entered into the Wolff Noncompetition Agreement. See
"Management." 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.
Management Investors Loans. In connection with the consummation of the
Transactions, Holdings loaned approximately $0.8 million to certain Management
Investors to finance a portion of their purchase of capital stock of Holdings.
The aggregate outstanding balances on the loans is $788,500. Each of these
loans was executed on February 27, 1997, is secured by a pledge of Holdings'
Common Stock, has an interest rate of 6.75% per annum and matures on June 30,
2007. The principal amount of each loan is due and payable on the earlier of
June 30, 2007 or within ninety days after the borrower ceases to be employed
by the Company. Interest
89
<PAGE>
is due and payable on June 30 of each year at which point the borrower, at his
or her option, may pay one-half of the interest accrued from July 1 of the
prior year, with the other one-half continuing to accrue interest at the same
rate of interest, or pay all interest accrued from July 1 of the prior year.
The Company believes the terms of the loans were on terms comparable to terms
that could have been received from disinterested third parties.
The Management Investors who borrowed from Holdings are as follows:
<TABLE>
<CAPTION>
LOAN INTEREST
AMOUNT RATE
------- --------
<S> <C> <C>
Jason Krakow............... 100,000 6.75%
Frank Pikus................ 115,600 6.75%
Carl Allard................ 173,400 6.75%
Howie Ellis................ 144,500 6.75%
Scott Durham............... 57,800 6.75%
Tom Martin................. 57,800 6.75%
John White................. 57,800 6.75%
Sue Agnitsch............... 28,900 6.75%
Dave Hosier................ 23,800 6.75%
Jim Keaton................. 28,900 6.75%
-------
Total...................... 788,500
=======
</TABLE>
Management Stock Purchases. On July 1, 1995, Mr.Gary and Mr. Menghini
purchased 6,000 and 7,000 shares of the Company's common stock (at $70.00 per
share), respectively, for an aggregate purchase price of $420,000 and
$490,000, respectively.
Incentive Compensation Plan. The Company will adopt on or prior to January
1, 1998, the Incentive Plan, which will provide for annual cash bonuses
payable based on a percentage of EBITA (as defined in the Incentive Plan), if
certain EBITA targets are met.
Directors and Officers Indemnification. Upon the consummation of the
Offering, the Company entered into indemnification agreements with each member
of the Board of Directors whereby the Company agreed, subject to certain
exceptions, to indemnify and hold harmless each director from liabilities
incurred as a result of such person's status as a director of the Company. See
"Management--Board of Directors."
Future Transactions. The Company has adopted a policy, effective
simultaneously with the consummation of the Offering, to provide that future
transactions between the Company and its officers, directors and other
affiliates, including transactions involving conflicts of interest must (i) be
approved by a majority of the members of the Board of Directors and by a
majority of the disinterested members of the Board of Directors and (ii) be on
terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account as a result
of market-making activities or other trading activities in connection with the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 120 days after
the Expiration Date, it will make available a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any such resale. In addition, until October 22, 1997, all dealers
effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will receive no proceeds in connection with the Exchange Offer.
New Notes received by broker-dealers for their own account pursuant to the
Exchange Offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing
of options on
90
<PAGE>
the New Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such New Notes. Any broker-dealer that resells New Notes
that were received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a distribution of such New Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
FEDERAL INCOME TAX CONSEQUENCES
TO EXCHANGING AND NONEXCHANGING HOLDERS
The exchange of an Old Note for a New Note pursuant to the Exchange Offer
will not be taxable to the exchanging Holders for Federal income tax purposes.
As a result (i) an exchanging Holder will not recognize any gain or loss on
the exchange, (ii) the holding period for the New Note will include the
holding period for the Old Note and (iii) the basis of the New Note will be
the same as the basis of the Old Note.
The Exchange Offer will result in no Federal income tax consequences to a
nonexchanging Holder.
The preceding discussion reflects the opinion of Mayer, Brown & Platt,
counsel to the Company, as to the material Federal income tax consequences
expected to result from the Exchange Offer. Each Holder should consult its own
tax adviser as to these and any other Federal income tax consequences of the
Exchange Offer as well as any tax consequences to it under state, local or
other law. This summary is based on the current provisions of the Internal
Revenue Code of 1986, as amended, and applicable Treasury regulations,
judicial authority and administrative rulings and practice. Those consequences
could be modified by future changes in the relevant law (which changes could
be applied retroactively).
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Mayer,
Brown & Platt, New York, New York. Certain legal matters relating to the Notes
offered hereby will be passed upon for the Initial Purchasers by Latham &
Watkins, New York, New York.
EXPERTS
The financial statements of Winning Ways, Inc. as of June 30, 1996 and for
the fiscal year ended June 30, 1996 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The balance sheet of GFSI, Inc. as of January 23, 1997 included in this
Prospectus has been audited by Deloitte & Touche LLP, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of Winning Ways, Inc. as of June 30, 1995 and for
each of the two fiscal years preceding the period ended June 30, 1995 included
in this Prospectus have been audited by Donnelly Meiners Jordan Kline,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
On January 2, 1997, the Company, by resolution of the Board of Directors,
appointed Deloitte & Touche LLP as its independent auditors, effective January
6, 1997, replacing Donnelly, Meiners Jordan Kline, the previous independent
auditors of the Company.
91
<PAGE>
In connection with its audit for the fiscal year ended June 30, 1995 and
through December 31, 1996, the Company has had no disagreements with Donnelly
Meiners Jordan Kline on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Donnelly Meiners Jordan
Kline would have caused them to make reference thereto in their report on the
financial statements for such periods. Donnelly Meiners Jordan Kline has
furnished a letter addressed to the Commission stating that it agrees with the
above statements.
The Company currently engages Deloitte & Touche LLP as its independent
auditors. During the most recent fiscal year and through the date of this
Offering Memorandum, the Company has not consulted with Deloitte & Touche LLP
on items which concerned the subject matter of a disagreement or reportable
event with the former auditor.
AVAILABLE INFORMATION
The Company has filed with the Commission the Registration Statement
pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the New Notes being offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the New Notes, reference is hereby made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to in the Registration
Statement are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. Upon consummation of the Exchange Offer, the Company will
become subject to the periodic and other informational requirements of the
Exchange Act. Periodic reports and other information filed by the Company with
the Commission may be inspected at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20540, or at its regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New
York, New York 10048 at prescribed rates. Such materials may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
92
<PAGE>
GFSI, INC.
UNAUDITED PRO FORMA STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
The following sets forth the Unaudited Pro Forma Statements of Income of
GFSI, Inc. ("GFSI") giving effect to the transactions described in Note 1 of
the Notes to the Unaudited Pro Forma Statements of Income as if such
transactions had consummated at the beginning of the earliest period
presented. The Unaudited Pro Forma Statements of Income of GFSI do not purport
to present the results of operations of GFSI had the transactions assumed
herein occurred on the date indicated, nor are they necessarily indicative of
the results of operations which may be expected to occur in the future.
