-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KIEJ7yGAH/h5r8rDL6nSOfNUZPJ0kkF5KWBZIOcv+ksl5K3DJcDeMPgZ6iiD+6TA lK4I3Q2ExorrOkg0QcJJBg== 0000950131-97-006403.txt : 19971030 0000950131-97-006403.hdr.sgml : 19971030 ACCESSION NUMBER: 0000950131-97-006403 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19971029 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GFSI HOLDINGS INC CENTRAL INDEX KEY: 0001036180 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 742810744 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-38951 FILM NUMBER: 97702569 BUSINESS ADDRESS: STREET 1: 9700 COMMERCE PARKWAY CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9138880445 MAIL ADDRESS: STREET 1: 9700 COMMERCE PKWY CITY: LENEXA STATE: KS ZIP: 66219 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- GFSI HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- DELAWARE 2396 74-2810744 (STATE OF OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) GFSI HOLDINGS, INC. 9700 COMMERCE PARKWAY LENEXA, KANSAS 66219 (913) 888-0445 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- JOHN L. MENGHINI, PRESIDENT GFSI HOLDINGS, INC. 9700 COMMERCE PARKWAY LENEXA, KANSAS 66219 (913) 888-0445 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- WITH A COPY TO: PHILIP J. NIEHOFF MAYER, BROWN & PLATT 190 SOUTH LASALLE STREET CHICAGO, ILLINOIS 60603 (312) 701-7843 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE - ----------------------------------------------------------------------------- 11.375% Series B Senior Discount Notes Due 2009.................. $108,467,780 46.1% $50,000,000 $15,151.52
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated solely for the purposes of calculating the registration fee. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED OCTOBER 29, 1997 PROSPECTUS GFSI HOLDINGS, INC. OFFER TO EXCHANGE ITS 11.375% SERIES B SENIOR DISCOUNT NOTES DUE 2009 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, FOR ANY AND ALL OF ITS OUTSTANDING 11.375% SERIES A SENIOR DISCOUNT NOTES DUE 2009 --------------- GFSI Holdings, Inc., a Delaware corporation ("Holdings" or the "Company"), 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 $50 million initial Accreted Value of 11.375% Series B Senior Discount Notes due 2009 (the "New Notes"), of the Company for a like initial Accreted Value of the Company's issued and outstanding 11.375% Series A Senior Discount Notes due 2009 (the "Old Notes" and collectively with the New Notes, the "Notes"), with the holders (each holder of Old Notes, a "Holder") thereof. Holdings is a holding Company whose principal asset is all of the common stock of GFSI, Inc., a Delaware company ("GFSI") . The Company will receive no proceeds in connection with the Exchange Offer. 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 Notes." The New Notes will be issued at a substantial discount from their principal amount. See "Description of Notes" and "Certain Federal Income Tax Considerations." The Notes will accrete at a rate of 11.375%, compounded semi- annually to an aggregate principal amount of $108,467,780 at September 15, 2004. Thereafter, the Notes will accrue interest at the rate of 11.375% per annum, payable semi-annually in cash on March 15 and September 15 of each year, commencing on March 15, 2005. The Notes will be redeemable at the option of Holdings, in whole or in part, at any time on or after September 15, 2002 in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined), if any, thereon to the date of redemption. In addition, at any time on or after March 15, 1998 and prior to September 15, 2002, Holdings, at its option, may redeem the Notes, in whole or in part, at a redemption price of 105.688% of the Accreted Value (determined at the date of redemption), upon the occurrence of a Change of Control (as defined) or with the net cash proceeds of an Equity Offering (as defined) of Holdings or GFSI. See "Description of Notes--Redemption of Notes." In addition, upon the occurrence of a Change of Control, each holder of Notes will have the right to require Holdings to repurchase all or any part of such holder's Notes at an offer price in cash equal to 100% of the Accreted Value (determined at the date of redemption) thereof on the date of repurchase (if such date of repurchase is prior to September 15, 2004) or 100% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase (if such date of repurchase is on or after September 15, 2004). See "Description of Notes-- Mandatory Offers to Purchase Notes--Change of Control." There can be no assurance that, in the event of a Change of Control, Holdings would have sufficient funds to repurchase all Notes tendered. See "Risk Factors--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 the 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 , 1997, UNLESS EXTENDED. (Cover continued on following page) --------------- 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" BEGINNING ON PAGE 13 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 , 1997 The Notes will be general unsecured obligations of Holdings, will rank pari passu in right of payment to all existing and future Senior Indebtedness of Holdings, and senior in right of payment to any future subordinated indebtedness of Holdings. As indebtedness of Holdings, however, the Notes will be effectively subordinated to all indebtedness of GFSI. As of June 27, 1997, the aggregate principal amount of indebtedness of GFSI to which the Notes would have been effectively subordinated would have been approximately $193.0 million. The Indenture (as defined) 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 , 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 will pay the expenses of the Exchange Offer. GFSI and Holdings were organized by affiliates of The Jordan Company ("TJC") and management to acquire Winning Ways, Inc. ("Winning Ways") in February 1997 (the "Acquisition"). The Old Notes were issued and sold as part of an offering on September 17, 1997 (the "Old 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. In the Old Offering certain holders of Subordinated Discount Notes and Preferred Stock issued and sold units (the "Units") consisting of 11.375% Subordinated Discount Notes due 2009 (the "Subordinated Discount Notes") and 11.375% Series D Preferred Stock due 2009 (the "Preferred Stock") which were exchangeable at the option of Holdings any time on or after September 29, 1997 into Old Notes. On October 23, 1997 the Units were exchanged into Old Notes (the "Old Exchange"). 