The acquisition of the Company has been accounted for as a leveraged
recapitalization, and accordingly, the accompanying Unaudited Pro Forma
Statements of Income reflect no change in the accounting basis of GFSI's
assets and liabilities for financial accounting purposes.
P-1
<PAGE>
GFSI, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
NINE MONTHS ENDED MARCH 28, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENT
GFSI, INC. ------------------------ GFSI, INC.
HISTORICAL DR CR PRO FORMA
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.................... $144,182 $ -- $ -- $144,182
Costs of sales............... 80,122 153(2) -- 80,275
-------- ---------- --------- --------
Gross profit............. 64,060 153 -- 63,907
Operating expenses:
Selling.................... 14,654 -- -- 14,654
General and
administrative............ 19,181 593(3) 676(3) 19,098
-------- ---------- --------- --------
33,835 593 676 33,752
-------- ---------- --------- --------
Operating income......... 30,225 746 676 30,155
Other income/(expense):
Interest expense........... (3,339) 12,687(4) 1,841(4) (14,185)
Other...................... 60 -- -- 60
-------- ---------- --------- --------
(3,279) 12,687 1,841 (14,125)
-------- ---------- --------- --------
Income before income taxes
and extraordinary item...... 26,946 13,433 2,517 16,030
Provision for income
taxes..................... 1,319 6,087(5) 994(5) 6,412
-------- ---------- --------- --------
Net income before
extraordinary item.......... $ 25,627 $ 19,520 $ 3,511 $ 9,618
======== ========== ========= ========
</TABLE>
See Notes to Unaudited Pro Forma Statements of Income.
P-2
<PAGE>
GFSI, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENT
GFSI, INC. ------------------------ GFSI, INC.
HISTORICAL DR CR PRO FORMA
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales...................... $169,321 $ -- $ -- $169,321
Costs of sales................. 97,308 229(2) -- 97,537
-------- ---------- --------- --------
Gross profit............... 72,013 229 -- 71,784
Operating expenses:
Selling...................... 16,963 -- -- 16,963
General and administrative... 22,216 890(3) 1,265(3) 21,841
-------- ---------- --------- --------
39,179 890 1,265 38,804
-------- ---------- --------- --------
Operating income........... 32,834 1,119 1,265 32,980
Other income/(expense):
Interest expense............. (2,608) 19,033(4) 2,608(4) (19,033)
Other........................ -- -- -- --
-------- ---------- --------- --------
(2,608) 19,033 2,608 (19,033)
-------- ---------- --------- --------
Income before income taxes..... 30,226 20,152 3,873 13,947
Provision for income taxes... -- 5,579(5) -- 5,579
-------- ---------- --------- --------
Net income..................... $ 30,226 $ 25,731 $ 3,873 $ 8,368
======== ========== ========= ========
</TABLE>
See Notes to Unaudited Pro Forma Statements of Income.
P-3
<PAGE>
GFSI, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF INCOME
1. Presentation and Transactions:
The unaudited pro forma statements of income assume the following
transactions occurred at the beginning of the earliest period presented.
Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by
affiliates of The Jordan Company and management to effect the acquisition
of the Company. Pursuant to the Acquisition Agreement, Holdings and GFSI on
February 27, 1997, acquired all of the issued and outstanding capital stock
of the Company, and the Company immediately thereafter merged with and into
GFSI. All of the capital stock of the Company 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 the Company 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 the Company's
Existing Indebtedness including a $2.4 million prepayment penalty. To
finance the Acquisition, including approximately $11.5 million of related
fees and expenses: (i) TJC, its affiliates and MCIT 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 in cash to the Company (the "Equity
Contribution"); (ii) the Company consummated the Offering of Old Notes; and
(iii) the Company entered into the New Credit Agreement providing for
borrowings of up to $115.0 million, of which approximately $68.0 million
was outstanding and $22.9 million was utilized to cover outstanding letters
of credit at Closing. 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.
Consummation of the Offering of Old Notes was conditioned upon the
concurrent consummation of the Acquisition, the Equity Contribution and the
initial borrowings under the New Credit Agreement which all occurred on
February 27, 1997.
The Transactions are reflected in the accompanying unaudited pro forma
financial statements of the Company as a leveraged recapitalization under
which the existing basis of accounting was continued for financial
accounting and reporting purposes.
The following summarizes the sources and uses of funds resulting from the
Transactions described above at the Company's level (in millions):
<TABLE>
<S> <C>
SOURCES OF FUNDS:
New Credit Agreement............................................... $ 68.0
New 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
======
</TABLE>
Subsequent to the Transactions, Holdings is dependent upon the cash flows
of the Company to provide funds to service $25.0 million of Holdings
Subordinated Notes. The annual cash flow requirements to service
P-4
<PAGE>
GFSI, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF INCOME--(CONTINUED)
Holdings Subordinated Notes is $3 million (principal due in balloon payment
in 2008). Pursuant to the terms of a deferred limited interest guaranty
between the Company and Holdings, the Company is obligated to pay accrued
and unpaid interest on the Holdings Subordinated Notes under certain
limited circumstances. Additionally, Holdings' cumulative non-cash
preferred stock dividends will total $3.2 million annually. Holdings
Preferred Stock may be redeemed at stated value ($27.0 million) plus
accrued dividends with mandatory redemption in 2009. The annual cash flow
requirements relative to the Holdings Subordinated Notes and Holdings
Preferred Stock are not reflected in the accompanying unaudited pro forma
financial statements.
2.The pro forma adjustment to costs of sales represents fees associated
with inventory purchased under letter of credit arrangements in accordance
with the New Credit Agreement.
3.The pro forma adjustment to general and administrative expense (in
thousands):
<TABLE>
<CAPTION>
YEAR
NINE MONTHS ENDED
ENDED JUNE
MARCH 28, 30,
1997 1996
----------- -------
<S> <C> <C>
Additional general and administrative expense related
to:
Consulting fee to The Jordan Company................ $ 333 $ 500
Board of Directors fees............................. 93 140
Wolff non-competition payments...................... 167 250
----- -------
Pro forma adjustment.............................. $ 593 $ 890
===== =======
Elimination of general and administrative expense
related to:
Officers life insurance premiums.................... $(289) $ (718)
Expenses of corporate jet not retained by Company... (153) (195)
Depreciation on corporate jet not retained by
Company............................................ (234) (352)
----- -------
Pro forma adjustment.............................. $(676) $(1,265)
===== =======
</TABLE>
P-5
<PAGE>
GFSI, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF INCOME--(CONTINUED)
4. The pro forma adjustments to interest expense (in thousands):
<TABLE>
<CAPTION>
YEAR
NINE MONTHS ENDED
ENDED JUNE
MARCH 28, 30,
1997 1996
----------- -------
<S> <C> <C>
Elimination of interest expense relating to Winning
Ways, Inc.'s prior debt agreements:
Repay prior 10.125% credit agreement............... $ (255) $ (501)
Repay prior line of credit agreement............... (583) (545)
Repay prior 10.28% mortgage loan................... (647) (998)
Repay prior 5.78% industrial revenue bonds......... (11) (29)
Repay prior short-term borrowings.................. (345) (535)
------- -------
Pro forma adjustment............................. $(1,841) $(2,608)
======= =======
Additional interest expense related to:
Issuance of Notes (9.625%)......................... $ 8,021 $12,031
Amortization of deferred issuance costs related to
the Notes......................................... 428 643
Issuance of Term Loans assuming 8.44% interest
rate.............................................. 3,657 5,486
Issuance of Revolver assuming 8.25% interest rate.. 165 248
Amortization of deferred issuance costs related to
New Credit Agreement.............................. 336 504
Commitment fees related to New Credit Agreement.... 80 121
------- -------
Pro forma adjustment............................. $12,687 $19,033
======= =======
</TABLE>
The pro forma adjustments to interest expense do not include the
extraordinary item related to the loss on early extinguishment of debt, of
$2.5 million ($1.5 million on an after-tax basis) included in the Statement of
Income for the nine months ended March 28, 1997. Such amounts are excluded
from the accompanying pro forma income statement as it is considered a non-
recurring charge.
P-6
<PAGE>
GFSI, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF INCOME--(CONCLUDED)
5. The pro forma adjustment to provide income taxes at an effective rate of
40% recognizes that the Company is subject to income tax upon revocation of
the S Corporation status for income tax purposes. The tax expense
associated with the Company's change in tax status reflecting the
cumulative difference between the book and tax basis of assets and
liabilities as of the date of the conversion was $994,000. Such expense was
charged to operations at the date of conversion, however, it has been
treated as a pro forma adjustment in the accompanying statements of income
as it is considered a nonrecurring charge.
P-7
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GFSI, Inc. (formerly Winning Ways, Inc.)--Historical Financial Statements:
Independent Auditors' Reports........................................... F-2
Balance Sheets--June 30, 1995 and 1996 and March 28, 1997 (unaudited)... F-4
Statements of Income--Years Ended June 30, 1994, 1995 and 1996 and Nine
Months Ended March 31, 1996 and March 28, 1997 (unaudited)............. F-5
Statements of Changes in Stockholders' Equity--Years Ended June 30,
1994, 1995 and 1996 and Nine Months Ended March 28, 1997 (unaudited)... F-6
Statements of Cash Flows--Years Ended June 30, 1994, 1995 and 1996 and
Nine Months Ended March 31, 1996 and March 28, 1997 (unaudited)........ F-7
Notes to Financial Statements........................................... F-8
GFSI, Inc.--Balance Sheet:
Independent Auditors' Report............................................ F-19
Balance Sheet--January 23, 1997......................................... F-20
Notes to Balance Sheet.................................................. F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI, Inc. (formerly Winning Ways, Inc.)
Lenexa, Kansas
We have audited the accompanying balance sheet of GFSI, Inc. (formerly
Winning Ways, Inc.) (the "Company") as of June 30, 1996, and the related
statements of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1996, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, the Company completed
recapitalization transactions on February 27, 1997 which included the merger
of Winning Ways, Inc. with and into GFSI, Inc. with GFSI, Inc. as the
surviving entity.
Deloitte & Touche LLP
Kansas City, Missouri
January 24, 1997
(February 27, 1997 as to Note 1)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Winning Ways, Inc.
Lenexa, Kansas
We have audited the accompanying balance sheet of Winning Ways, Inc. (the
"Company") as of June 30, 1995, and the related statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended June 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1995, and the
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1995 in conformity with generally accepted accounting
principles.
Donnelly Meiners Jordan Kline
Kansas City, Missouri
July 26, 1996
F-3
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
BALANCE SHEETS
JUNE 30, 1995 AND 1996 AND MARCH 28, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
----------------------- MARCH 28,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 112,459 $ 139,977 $ 5,568,997
Accounts receivable, net of allowance
for doubtful accounts of $463,270 and
$472,092 at June 30, 1995 and 1996,
$569,936 at March 28, 1997
(unaudited).......................... 18,080,480 22,583,452 25,562,086
Inventories, net...................... 29,484,671 27,782,953 27,886,586
Cash value of life insurance, net of
related policy loans of $90,117 at
March 28, 1997 (unaudited)........... -- -- 5,187,487
Income tax receivable................. -- -- 664,529
Deferred income taxes................. -- -- 515,804
Prepaid expenses and other current
assets............................... 1,463,502 802,311 1,013,413
----------- ----------- -------------
Total current assets................ 49,141,112 51,308,693 66,398,902
Property, plant and equipment, net...... 23,751,206 23,038,589 22,184,789
Other assets:
Deferred financing costs, net of
accumulated amortization of $42,103
and $51,459 at June 30, 1995 and 1996
and $93,656 at March 28, 1997
(unaudited).......................... 98,239 88,883 9,858,480
Cash value of life insurance, net of
related policy loans of $90,117 at
June 30, 1995 and 1996............... 3,935,904 4,267,871 --
Other................................. 12,003 7,269 3,995
----------- ----------- -------------
4,046,146 4,364,023 9,862,475
----------- ----------- -------------
Total assets...................... $76,938,464 $78,711,305 $ 98,446,166
=========== =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Short-term borrowings................. $ 8,000,000 $ 7,000,000 $ 3,000,000
Accounts payable...................... 7,383,223 9,667,536 8,079,744
Accrued expenses...................... 4,533,584 5,288,998 7,443,306
Distributions payable to Winning Ways,
Inc. stockholders.................... -- -- 10,022,141
Current portion of long-term debt..... 1,639,443 1,658,160 3,375,000
----------- ----------- -------------
Total current liabilities........... 21,556,250 23,614,694 31,920,191