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 Purchaser (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, 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. 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. i 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 meeting the requirements of the Securities Act 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, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." ii 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 the context indicates or otherwise requires, references in this Prospectus to the "Company" are to GFSI Holdings, Inc. and its subsidiaries and their respective predecessors, including GFSI, Inc., references to "Holdings" are to GFSI Holdings, Inc., references to "GFSI" are to GFSI, Inc., and references to a fiscal year are to the twelve months ended June 30 of such year, except 1997, which is June 27. THE COMPANY Holdings and GFSI, a wholly owned subsidiary of Holdings, were organized by affiliates of TJC and management to acquire Winning Ways in February 1997. Holdings' current operations are conducted exclusively through GFSI and Holdings' only significant asset is the outstanding capital stock of GFSI. 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 teams and events. 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 fiscal 1997, the Company generated net sales and EBITDA of $183.3 million and $39.1 million, 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 sales force 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 are: . The Resort Division (36.5% of fiscal 1997 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." 1 . The Corporate Division (30.6% of fiscal 1997 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 (20.8% of fiscal 1997 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, 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. See "Business--Sales Divisions--College Bookstore Division." . The Sports Specialty Division (5.8% of fiscal 1997 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 marketed 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." 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. 2 . 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 customer's 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 own an aggregate of 50% of the capital stock of Holdings. See "The Transactions." The management team has 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. ---------------- Holdings was incorporated in the state of Delaware on December 23, 1996. On February 27, 1997, GFSI and Holdings effected the Acquisition, in which Winning Ways merged with and into GFSI. The principal executive offices of the Company are located at 9700 Commerce Parkway, Lenexa, Kansas 66219 and their telephone number is (913) 888-0445. THE TRANSACTIONS Holdings and GFSI were organized by affiliates of 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, Barry S. Golden, Terry Glenn, Kirk Kowelewski, Mark Schimpf, Anthony Gagliano, David Churchman, Dave Geenens, 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 indebtedness of Winning Ways, 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 GFSI (the "Equity Contribution"); (ii) GFSI consummated its offering (the "GFSI Offering") of 9 5/8% Senior 3 Subordinated Notes Due 2007 (the "GFSI Senior Subordinated Notes"); and (iii) GFSI entered into a credit agreement (the "Credit Agreement") providing for borrowings of up to $115.0 million. The Equity Contribution was comprised of: (i) a contribution of $13.6 million from the Jordan Investors to Holdings in exchange for preferred stock (the "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 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 (the "Holdings Subordinated Notes") . Approximately $0.8 million of the contribution from the Management Investors was financed by loans from Holdings. For additional information, see "The Transactions." The Equity Contribution, the consummation of the GFSI Offering, the execution of the Credit Agreement, the consummation of the Acquisition and the repayment of certain indebtedness of GFSI's are collectively referred to herein as the "Transactions." GFSI'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 $20.6 million, representing the accumulated and undistributed S-Corporation earnings of GFSI as of February 27, 1997. GFSI recognized, with a post-closing adjustment, approximately $1.0 million in net deferred income tax liabilities upon the conversion from S-Corporation to C- Corporation status for income tax reporting purposes. GFSI does not anticipate any future material adverse tax liabilities arising from this distribution and conversion. THE EXCHANGE OFFER Securities Offered............. $50 million initial Accreted Value of 11.375% Series B Senior Discount Notes due 2009. 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 Units and Old Notes; Registration Rights.... The Units were issued on September 17, 1997 to Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial Purchaser"), which placed the Units with "qualified institutional buyers" (as such term is defined in Rule 144A promulgated under the Securities Act). On October 23, 1997 the Units were exchanged for the Old Notes. In connection therewith, the Company executed and delivered for the benefit of the holders of Old Notes a 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 November 16, 1997 with respect to the Exchange Offer and (ii) to use its best efforts to cause the Registration Statement to be declared effective by the Commission on or prior to January 15, 1998. 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 4 Registration Rights Agreement, it will be required to pay liquidated damages ("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 Accreted Value 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 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) cannot 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 5 that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of 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 the requests for information should be directed to the Exchange Agent. See "The Exchange Offer--Procedures for Tendering Old Notes." Tenders, Expiration Date; Withdrawal.................... The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997 or such later date and time to which it is extended. 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, 6 financial condition, operations, results of operations or prospects of Holdings 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 of Old Notes for New Notes pursuant to the Exchange Offer will not result in any income, gain or loss to the Holders or the Company. See "Certain Federal Income Tax Considerations" for a discussion 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................. State Street Bank and Trust Company is serving as Exchange Agent in connection with the Exchange Offer. 7 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 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 February 14, 1998, 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 ("Liquidated Damages"). 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 accrete from the most recent date to which accretion has been recognized on the Old Notes or, if no accretion has been recognized on the Old Notes, from September 17, 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 accretion from the most recent date to which accretion has been recognized or, if no accretion has been recognized, from September 17, 1997. Old Notes accepted for exchange will cease to accrete from and after the date of consummation of the Exchange Offer. Holders of Old Notes whose Old Notes are accepted will not receive any accretion or payment in respect of interest on such Old Notes otherwise payable on any interest payment or accretion date which occurs on or after the consummation of the Exchange Offer. THE NEW NOTES Securities Offered............. $50 million initial Accreted Value of 11.375% Series B Senior Discount Notes due 2009. Maturity....................... September 15, 2009. Accretion...................... The New Notes will accrete at a rate of 11.375%, compounded semi-annually to an aggregate principal amount of $108,467,780 at September 15, 2004. Interest....................... The Old Notes were and the New Notes will be issued at a substantial discount from their principal amount at maturity, and there will not be any cash payment of interest prior to March 15, 2005. Commencing September 15, 2004, interest on the Notes will accrue at the rate of 11.375% per annum, payable semi-annually in cash, on March 15 and September 15 of each year, commencing March 15, 2005. 8 Original Issue Discount........ For U.S. federal income tax purposes, the Old Notes were and the New Notes will be treated as having been issued with "original issue discount" ("OID"). Thus, although interest will not be payable on the Exchange Notes prior to March 15, 2005, holders of Notes will be required to include amounts in gross income for federal income tax purposes in advance of the receipt of cash payment to which the income is attributable. See "Certain Federal Income Tax Considerations." Optional Redemption............ On or after March 15, 1998 and prior to September 15, 2002, the Notes will be redeemable at the option of Holdings, in whole or in part, at any time in cash at 105.688% of Accreted Value thereof (determined at the date of redemption) only (i) in the event of a Change in Control of Holdings or GFSI and/or (ii) with the net proceeds of one or more Equity Offerings of Holdings or GFSI. On or after September 15, 2002, the Notes will be redeemable at the option of Holdings, in whole or in part, at any time in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidation Damages, if any, thereon to the date of redemption. See "Description of New Notes-- Redemption of Notes--Optional Redemption." Ranking........................ The Old Notes were and the New Notes will be general unsecured obligations of Holdings, will rank pari passu in right of payment with all existing and all future senior indebtedness of Holdings and will rank senior in right of payment with any Subordinated Indebtedness (as defined) incurred by Holdings in the future. As indebtedness of Holdings, however, the Notes will be effectively subordinated to all indebtedness of GFSI. As of June 27, 1997, on a pro forma basis, after giving effect to the Old Offering and the Exchange, the Exchange Notes would have been effectively subordinated to approximately $193.0 million of indebtedness of GFSI. See "Risk Factors--Holding Company Structure; Effective Subordination." The Indenture will permit Holdings and GFSI to incur additional Indebtedness subject to certain limitations. See "Description of Notes--Certain Covenants" and "Description of Certain Indebtedness." Change of Control.............. Upon the occurrence of a Change of Control, each holder of Notes will have the right to require Holdings to repurchase all or any part of such holder's Notes at a price equal to 100% of the Accreted Value thereof on the date of repurchase (if such date of repurchase is prior to September 15, 2004) or 100% of the aggregate principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the date of repurchase (if such date of repurchase is on or after September 15, 2004). See "Description of Notes--Mandatory Offers to Purchase Notes-- Change of Control" and "--Certain Definitions." There can be no assurance that, in the event of a 9 Change of Control, Holdings would have sufficient funds to repurchase all Notes tendered. See "Risk Factors--Change of Control." Certain Covenants.............. The Indenture contains covenants that, among other things, limit the ability of Holdings and its Restricted Subsidiaries (as defined) 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, Holdings will be required to offer to purchase Notes at a price equal to 100% of the Accreted Value or principal amount thereof, as applicable, 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." For a more detailed description of the terms of the New Notes, see "Description of Notes." FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY HOLDERS OF THE OLD NOTES, SEE "RISK FACTORS." 10 SUMMARY FINANCIAL DATA (DOLLARS IN THOUSANDS) Holdings is structured as a holding company whose only significant asset is the capital stock of GFSI. The following table presents: (i) historical operating and other data of the Company for fiscal 1993, 1994, 1995, 1996 and 1997; and (ii) pro forma data of the Company as of and for the year ended June 27, 1997. The historical financial statements for the Company for fiscal 1993, 1994 and 1995 have been audited by Donnelly Meiners Jordan Kline, and the historical financial statements for fiscal 1996 and 1997 have been audited by Deloitte & Touche LLP. 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 periods. 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 merged with and into GFSI, a new entity with no previous operations, with GFSI as the surviving entity. The statements of income data and other data presented below includes historical information of Winning Ways through the merger date and the merged entity, Holdings, subsequent thereto.