Deferred income taxes................... -- -- 1,509,425
Long-term debt, less current portion.... 23,275,973 20,617,878 186,625,000
Commitments and contingencies (Notes 6)
Stockholders' equity (deficit):
Winning Ways, Inc. Common stock, $.10
par value, 2,000,000 shares
authorized, 1,491,000 shares issued
at June 30, 1995 and 1996............ 149,100 149,100 --
GFSI, Inc. Common Stock, $.10 par
value, 10,000 shares authorized,
10,000 shares issued and outstanding
at March 28, 1997 (unaudited)........ -- -- 100
Additional paid-in capital............ 882,746 1,585,691 49,938,863
Retained earnings (accumulated
deficit)............................. 33,554,728 35,045,220 (171,547,413)
----------- ----------- -------------
34,586,574 36,780,011 (121,608,450)
Less treasury stock, at cost.......... 2,480,333 2,301,278 --
----------- ----------- -------------
Total stockholders' equity
(deficit).......................... 32,106,241 34,478,733 (121,608,450)
----------- ----------- -------------
Total liabilities and
stockholders' equity............. $76,938,464 $78,711,305 $ 98,446,166
=========== =========== =============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 28, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, NINE MONTHS ENDED
---------------------------------------- --------------------------
MARCH 31, MARCH 28,
------------ ------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $128,171,107 $148,196,394 $169,320,620 $132,068,220 $144,182,342
Cost of sales........... 74,447,220 84,869,223 97,307,746 74,720,872 80,122,678
------------ ------------ ------------ ------------ ------------
Gross profit........ 53,723,887 63,327,171 72,012,874 57,347,348 64,059,644
Operating expenses:
Selling............... 12,062,795 14,884,100 16,963,137 13,572,654 14,653,988
General and
administrative....... 17,087,995 19,544,325 22,216,193 16,457,752 19,180,991
------------ ------------ ------------ ------------ ------------
29,150,790 34,428,425 39,179,330 30,030,406 33,834,989
------------ ------------ ------------ ------------ ------------
Operating income.... 24,573,097 28,898,746 32,833,544 27,316,942 30,224,675
Other income (expense):
Interest expense...... (2,455,129) (2,522,054) (2,608,154) (2,038,113) (3,338,777)
Other................. (13,054) (156,869) 490 (8,702) 59,959
------------ ------------ ------------ ------------ ------------
(2,468,183) (2,678,923) (2,607,664) (2,046,815) (3,278,818)
------------ ------------ ------------ ------------ ------------
Income before income
taxes and extraordinary
item................... 22,104,914 26,219,823 30,225,880 25,270,127 26,945,857
Provision for income
taxes.................. -- -- -- -- 1,318,726
------------ ------------ ------------ ------------ ------------
Income before
extraordinary item..... 22,104,914 26,219,823 30,225,880 25,270,127 25,627,131
Extraordinary item, net
of tax benefit of
$989,634............... -- -- -- -- 1,484,451
------------ ------------ ------------ ------------ ------------
Net income.............. $ 22,104,914 $ 26,219,823 $ 30,225,880 $ 25,270,127 $ 24,142,680
============ ============ ============ ============ ============
Supplemental
information:
Income before income
taxes and
extraordinary item... $ 22,104,914 $ 26,219,823 $ 30,225,880 $ 25,270,127 $ 26,945,857
Pro forma income tax
provision........... 9,063,000 10,750,000 12,393,000 10,361,000 11,048,000
------------ ------------ ------------ ------------ ------------
Pro forma income before
extraordinary item..... $ 13,041,914 $ 15,469,823 $ 17,832,880 $ 14,909,127 $ 15,897,857
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996 AND
NINE MONTHS ENDED MARCH 28, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
-------------------- PAID-IN RETAINED --------------------- STOCKHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS SHARES AMOUNTS EQUITY
---------- -------- ----------- ------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993 .. 1,491,000 $149,100 $ 413,246 $ 29,543,853 282,250 $(2,604,250) $ 27,501,949
Reissuance of treasury
stock................. -- -- 7,500 -- (125) 1,875 9,375
Net income............. -- -- -- 22,104,914 -- -- 22,104,914
Dividends declared..... -- -- -- (20,186,975) -- -- (20,186,975)
---------- -------- ----------- ------------- -------- ----------- -------------
Balance, June 30, 1994.. 1,491,000 149,100 420,746 31,461,792 282,125 (2,602,375) 29,429,263
Purchase of treasury
stock................. -- -- -- 125 (3,958) (3,958)
Reissuance of treasury
stock................. -- -- 462,000 -- (8,400) 126,000 588,000
Net income............. -- -- -- 26,219,823 -- -- 26,219,823
Dividends declared..... -- -- -- (24,126,887) -- -- (24,126,887)
---------- -------- ----------- ------------- -------- ----------- -------------
Balance, June 30, 1995.. 1,491,000 149,100 882,746 33,554,728 273,850 (2,480,333) 32,106,241
Reissuance of treasury
stock................. -- -- 702,945 -- (12,600) 179,055 882,000
Net income............. -- -- -- 30,225,880 -- -- 30,225,880
Dividends declared..... -- -- -- (28,735,388) -- -- (28,735,388)
---------- -------- ----------- ------------- -------- ----------- -------------
Balance, June 30, 1996.. 1,491,000 149,100 1,585,691 35,045,220 261,250 (2,301,278) 34,478,733
Reissuance of treasury
stock (unaudited) .... -- -- 1,134,396 -- (19,250) 267,791 1,402,187
Net income (unau-
dited)................ -- -- -- 24,142,680 -- -- 24,142,680
Distributions to share-
holders
(unaudited)........... -- -- -- (48,407,375) -- -- (48,407,375)
Distributions and re-
capitalization of Win-
ning Ways, Inc. (unau-
dited)................ (1,491,000) (149,100) (2,720,087) (182,327,938) (242,000) 2,033,487 (183,163,638)
Issuance of common
stock to GFSI Hold-
ings, Inc. (net of is-
suance costs of
$1,472,637) (unau-
dited)................ 10,000 100 49,938,863 -- -- -- 49,938,963
---------- -------- ----------- ------------- -------- ----------- -------------
Balance at March 28,
1997 (unaudited) ...... 10,000 $ 100 $49,938,863 $(171,547,413) -- $ -- $(121,608,450)
========== ======== =========== ============= ======== =========== =============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995, AND 1996 AND
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 28, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, NINE MONTHS ENDED
---------------------------------------- -------------------------
MARCH 31, MARCH 28,
----------- ------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income............. $ 22,104,914 $ 26,219,823 $ 30,225,880 $25,270,127 $ 24,142,680
Adjustments to recon-
cile net income to net
cash provided by oper-
ating activities:
Depreciation and amor-
tization.............. 2,302,955 2,860,190 3,200,951 2,378,965 2,543,823
(Gain) loss on sale or
disposal of property,
plant and equipment... 5,673 156,869 1,009 10,202 (24,567)
Deferred income tax-
es.................... -- -- -- -- 993,621
Increase in cash value
of life insurance..... (638,166) (519,580) (331,967) (242,646) (919,616)
Extraordinary loss on
early extinguishment
of debt............... -- -- -- -- 2,473,192
Changes in operating
assets and liabili-
ties:
Accounts receivable,
net................... 860,105 (4,993,971) (4,502,972) (2,962,248) (2,978,634)
Income tax receiv-
able.................. -- -- -- -- (664,529)
Inventories, net....... (4,017,993) (1,873,099) 1,701,718 4,466,398 (103,633)
Prepaid expenses and
other assets.......... 1,331,544 271,658 665,925 613,996 (207,828)
Accounts payable and
accrued expenses...... 2,481,751 1,783,226 3,039,727 (1,110,425) 566,516
------------ ------------ ------------ ----------- ------------
Net cash provided by
operating activi-
ties................ 24,430,783 23,905,116 34,000,271 28,424,369 25,821,025
------------ ------------ ------------ ----------- ------------
Cash flows from invest-
ing activities:
Proceeds from sales of