FISCAL YEAR ENDED, ---------------------------------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 27, 1993 1994 1995 1996 1997 -------- -------- -------- ---------- ---------- STATEMENTS OF INCOME DATA: Net sales.............. $121,131 $128,171 $148,196 $ 169,321 $ 183,298 Gross profit........... 50,936 53,724 63,327 72,013 80,691 Operating expenses..... 28,201 29,151 34,428 39,179 44,752 Operating income(1).... 22,735 24,573 28,899 32,834 35,939 OTHER DATA: EBITDA(2).............. $ 24,733 $ 26,876 $ 31,759 $ 36,035 $ 39,114 Cash flows from operating activities.. 20,985 24,431 23,905 34,000 26,029 Cash flows from investing activities.. (2,163) (2,597) (4,255) (2,480) 3,643 Cash flows from financing activities.. (19,130) (21,921) (19,669) (31,493) (28,695) Depreciation and amortization.......... 1,998 2,303 2,860 3,201 3,175 Capital expenditures... 2,304 2,856 4,989 2,611 2,615 EBITDA margin(3)....... 20.4% 21.0% 21.4% 21.3% 21.3% Ratio of earnings to fixed charges(4)...... 9.1x 10.0x 11.4x 12.6x 3.5x PRO FORMA DATA(5): Operating income(1).... $ 36,022 Income before extraordinary item.... 6,664 Ratio of earnings to fixed charges(4)...... 1.4x AS OF JUNE 27, 1997 ---------------------- PRO ACTUAL FORMA ---------- ---------- BALANCE SHEET DATA: Cash and cash equivalents........... $ 1,117 $ 1,147 Total assets........... 96,153 96,114 Long-term debt (including current portion) and redeemable preferred stock................. 246,080 246,080 Total stockholders' equity (deficit)...... (174,215) (173,633)
11 - -------- (1) Operating income presented for the year ended June 27, 1997 does not include the extraordinary loss related to the early extinguishment of debt in the amount of $2,474 ($1,484 on an after-tax basis). See the audited statements of income and the related notes thereto included elsewhere in this prospectus. (2) EBITDA represents operating income plus depreciation and amortization. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles ("GAAP"), it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditures 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) In the computation of the ratio of earnings to fixed charges, earnings consist of income before income taxes, plus fixed charges. Fixed charges consist of interest expense on indebtedness, plus that portion of lease rental expense representative of the interest factor. Adjustments to pro forma fixed charges include the additional interest expense related to the new indebtedness and a decrease in redeemable preferred stock dividends incurred upon completion of the Transactions and the Old Offering. See "The Transactions." (5) See the unaudited pro forma financial statements and the related notes thereto included elsewhere in this Prospectus. 12 RISK FACTORS Holders of the Old Notes should consider carefully the risk factors set forth below as well as the 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. This Prospectus contains certain forward-looking statements, including statements containing the words "believes," "anticipates," "expects" and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: adverse changes in national or local economic conditions, increased competition, changes in availability, cost and terms of financing, changes in operating expenses and other factors referenced in this Prospectus, including, without limitation, under the captions "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business." Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Prospectus to reflect future events or developments. 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 a 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 13 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." HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION Holdings is a holding company and does not have any material operations or assets other than ownership of capital stock of GFSI. Accordingly, the Notes will be effectively subordinated to all existing and future liabilities of GFSI, including indebtedness under the Credit Agreement and the GFSI Senior Subordinated Notes. As of June 27, 1997, on a pro forma basis after giving effect to the Old Offering and the Exchange Offer, the aggregate amount of indebtedness of GFSI to which the holders of the Notes would be effectively subordinated would have been approximately $193.0 million. Holdings and GFSI may incur additional indebtedness in the future, subject to certain limitations contained in the instruments governing their indebtedness. Any right of Holdings to participate in any distribution of the assets of GFSI upon liquidation, reorganization or insolvency of GFSI (and the consequent right of the holders of the Notes to participate in distribution of those assets) will be subject to the prior claims of GFSI's creditors. The obligations of GFSI under the Credit Agreement are secured by substantially all of its assets. See "Description of Certain Indebtedness--Credit Agreement." RANKING OF NOTES The Notes will be senior unsecured obligations of Holdings and will rank pari passu with all Senior Indebtedness of Holdings. In the event of the insolvency, liquidation, reorganization, dissolution or other winding up of Holdings, or upon the maturity of any Senior Indebtedness, whether by lapse of time, acceleration or otherwise, the holders of Senior Indebtedness must be paid in full in cash before any payment of principal or interest in respect of the Notes. As a result, holders of Notes may recover ratably less than general creditors of Holdings. The Notes will effectively rank junior to any secured Indebtedness of Holdings and to Indebtedness and claims of creditors of Holdings' subsidiaries, including Indebtedness incurred by GFSI under the Credit Agreement. At June 27, 1997, the aggregate indebtedness of Holdings' subsidiaries was approximately $193.0 million on a pro forma basis, after giving effect to the Old Offering and the Exchange Offer. See "Description of Notes--Ranking." The Indenture will permit Holdings and its subsidiaries to incur additional Senior Indebtedness, subject to certain limitations. See "Description of Certain Indebtedness and Other Obligations" and "Description of Notes--Certain Covenants." LIMITATION ON PAYMENT OF FUNDS TO HOLDINGS BY GFSI Holdings' cash flow, and consequently its ability to pay dividends and debt service, including its obligations under the Notes, is dependent on the cash flow of GFSI and the payment of funds by GFSI to Holdings in the form of loans, dividends or otherwise. GFSI has no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or to make any funds available therefor. In addition, the Credit Agreement and the indenture governing the GFSI Senior Subordinated Notes impose, and agreements entered in the future may impose, significant restrictions on the payment of dividends and the making of loans by GFSI to Holdings. ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS The Old Notes were and the New Notes will be issued at a substantial original issue discount from their principal amount at maturity. Consequently, holders of the New Notes will be required to include amounts in gross income for federal income tax purposes in advance of receipt of the cash payments to which the income is attributable. See "Certain Federal Income Tax Considerations" for a more detailed discussion of the federal income tax consequences to the holders of the New Notes resulting from the purchase, ownership or disposition thereof. 14 Under the Indenture, in the event of an acceleration of the maturity of the New Notes, upon the occurrence of an Event of Default, the holders of the New Notes may be entitled to recover only the amount that may be declared due and payable pursuant to the Indentures, which may be less than the principal amount at maturity of the New Notes. If a bankruptcy case is commenced by or against Holdings under the United States Bankruptcy Code, the claim of a holder of New Notes with respect to the principal amount thereof may be limited to an amount equal to the sum of (i) the consideration paid for the New Notes at the time of the Exchange Offer and (ii) that portion of the OID (as determined on the basis of such issue price) which is not deemed to constitute "unmatured interest" for purposes of the United States Bankruptcy Code. Accordingly, holders of the New Notes under such circumstances may, even if sufficient funds are available, receive a lesser amount than they would be entitled to under the express terms of the Indenture. In addition, there can be no assurance as to exactly how a bankruptcy court would determine the amount of OID on the New Notes, assuming such a court determines that the Exchange Offer created OID. Thus, there is no assurance that a bankruptcy court would compute the accrual of interest under the same rules as those used for the calculation of OID under federal income tax law and, accordingly, a holder might be required to recognize a gain or loss in the event of a distribution related to such a bankruptcy case. LEVERAGE AND DEBT SERVICE Holdings has substantial consolidated indebtedness and debt service obligations. At June 27, 1997, Holdings' total indebtedness, including current portion, would have been approximately $246.1 million (including redeemable preferred stock) and its net capital deficiency would have been $173.6 million, in each case on a pro forma basis after giving effect to the Old Offering and the Exchange Offer. In addition, subject to the restrictions under the Credit Agreement and the indenture governing the GFSI Senior Subordinated Notes, GFSI may incur additional indebtedness, from time to time, and, subject to the restrictions under the Indenture, Holdings may incur additional indebtedness from time to time. As a result of accounting for the Transactions as a leveraged recapitalization under GAAP, total stockholders' equity of Holdings changed from $38.7 million at December 31, 1996 to a deficit of approximately $173.6 million as of June 27, 1997, on a pro forma basis. See "The Transactions," "Capitalization" and "Description of Notes-- Limitation on Incurrence of Indebtedness." The level of Holdings' indebtedness could have important consequences to holders of the Notes including: (i) a substantial portion of GFSI's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) Holdings' ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited; and (iii) Holdings' level of indebtedness could limit its flexibility to react to changes in its operating environment and economic conditions generally. Holdings' 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 for GFSI under the Credit Agreement or a successor facility. If Holdings 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. CONTROL BY PRINCIPAL STOCKHOLDERS AND CERTAIN TRANSACTIONS The Company's executive officers and directors (and their respective affiliates, including TJC) (collectively, the "Principal Stockholders") own a majority of the issued and outstanding capital stock of Holdings. See "Principal Stockholders." The Principal Stockholders, if voting together, have sufficient voting power to elect the entire Board of Directors of the Company, exercise control over the business, policies and affairs of the Company, and, in general, determine the outcome of any corporate transaction or other matters submitted to the 15 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. Caputo, Jordan and Zalaznick, all directors of the Company, are partners of TJC. In addition, the Company will maintain affiliate transactions with certain members of senior management, and the Company has entered into certain affiliate transactions with TJC. See "Certain Transactions." RESTRICTIVE COVENANTS The Indenture restricts, among other things, Holdings' 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 Credit Agreement contains other and more restrictive covenants and prohibits GFSI from prepaying other indebtedness. The indebtedness outstanding under the Credit Agreement is secured by liens on substantially all of the personal property and certain real property of GFSI. The 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 Credit Agreement and certain permitted liens; (iv) mergers, consolidations, and sales of all or a substantial part of GFSI's business or property; (v) the sale of assets; (vi) the making of capital expenditures; and (vii) operating lease rentals. The Credit Agreement also requires GFSI to comply with certain financial ratios, including minimum interest coverage, minimum fixed charge coverage and maximum leverage ratios. The ability of GFSI to comply with these and other provisions of the Credit Agreement may be affected by events beyond GFSI's control. The breach of any of these covenants could result in a default under the 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 Credit Agreement, together with accrued interest, to be due and payable, and GFSI would be prohibited from making payments to Holdings until the default is cured or all of the GFSI indebtedness under the Credit Agreement is paid or satisfied in full. If Holdings were unable to repay such borrowings, such lenders could proceed against their collateral. If the indebtedness under the 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--Credit Agreement." CHANGE OF CONTROL In the event of a Change of Control, each holder of Notes will be entitled to require Holdings 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." In the event that a Change of Control occurs, the Company would likely be required to refinance the indebtedness outstanding under the Credit Agreement, the GFSI Senior Subordinated Notes and the 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 Holdings 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. Moreover, the ability of Holdings to repurchase or redeem the Notes following a Change of Control will be limited by Holdings' then- 16 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 Holdings or the Trustee (as defined) 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 Holdings and, thus, the removal of incumbent management. 