property, plant and
equipment............. 259,149 733,698 131,032 121,781 946,153
Purchases of property,
plant and equipment... (2,856,257) (4,988,639) (2,611,019) (1,359,659) (2,511,716)
------------ ------------ ------------ ----------- ------------
Net cash used by in-
vesting activities.. (2,597,108) (4,254,941) (2,479,987) (1,237,878) (1,565,563)
------------ ------------ ------------ ----------- ------------
Cash flows from financ-
ing activities:
Net changes to short-
term borrowings....... (9,829,398) 6,200,000 (1,000,000) (2,000,000) (4,000,000)
Issuance of senior sub-
ordinated notes....... -- -- -- -- 125,000,000
Proceeds from long-term
debt.................. 9,700,000 -- -- 1,000,000 67,000,000
Payments on long-term
debt.................. (1,613,838) (2,326,424) (2,639,378) (6,261,234) (24,276,038)
Cash paid for penalties
related to early ex-
tinguishment of debt.. -- -- -- -- (2,390,546)
Cash paid for financing
costs................. -- -- -- -- (9,952,136)
Distributions to stock-
holders............... (20,186,975) (24,126,887) (28,735,388) (18,897,387) (48,407,375)
Distributions and re-
capitalization of
Winning Ways, Inc..... -- -- -- -- (183,163,638)
Issuance of Common
Stock to GFSI Hold-
ings, Inc. ........... -- -- -- -- 49,938,963
Proceeds from sale of
treasury stock........ 9,375 588,000 882,000 882,000 1,402,187
Purchase of treasury
stock................. -- (3,958) -- -- --
------------ ------------ ------------ ----------- ------------
Net cash used by fi-
nancing activities.. (21,920,836) (19,669,269) (31,492,766) (25,276,621) (18,826,442)
------------ ------------ ------------ ----------- ------------
Net increase (de-
crease) in cash..... (87,161) (19,094) 27,518 1,909,870 5,429,020
Cash and cash equiva-
lents,
Beginning of period.... 218,714 131,553 112,459 112,459 139,977
------------ ------------ ------------ ----------- ------------
End of period.......... $ 131,553 $ 112,459 $ 139,977 $ 2,022,329 $ 5,568,997
============ ============ ============ =========== ============
Supplemental cash flow
information:
Interest paid.......... $ 2,465,752 $ 2,496,989 $ 2,628,291 $ 2,159,201 $ 2,206,562
============ ============ ============ =========== ============
Supplemental schedule of
non-cash financing ac-
tivities:
Distributions payable
to Winning Ways, Inc.
stockholders.......... $ -- $ -- $ -- $ -- $ 10,022,141
============ ============ ============ =========== ============
</TABLE>
See notes to financial statements.
F-7
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996 AND
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 28, 1997 (UNAUDITED)
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. (the "Company"), a wholly owned
subsidiary of Holdings, to effect the acquisition of Winning Ways. On February
27, 1997, pursuant to the acquisition agreement, Holdings and the Company
acquired all of the issued and outstanding capital stock of Winning Ways, and
immediately thereafter merged Winning Ways with and into GFSI, Inc. with GFSI,
Inc. as the surviving entity. All of the capital stock of Winning Ways
acquired by Holdings in connection with the acquisition was contributed to the
Company 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 MCIT 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 the Company (the "Equity
Contribution"); (ii) the Company entered into a credit agreement (the "New
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) the Company issued $125.0 million of Senior Subordinates Notes (the
"Senior Subordinated Notes") which were purchased by institutional investors
through a Regulation 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 are reflected in the accompanying unaudited financial
statements of the Company as of and for the nine months ended March 28, 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 include
Winning Ways through February 27, 1997 and the merged entity, GFSI, Inc.,
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:
<TABLE>
<S> <C>
New Credit Agreement................................................ $ 68.0
New 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
======
USE 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
======
</TABLE>
F-8
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996 AND
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 28, 1997 (UNAUDITED)
Subsequent to the recapitalization transactions described above, the Company
is a wholly-owned subsidiary of Holdings. Holdings is dependent upon the cash
flows of the Company to provide funds to service $25.0 million of Holdings
subordinated notes. The annual cash flow requirements to service Holdings
subordinated notes is $3 million (principal due in balloon payment in 2008).
Pursuant to the terms of a deferred limited interest guarantee between the
Company and Holdings, the Company is obligated to pay accrued and unpaid
interest on the Holdings subordinated Notes under certain limited
circumstances. Additionally, Holdings' cumulative non-cash preferred stock
dividends will total $3.2 million annually. Holdings preferred stock may be
redeemed at stated value ($27.0 million) plus accrued dividends with mandatory
redemption in 2009. The annual cash flow requirements relative to the Holdings
subordinated notes and Holdings preferred stock are not reflected in the
accompanying unaudited financial statements as of March 28, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--GFSI, Inc. (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. The Company's customer base is spread
throughout the United States.
FISCAL YEAR--On January 1, 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 fiscal year ended June 30. Due to conversion, the nine month
period ended March 28, 1997 contains 39 weeks. The nine month period ended
March 31, 1996 contains 39 weeks.
CASH AND CASH EQUIVALENTS--The Company 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 $1,570,917 and $1,922,038 at June 30, 1995 and 1996,
respectively and $906,387 (unaudited) at March 28, 1997.
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:
<TABLE>
<S> <C>
Buildings and improvements.................................... 40 years
Furniture and fixtures........................................ 3-10 years
</TABLE>
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.
INTEREST RATE SWAP AGREEMENTS--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 agreements are
recognized as other income (expense) when terminated in conjunction with the
retirement of the associated debt. Gains and losses are deferred and amortized
to interest expense over the remaining life of the associated debt to the
extent such debt remains outstanding. Redesignations which are appropriately
matched against underlying debt instruments will continue to qualify for
settlement accounting.
F-9
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1995 AND 1996 AND
NINE MONTHS ENDED MARCH 31, 1996 AND MARCH 28, 1997 (UNAUDITED)
ADVERTISING COSTS. All costs related to advertising the Company's products
are expensed in the period incurred. Advertising expenses totaled $813,320,
$865,341, and $1,011,784 for the years ended June 30, 1994, 1995 and 1996,
respectively, and $781,865 (unaudited) and $1,108,537 (unaudited) for the nine
months ended March 31, 1996 and March 28, 1997, respectively.
INCOME TAXES--Effective July 1, 1982, the Company 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 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.
In addition upon consummation of the Transactions, the Company became a
party to a tax-sharing agreement with Holdings. As such, the taxable income of
the Company is included in the consolidated federal and state income tax
returns of Holdings. The Company's income tax provision subsequent to February
27, 1997 has been calculated as if the Company would have filed separate
federal and state income tax returns.
Supplemental information relative to the Statements 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.
UNAUDITED INTERIM FINANCIAL INFORMATION--The unaudited interim financial
information as of March 28, 1997 and for the nine months ended March 31, 1996
and March 28, 1997 has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the interim information. Operating
results for the nine months ended March 28, 1997 are not necessarily
indicative of the results that may be expected for the entire year ending June
30, 1997.
NEW ACCOUNTING STANDARDS--Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," was implemented on July 1, 1996. The adoption of
this Statement did not have a material impact on the Company's financial
position or results of operations.
F-10
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30,
----------------------- MARCH 28,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land....................................... $ 2,442,373 $ 2,442,373 $ 2,442,373
Buildings and improvements................. 17,235,686 18,392,598 19,140,216
Furniture and fixtures..................... 15,851,182 16,722,972 15,848,370
----------- ----------- -----------
35,529,241 37,557,943 37,430,959
Less accumulated depreciation.............. 11,779,797 14,521,591 16,292,088
----------- ----------- -----------
23,749,444 23,036,352 21,138,871
Construction in progress................... 1,762 2,237 1,045,918
----------- ----------- -----------
$23,751,206 $23,038,589 $22,184,789
=========== =========== ===========
</TABLE>
The net book value of assets under capital lease were $1,653,662 and
$1,576,876 at June 30, 1995 and 1996, respectively.
4. SHORT-TERM BORROWINGS
At June 30, 1996, the Company had a $40,000,000 unsecured line of credit
with floating interest of 5.37%. The floating interest rate is based on a 40
basis point spread over bankers acceptance, federal funds, or LIBOR rates
adjusted daily. 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 current ratio of
greater than 1.3 to 1.0, a cash flow coverage ratio of greater than 1.5 to 1.0
and a leverage ratio of less than 3.3 to 1.0. Borrowings against this line
totaled $8,000,000 and $7,000,000 at June 30, 1995 and 1996, respectively.
Letters of credit against this line for unshipped merchandise aggregated
$18,708,772, and $23,512,080 at June 30, 1995 and 1996, respectively.
As discussed in Note 9 to the financial statements, the floating interest
rate on the above line of credit is partially converted to a fixed interest
rate of 5.30% by an interest rate swap agreement. The notional amount of the
interest rate swap agreement fluctuates based on the Company's anticipated
level of short term borrowing with the maximum notional amount equalling
$33,100,000. This interest rate swap agreement was terminated on February 27,
1997 in conjunction with the early retirement of debt. The gain realized by
the Company of $300,000 on the terminated swap was deferred and will be
amortized over the life of the New Credit Agreement.
In conjunction with the recapitalization transactions (see note 1), the
Company replaced the $40,000,000 unsecured line of credit whereby, at March
28, 1997, the Company had a $50,000,000 secured line of credit (the "Line")
with floating interest of 7.81%. The Line is secured by substantially all of
the property of the Company and is subject to general and financial covenants
that place certain restrictions on the Company. 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
$3,000,000 (unaudited) at March 28, 1997.
F-11
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Letters of credit against this line at March 28, 1997, for unshipped
merchandise aggregated $18,610,609 (unaudited). Stand-by letters of credit
issued against the line at March 28, 1997, aggregated $18,105,686 (unaudited).
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30,
----------------------- MARCH 28,
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
10.125% credit agreement with bank to
borrow up to $10,000,000, unsecured,
payable in monthly principal
installments of $119,048 plus interest
through July 1, 1997 when the remaining
unpaid principal and accrued interest
is due (paid off on February 27, 1997-
unaudited).............................. $ 5,714,286 $ 4,285,714 $ --
Floating interest $10,000,000 line of
credit agreement maturing in July 1997.
Interest was 5.71% at June 30, 1996 and
6.00% at December 31, 1996 (paid off on
February 27, 1997-unaudited)............ 9,000,000 8,000,000 --
10.28% first mortgage loan, secured by
building and equipment (with a carrying
value of $9,556,710 at June 30, 1996),
payable in monthly installments of
$88,935 through February 1, 2006 when
the remaining unpaid principal and
accrued interest is due (paid off on
February 27, 1997-unaudited)............ 9,631,130 9,550,324 --
5.78% Industrial revenue bonds, payable
in amounts equal to the principal and
interest payments due on the bonds
through 1998 (paid off on February 27,
1997-unaudited)......................... 570,000 440,000 --
Senior Subordinated Notes, 9.625%
interest rate, due 2007................. -- -- 125,000,000
Term Loan A, variable interest rate,
7.81% at March 28, 1997, due 2002....... -- -- 40,000,000
Term Loan B, variable interest rate,
8.31% at March 28, 1997, due 2004....... -- -- 25,000,000
----------- ----------- ------------
24,915,416 22,276,038 190,000,000
Less current portion..................... 1,639,443 1,658,160 3,375,000
----------- ----------- ------------
$23,275,973 $20,617,878 $186,625,000
=========== =========== ============
</TABLE>
The above agreements which were in effect at June 30, 1995 and 1996
contained certain restrictions and covenants, the most restrictive of which
require the Company to maintain a current ratio of greater than 1.3 to 1.0, a
cash flow coverage ratio of greater than 1.5 to 1.0 and a leverage ratio of
less than 3.3 to 1.0.
As discussed in Note 9 to the financial statements, the floating interest
rate on the $10,000,000 line of credit agreement is partially converted to
fixed interest rate of 5.62% by a $7,000,000 notional amount interest rate
swap agreement terminating on November 18, 2000. The floating interest rate is
based generally on the higher of the corporate base rate of the federal funds
rate plus 50 basis points adjusted daily. 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. Accordingly, the unrealized gain of
$173,208 at termination was not recognized.
F-12
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Scheduled reduction of long-term debt at June 30, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1997.......................................................... $ 1,658,160
1998.......................................................... 11,101,387
1999.......................................................... 264,942
2000.......................................................... 121,792
2001.......................................................... 134,919
Thereafter.................................................... 8,994,838
-----------
$22,276,038
===========
</TABLE>
Included in the foregoing schedule of long-term debt as of June 30, 1995 and
1996 is the following capital lease information on the Company's 100,000
square foot manufacturing and distribution facility. At March 28, 1997, no
capital lease obligations were outstanding.
<TABLE>
<CAPTION>
JUNE 30,
----------------- MARCH 28,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Total minimum lease payments..................... $639,326 $479,657 $ --
Less amounts representing interest............... 69,326 39,657 --
-------- -------- --------
Present value of net minimum lease payments...... $570,000 $440,000 $ --
======== ======== ========
</TABLE>
On February 27, 1997 (unaudited), the Company entered into the New 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 $20,000,000 ("Term Loan B" and collectively, with Term Loan A, the "Term
Loans") and (iii) the $50,000,000 secured line of credit. At closing of the
recapitalization transaction, $68,000,000 was borrowed under the New Credit
Agreement to finance the transactions described in Note 1 to the financial
statements.