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 October 23, 1997 pursuant to the Old Exchange 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 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 GFSI, 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. On the basis of its historical financial information, its recent operating history as discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition" and other factors, the Company believes that, after giving effect to the Old Offering and Exchange Offer, the Company was and 17 will be solvent, did and will have sufficient capital for the business in which it is engaged and did not and will not have incurred debts beyond its ability to pay such debts as they mature. There can be no assurance, however, that a court would necessarily agree with these conclusions. 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 1997, the Company had 256 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 1997. 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 markets 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, the Company's 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 1997, 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--Credit Agreement." FOREIGN SOURCING In fiscal 1997, the Company sourced approximately 77% of its blanks through its foreign suppliers located in Taiwan, Korea, Malaysia, Hong Kong, Singapore, Indonesia, Pakistan, China, Honduras, Israel, Fiji and Sri Lanka. The Company continually evaluates its sourcing options and strives to maintain a concentration of no more than 20% sourced product from any one particular foreign country. During fiscal 1997, approximately 70% of the foreign supplied product was provided by Malaysia, Taiwan, Honduras and Korea, while concentrations 18 from the other named foreign countries made up the remaining 30%. 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 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 "Business--Employees," "Management" 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 1998 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 19 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. 20 THE TRANSACTIONS Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by affiliates of TJC and management to acquire Winning Ways. Pursuant to 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 indebtedness of Winning Ways, 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 GFSI; (ii) GFSI consummated the GFSI Offering; and (iii) GFSI entered into the Credit Agreement providing for borrowings of up to $115.0 million. The Equity Contribution is comprised of: (i) a contribution of $13.6 million from the Jordan Investors to Holdings in exchange for 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 was financed by loans from Holdings. Prior to the closing of the Old Offering, the holders of Holdings Subordinated Notes and preferred stock of Holdings exchanged those securities for the Subordinated Discount Notes and Preferred Stock which constituted the Units. GFSI'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 $20.6 million, representing the accumulated and undistributed S-Corporation earnings of GFSI as of February 27, 1997. GFSI 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. GFSI does not anticipate any future material adverse tax liabilities arising from this distribution and conversion. The following chart depicts the organizational structure and common equity interest in Holdings and GFSI following consummation of the Transactions. LOGO 21 USE OF PROCEEDS The Company will not receive any proceeds from the Exchange Offer. CAPITALIZATION (DOLLARS IN MILLIONS) The following table sets forth the capitalization of Holdings as of June 27, 1997 and the pro forma capitalization of Holdings as of June 27, 1997, as adjusted to reflect the Old Offering and the Exchange Offer. The table should be read in conjunction with the financial statements of Holdings and related notes thereto included elsewhere in the Prospectus. See "The Transactions," "Selected Financial Data," the unaudited pro forma financial statements of Holdings and the historical financial statements of Holdings and the related notes thereto included elsewhere in this Prospectus.
AS OF JUNE 27, 1997 ---------------- PRO ACTUAL FORMA ------- ------- Cash and cash equivalents............................... $ 1.1 $ 1.1 ======= ======= Long-term debt (excluding current maturities) GFSI: Credit Agreement.................................... $ 64.6 $ 64.6 9 5/8% Senior Subordinated Notes due 2007........... 125.0 125.0 ------- ------- Total GFSI long-term debt......................... 189.6 189.6 Holdings: Senior Discount Exchange Notes due 2009............. 0.0 50.0 Subordinated Discount Notes......................... 25.0 0.0 ------- ------- Total Holdings long-term debt..................... 25.0 50.0 Total long-term debt.................................... 214.6 239.6 Redeemable preferred stock.............................. 28.1 3.1 Holdings' stockholders' equity (deficit)................ (174.2) (173.6) ------- ------- Total capitalization.................................... $ 68.5 $ 69.1 ======= =======
22 SELECTED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 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. Factors 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. Holdings is structured as a holding company whose only significant asset is the capital stock of GFSI. The following table presents: (i) historical operating and other data of the Company for fiscal 1993, 1994, 1995, 1996 and 1997; and (ii) balance sheet data as of June 30, 1993, 1994, 1995 and 1996, and June 27, 1997. The historical financial statements for the Company for fiscal 1993, 1994 and 1995 have been audited by Donnelly Meiners Jordan Kline, and the historical financial statements for fiscal 1996 and 1997 have been audited by Deloitte & Touche LLP. The selected financial data set forth below should be read in conjunction with "The Transactions," "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 merged with and into GFSI, a new entity with no previous operations, with GFSI as the surviving entity. The statements of income data and other data presented below includes historical information of Winning Ways through the merger date and the merged entity Holdings subsequent thereto.
FISCAL YEAR ENDED, ------------------------------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 27, 1993 1994 1995 1996 1997 -------- -------- -------- -------- --------- STATEMENTS OF INCOME DATA: Net sales................. $121,131 $128,171 $148,196 $169,321 $ 183,298 Gross profit.............. 50,936 53,724 63,327 72,013 80,691 Operating expenses........ 28,201 29,151 34,428 39,179 44,752 Operating income(1)....... 22,735 24,573 28,899 32,834 35,939 Income before extraordinary item....... 20,055 22,105 26,220 30,226 25,500 OTHER DATA(2): EBITDA(3)................. $ 24,733 $ 26,876 $ 31,759 $ 36,035 $ 39,114 Cash flows from operating activities............... 20,985 24,431 23,905 34,000 26,029 Cash flows from investing activities............... (2,163) (2,597) (4,255) (2,480) 3,643 Cash flows from financing activities............... (19,130) (21,921) (19,669) (31,493) (28,695) Depreciation and amortization............. 1,998 2,303 2,860 3,201 3,175 Capital expenditures...... 2,304 2,856 4,989 2,611 2,615 EBITDA margin(4).......... 20.4% 21.0% 21.4% 21.3% 21.3% Ratio of earnings to fixed charges(5)............... 9.1x 10.0x 11.4x 12.6x 3.5x BALANCE SHEET DATA: Cash and cash equivalents. $ 219 $ 132 $ 112 $ 140 $ 1,117 Total assets.............. 67,510 70,176 76,938 78,711 96,153 Long-term debt (including current portion) and redeemable preferred stock.................... 19,157 27,242 24,915 22,276 246,080 Total stockholders' equity (deficit)................ 27,502 29,429 32,106 34,479 (174,215)