The New Credit Agreement is secured by substantially all of the property of
the Company and is subject to general and financial covenants that place
certain restrictions on the Company. 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.
In addition, on February 27, 1997, the Company issued the 9 5/8% Senior
Subordinated Notes due 2007 (the "Subordinated Notes") in the aggregate
principal amount of $125,000,000 in a Regulation 144A private placement.
Proceeds from the Subordinated Notes were also used to finance the
transactions described in Note 1 to the financial statements.
Interest on the Subordinated Notes is payable semi-annually in cash in
arrears on September 1 and March 1, commencing September 1, 1997. The
Subordinated Notes mature on March 1, 2006 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:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.813%
2003........................................................ 103.208
2004........................................................ 101.604
2005 and thereafter......................................... 100.000
</TABLE>
F-13
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At any time prior to March 1, 2000, the Company may redeem up to 40% of the
original aggregate principal amount of the 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, the Company will be
required, subject to certain conditions, to make an offer to purchase the
Subordinated Notes at a price equal to 101% of the principal amount plus
accrued and unpaid interest to the date of purchase.
The Subordinated Notes are senior unsecured obligations of the Company and
pursuant to the terms of the 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 the Company, including
borrowings under the New Credit Agreement.
At March 28, 1997, the Subordinated Notes estimated fair value approximated
their carrying value.
The 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 March 28, 1997, the Company was
in compliance with all such covenants.
Aggregate maturities of the Company's long-term debt as of March 28, 1997
are as follows assuming a 52/53 week fiscal year:
<TABLE>
<CAPTION>
FISCAL YEAR,
------------
<S> <C>
1998...................................................... $ 3,375,000
1999...................................................... 4,875,000
2000...................................................... 6,125,000
2001...................................................... 7,625,000
2002...................................................... 9,500,000
Thereafter................................................ 158,500,000
------------
Total..................................................... $190,000,000
============
</TABLE>
In connection with the early extinguishment of debt existing at February 27,
1997, the Company recognized an extraordinary loss in the statement of income
for the nine months ended March 28, 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 $2,390,547 ($1,434,328 on an after-tax basis)
incurred in connection with the prepayment of the Company's first mortgage
loan.
6. COMMITMENTS AND CONTINGENCIES
Prior to February 27, 1997, the Company was obligated under stock redemption
agreements to repurchase all shares owned upon the death of any stockholder
and termination of key employee stockholders. The price to be paid was
determined annually by the Board of Directors, and the Company could elect a
ten year installment payment plan. The majority of the commitment arising from
these agreements was funded by life insurance contracts.
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.
F-14
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. PROFIT SHARING AND (401K) PLAN
The Company provides a non-contributory defined contribution profit sharing
plan (the "Plan") covering all eligible employees. Contributions are at the
discretion of the Board of Directors of the Company and totaled $1,079,215 and
$875,756 for the years ended June 30, 1995 and 1996, respectively.
On August 1, 1996, the Company amended the Plan to include employee directed
contributions with an annual Company discretionary matching contribution and
renamed the Plan the Winning Ways, Inc. Profit Sharing and 401(k) Plan.
Participants exercise control over the assets of his or her account and choose
from a broad range of investment alternatives. Contributions made by the
Company to the plan related to the 401(k) and profit sharing portions totaled
$168,651 (unaudited) and $263,062 (unaudited), respectively, for the nine
months ended March 28, 1997.
8. INCOME TAXES (UNAUDITED)
The provision for income taxes for the nine months ended March 28, 1997
consists of the following.
<TABLE>
<CAPTION>
MARCH 28,
1997
-----------
(UNAUDITED)
<S> <C>
Current income tax benefit........................................ ($ 664,529)
Deferred income tax provision..................................... 993,621
-----------
Total income tax provision........................................ $ 329,092
===========
Allocated to:
Operating activities............................................. $1,318,726
Extraordinary loss............................................... (989,634)
-----------
$ 329,092
===========
</TABLE>
The income tax provision differs from amounts computed at the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
MARCH 28, 1997
-----------------
AMOUNT %
---------- -----
(UNAUDITED)
<S> <C> <C>
Income tax provision at the statutory rate................... $9,431,050 35.0%
Income attributable to S-Corporation earnings................ (9,146,583) (33.9)
Change in tax status to C-Corporation........................ 993,621 3.7
Effect of state income taxes, net of federal benefit......... 40,638 0.1
---------- -----
$1,318,726 4.9%
========== =====
</TABLE>
The Company's operating results are included in Holding's consolidated
income tax returns. The provision for current income taxes is based on the
Company's taxable income calculated as if the Company filed a separate tax
return.
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 March 28, 1997, along with
the income tax effect of each, are as follows:
F-15
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARCH 28, 1997
DEFERRED INCOME TAX
--------------------
CURRENT LONG-TERM
ASSETS LIABILITIES
-------- -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable........................................ $218,392 $ --
Inventory valuation........................................ 239,666 --
Property, plant, and equipment............................. -- 1,509,425
Accrued expenses........................................... 57,746 --
-------- ----------
Total...................................................... $515,804 $1,509,425
======== ==========
</TABLE>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company engages in transactions which result in off-balance sheet risk.
Interest rate swap agreements are primarily 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. 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 counterparties by
entering into interest rate swap agreements only with major financial
institutions.
The fair values of the Company's interest rate swap agreements are not
recognized in the financial statements as they are used in conjunction with
on-balance sheet liabilities and were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
CONTRACT OR ESTIMATED INTEREST RATE
NOTIONAL FAIR ------------------
AMOUNT VALUE RECEIVABLE PAYABLE
----------- --------- ---------- -------
<S> <C> <C> <C> <C>
June 30, 1995....................... $ 7,000,000 $219,000 5.83% 5.62%
June 30, 1996....................... 21,900,000 850,000 5.39 5.62
March 28, 1997 (unaudited).......... 7,000,000 249,000 5.47 5.43
</TABLE>
The Company has entered into two interest rate swap agreements to exchange
fixed interest rates for floating rate debt payments. One interest rate swap
agreement carries a notional amount of $7,000,000 and terminates on November
18, 2000 as further described in Note 5 to the financial statements. The
notional amount of the other interest rate swap agreement fluctuates based on
the Company's anticipated level of short-term borrowing with the maximum
notional amount equalling $33,100,000 as further described in Note 4 to the
financial statements. This agreement was entered into in January 1996 to be
effective July 1, 1996. The interest rate swap agreement was terminated on
February 27, 1997.
10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires that the Company disclose estimated
fair values for its financial instruments which include cash and cash
equivalents, accounts receivables, short-term borrowings, accounts payables,
long-term debt and interest rate swap agreements.
F-16
<PAGE>
GFSI, INC.