23 - -------- (1) Operating income presented for the year ended June 27, 1997 does not include the extraordinary loss related to the early extinguishment of debt in the amount of $2,474 ($1,484 on an after-tax basis). See the audited statements of income and the related notes thereto included elsewhere in this prospectus. (2) Distributions per share totaled $16.91, $16.70, $19.82 and $23.37 for the years ended June 30, 1993, 1994, 1995 and 1996 respectively. Distributions per share in fiscal 1997 are not comparable nor meaningful due to the leveraged recapitalization transactions and the conversion to a C- corporation from an S-corporation for income tax reporting purposes which occurred during fiscal 1997. See "The Transactions." (3) EBITDA represents operating income plus depreciation and amortization. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with GAAP, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditures and working capital requirements. In addition, the Company believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. (4) EBITDA margin represents EBITDA as a percentage of net sales. (5) The ratio of earnings to fixed charges computed on a pro forma basis would have been 1.4x for the fiscal year ended June 27, 1997. In the computation of the ratio of earnings to fixed charges, earnings consist of income before income taxes, plus fixed charges. Fixed charges consist of interest expense on indebtedness, plus that portion of lease rental expense representative of the interest factor. Adjustments to pro forma fixed charges include the additional interest expense related to the new indebtedness and a decrease in redeemable preferred stock dividends incurred upon completion of the Transactions and the Old Offering. See "The Transactions." 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 teams and events. 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 sales force with a specialized knowledge of its particular markets and customers. The Company's four divisions include: (i) the Resort division (36.5% of fiscal 1997 net sales); (ii) the Corporate division (30.6% of fiscal 1997 net sales); (iii) the College Bookstore division (20.8% of fiscal 1997 net sales); and (iv) the Sports Specialty division (5.8% of fiscal 1997 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. 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. 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 thousands):
FISCAL 1997 NET SALES -------------- NET % OF DIVISION CUSTOMERS SALES TOTAL -------- --------- ----- ----- Resort Destination resorts, family entertainment companies, hotel chains, golf clubs, cruise lines, and casinos $ 66,906 36.5% Corporate Large and small companies serving a variety of industries 56,179 30.6 College Bookstore Major colleges and universities as well as college bookstore lease operators 38,053 20.8 Sports Specialty Sports specialty stores and catalogues, stadium stores, and professional sports teams and their staffs 10,678 5.8 Other Various institutions, organizations and individuals 11,482 6.3 -------- ----- $183,298 100.0% ======== =====
25 The following sets forth the amount and percentage of net sales for each of the periods indicated (dollars in thousands):
FISCAL YEAR ENDED -------------------------------------------- JUNE 30, JUNE 30, JUNE 27, 1995 1996 1997 -------------- -------------- -------------- Resort............................. $ 60,047 40.5% $ 67,739 40.0% $ 66,906 36.5% Corporate.......................... 38,316 25.9% 47,167 27.9% 56,179 30.6% Bookstore.......................... 37,823 25.5% 37,733 22.3% 38,053 20.8% Sports Specialty................... 3,154 2.1% 6,342 3.7% 10,678 5.8% Other.............................. 8,856 6.0% 10,340 6.1% 11,482 6.3% -------- -------- -------- Total.............................. $148,196 $169,321 $183,298 ======== ======== ========
RESULTS OF OPERATIONS The following table sets forth certain historical financial information of the Company, expressed as a percentage of net sales, for fiscal 1995, 1996 and 1997:
FISCAL YEAR ENDED -------------------------- JUNE 30, JUNE 30, JUNE 27, 1995 1996 1997 -------- -------- -------- Net sales...................................... 100.0% 100.0% 100.0% Gross profit................................... 42.7 42.5 44.0 EBITDA......................................... 21.4 21.3 21.3 Operating income............................... 19.5 19.4 19.6
Fiscal Year Ended June 27, 1997 Compared to Fiscal Year Ended June 30, 1996 Net Sales. Net sales for fiscal 1997 increased 8.3% to $183.3 million from $169.3 million in fiscal 1996. The increase in net sales primarily reflects increases in net sales at the Company's Corporate and Sports Specialty divisions of 19.1% and 68.4%, respectively, and was partially offset by a slight decrease in net sales at the Resort division. These increases were driven primarily by volume increases due to continued account expansion and the introduction of new product lines through each distribution channel. Gross Profits. Gross profit for fiscal 1997 increased 12.1% to $80.7 million from $72.0 million in fiscal 1996, primarily as a result of the net sales increase described above. Gross profit as a percentage of net sales increased to 44.0% in fiscal 1997, from 42.5% in fiscal 1996. The increase in margin reflects a decrease in the cost of materials sold, as a percentage of net sales, from 50.0% in fiscal 1996 to 48.4% in fiscal 1997. These changes were driven primarily by growth in the Corporate division, which focuses on higher margin, production intensive embroidered products. Operating Expenses. Operating expenses for fiscal 1997 increased 14.3% to $44.8 million from $39.2 million in fiscal 1996 due primarily to increased sales and staffing levels. Operating expenses as a percentage of net sales increased to 24.4% for fiscal 1997, from 23.1% in fiscal 1996. The increase in operating expenses, as a percentage of net sales, is primarily due to an increase in non-recurring MIS consulting charges associated with the installation of the Company's new MIS system which increased from $625,000 in fiscal 1996 to $2.2 million in fiscal 1997. EBITDA. EBITDA for fiscal 1997 increased 8.6% to $39.1 million from $36.0 million in fiscal 1996, primarily as a result of the net sales and related gross profit increase described above. EBITDA as a percentage of net sales remained consistent at 21.3% in fiscal 1997 and 21.3% in fiscal 1996. The consistent margin level reflects the change in gross profit described above offset by an increase in selling and general and administrative expenses. 