(FORMERLY WINNING WAYS, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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--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--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value of debt issues with fixed rates. The carrying value of
floating rate debt is a reasonable estimate of their fair value.
INTEREST RATE SWAP AGREEMENTS--Quoted market prices or dealer quotes are
used to estimate the fair value of interest rate swap agreements.
The following summarizes the estimated fair value of financial instruments,
by type:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------
1995 1996 MARCH 28, 1997
----------------------- ----------------------- -----------------------
(UNAUDITED)
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets and liabilities:
Cash and cash
equivalents............ $ 112,459 $ 112,459 $ 139,977 $ 139,977 $ 5,568,997 $ 5,568,997
Accounts receivable..... 18,080,480 18,080,480 22,583,452 22,583,452 25,562,086 25,562,086
Short-term borrowings... 8,000,000 8,000,000 7,000,000 7,000,000 3,000,000 3,000,000
Accounts payable........ 7,383,223 7,383,223 9,667,536 9,667,536 8,079,744 8,079,744
Long-term debt.......... 24,915,416 27,387,454 22,276,038 24,562,702 190,000,000 190,000,000
Off Balance Sheet
Financial Instruments:
Interest rate swap
agreements
(asset/(liability)) ... -- 219,000 -- 850,000 -- 249,000
</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.
11. 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 $2,262,967 and $3,080,718 for the years ended June 30,
1995 and 1996, respectively, and $3,443,695 (unaudited) for the nine months
ended March 28, 1997.
F-17
<PAGE>
During the nine months ended March 28, 1997 (unaudited), the Company loaned
the affiliates $150,000 and $700,000 under separate promissory notes to
finance the affiliates purchase of embroidery equipment from the Company and
to provide for working capital. The equipment was sold at net book value. Each
of the promissory notes is unsecured, has an interest rate of 6.8% per annum
and matures July 1, 2000.
Subsequent to the consummation of the transactions at February 27, 1997, and
prior to March 28, 1997, a shareholder purchased the corporate aircraft from
the Company resulting in no gain or loss to the Company.
Subsequent to March 28, 1997, the cash value of life insurance was
liquidated into cash or transferred to the respective individuals at carrying
value. As a result, cash surrender value of life insurance is included in the
accompanying balance sheet at March 28, 1997, as a current asset.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI, Inc.
Lenexa, Kansas
We have audited the accompanying balance sheet of GFSI, Inc. ("GFSI") as of
January 23, 1997. This financial statement is the responsibility of GFSI's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of GFSI as of January 23, 1997 in conformity
with generally accepted accounting principles.
As described in Note 2 to the balance sheet, GFSI, Inc. completed
recapitalization transactions on February 27, 1997 which included the merger
of Winning Wasy, Inc. with and into GFSI, Inc. with GFSI, Inc. as the
surviving entity.
Deloitte & Touche LLP
Kansas City, Missouri
January 24, 1997
[February 27, 1997 as to Note 2]
F-19
<PAGE>
GFSI, INC.
BALANCE SHEET
JANUARY 23, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.................................................................... $100
----
Total................................................................. $100
====
STOCKHOLDER'S EQUITY
Common Stock, $.01 par value; 10,000 shares authorized; 1 share issued
and outstanding........................................................ $ 1
Additional paid-in-capital.............................................. 99
----
Total................................................................. $100
====
</TABLE>
See notes to balance sheet.
F-20
<PAGE>
GFSI, INC.
NOTES TO BALANCE SHEET
JANUARY 23, 1997
1. FORMATION
GFSI, a Delaware corporation, was formed on January 15, 1997. GFSI for the
sole purpose of becoming a wholly-owned subsidiary of GFSI Holdings, Inc.
("Holdings") concurrent with the consummation of the acquisition of Winning
Ways, Inc. (the "Acquisition"), described below.
GFSI is expected to affect an acquisition of Winning Ways, Inc. for a total
purchase price of $232.9 million, subject to certain post-closing net worth
adjustments, with closing to occur in February 1997. In order to finance the
Acquisition, GFSI intends to offer $125.0 million in aggregate principal
amount of Senior Subordinated Notes in a Rule 144A private placement
transaction.
In addition to the Senior Subordinated Notes, GFSI is expecting to enter
into a new credit facility and receive contributions of capital from Holdings
in order to complete the Acquisition.
GFSI received an initial capital contribution of $100 on January 16, 1997 in
exchange for 1 share of common stock. There have been no other transactions
involving GFSI as of January 23, 1997.
2. SUBSEQUENT EVENT
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. (the "Company"), a wholly owned
subsidiary of Holdings, to effect the acquisition of Winning Ways. On February
27, 1997, pursuant to the acquisition agreement, Holdings and the Company
acquired all of the issued and outstanding capital stock of Winning Ways, and
immediately thereafter merged Winning Ways with and into GFSI, Inc. with GFSI,
Inc. as the surviving entity. All of the capital stock of Winning Ways
acquired by Holdings in connection with the acquisition was contributed to the
Company 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: (1) the Jordan Company, its affiliates
and MCIT 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 the Company (the "Equity
Contribution"); (ii) the Company entered into a credit agreement (the "New
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 commercial and stand-by
letters of credit at Closing; and (iii) the Company issued $125.0 million of
Senior Subordinates Notes (the "Senior Subordinated Notes") which were
purchased by institutional investors through a Regulation 144A private
placement. The Equity Contribution was comprised of (i) a contribution of
$13.6 million form the Jordon 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.
Subsequent to the recapitalization transactions described above, the Company
is a wholly-owned subsidiary of Holdings. Holdings is dependent upon the cash
flows of the Company to provide funds to serve $25.0 million of Holdings
subordinated notes. The annual cash flow requirements to service Holdings
subordinated notes is $3 million (principal due in balloon payment in 2008).
Additionally, Holdings' cumulative non-cash preferred stock dividends will
total $3.2 million annually. Holdings preferred stock may be redeemed at
stated value ($27.0 million) plus accrued dividends with mandatory redemption
in 2009. The annual cash flow requirements relative to the Holdings
subordinated notes and Holdings preferred stock will not be refected in the
financial statements of the Company.
F-21
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 15
The Transactions......................................................... 22
Use of Proceeds.......................................................... 23
Capitalization........................................................... 24
Selected Historical Financial Data....................................... 25
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 27
Business................................................................. 34
Management............................................................... 44
Principal Stockholders................................................... 49
The Exchange Offer....................................................... 50
Description of Notes..................................................... 59
Description of Certain Indebtedness...................................... 87
Certain Transactions..................................................... 88
Plan of Distribution..................................................... 90
Federal Income Tax Consequences.......................................... 91
Legal Matters............................................................ 91
Experts.................................................................. 91
Available Information.................................................... 92
Unaudited Pro Forma Statements of Income................................. P-1
Index to Financial Statements............................................ F-1
</TABLE>
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$125,000,000
GFSI, INC.
9 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
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PROSPECTUS
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JULY 24, 1997
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