26 Operating Income. Operating income for fiscal 1997 increased 9.5% to $35.9 million from $32.8 million in fiscal 1996, primarily as a result of the net sales increase described above. Operating income as a percentage of net sales increased to 19.6% in fiscal 1997, from 19.4% in fiscal 1996. This increase in operating income reflects the change in EBITDA described above. Other Income (Expense). Other expense for fiscal 1997 increased 246.2% to $9.0 million from $2.6 million in fiscal 1996, primarily as a result of increased interest expense associated with the Company's recapitalization and subsequent issuance of $125 million Senior Subordinated Notes, borrowings of $68.0 million under the Credit Agreement and the issuance of the $25 million of subordinated notes. The effect of derivative financial instruments serve to minimize unplanned changes in interest expense due to changes in interest rates. Interest rate fluctuations and their effect were immaterial for the periods presented. A reasonable likely change in the underlying rate, price or index would not have a material impact on the financial position of the Company. Income Taxes. An income tax provision of $1.4 million was recorded for fiscal 1997 due to the Company's change in tax status from an S-Corporation to a C- Corporation for income tax reporting purposes which was effective February 27, 1997. The 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 approximately $1.0 million and an additional $400,000 of the income tax provision was related to operations, subsequent to the change in tax status. Extraordinary Item. The Company recognized an extraordinary loss for fiscal 1997 of $2.5 million ($1.5 million on after-tax basis) which consisted of a penalty incurred in the prepayment of the Company's mortgage and a write-off of previously capitalized deferred financing costs. Net Income. Net income for fiscal 1997 was $24.0 million compared to $30.2 million in fiscal 1996. The decrease in net income is primarily the result of interest expense, income taxes, and the extraordinary item, as mentioned above. 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 Sports Specialty divisions 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. 27 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. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities in fiscal 1997, 1996 and 1995 was $26.0 million, $34.0 million and $23.9 million, respectively. Changes in working capital resulted in cash sources (uses) of $(3.2) million, $0.9 million and $(4.8) million in fiscal 1997, 1996 and 1995, respectively. The decrease in cash provided by operating activities in fiscal 1997 from fiscal 1996 resulted from a decrease in net income, as previously discussed, in addition to increased inventory levels. The increase in cash provided by operating activities in 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 receivables. Cash provided by investing activities for fiscal 1997 was $3.6 million compared to cash used of $2.5 million and $4.3 million for fiscal 1996 and 1995, respectively. The decrease in cash used was a result of cash value of life insurance policy proceeds received of $5.3 million, in addition to proceeds from the sale of the corporate aircraft to a shareholder of the Company for its fair value of approximately $900,000. Capital expenditures in fiscal 1995 were $5.0 million and related to the $1.6 million purchase of a corporate aircraft from a non-affiliate of the Company. These expenditures were therefore in excess of the Company's normal capital expenditure requirements. Cash used in financing activities for fiscal 1997 was $28.7 million compared to cash used of $31.5 million and $19.7 million for fiscal 1996 and fiscal 1995, respectively. The cash used in financing activities for fiscal 1997 resulted from the cash used to complete the recapitalization transactions as previously described net of new borrowings under the Credit Agreement, the Senior Subordinated Notes and the Subordinated Notes. Cash used in financing activities in fiscal 1996 and 1995 was primarily used to make Subchapter S distributions to the Company's stockholders and scheduled loan principal payments. The Company believes that cash flow from operating activities and borrowings under the Credit Agreement will be adequate to meet the Company's short-term and long-term liquidity requirements prior to the maturity of its credit facilities in 2007, although no assurance can be given in this regard. The Company has no material capital commitments over the next twelve months. Under the Credit Agreement, the revolver provides $50 million of revolving credit availability (the "Revolver") (of which $3.0 million was borrowed as of June 27, 1997 and approximately $29.8 million was utilized for outstanding commercial and stand-by letters of credit). 28 As part of the Company's upgrade of its MIS, the Company believes that its new MIS will adequately address any concerns related to the year 2000 issue, without any additional expenditures. See "Risk Factors-- New Management Information System." GFSI anticipates paying dividends to Holdings to enable Holdings to pay corporate income taxes, interest on the Exchange Notes, fees payable under the TJC Agreement (as defined herein) and certain other ordinary course expenses incurred on behalf of GFSI. Holdings is dependent upon the cash flows of GFSI to provide funds to service the indebtedness represented by the Exchange Notes and will be dependent on the cash flows of GFSI to service the Exchange Notes. 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. 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 1997, 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. 29 BUSINESS Holdings and GFSI, a wholly owned subsidiary of Holdings, were organized by affiliates of TJC and management to effect the acquisition of Winning Ways. Holdings current operations are conducted exclusively through GFSI and Holdings' only significant asset is the capital stock of GFSI. The following is a description of the business of GFSI. 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 teams and events. 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 fiscal 1997, the Company generated net sales and EBITDA of $183.3 million and $39.1 million, 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 sales force 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. 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. 30 . 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 own an aggregate of 50% of the capital stock of 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. 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):
FISCAL 1997 NET SALES -------------------- DIVISION CUSTOMERS NET SALES % OF TOTAL -------- --------- --------- ---------- Resort Destination resorts, family $ 66.9 36.5% entertainment companies, hotel chains, golf clubs, cruise lines, and casinos Corporate Large and small companies serving a 56.2 30.6 variety of industries College Bookstore Major colleges and universities as 38.0 20.8 well as college bookstore lease operators Sports Specialty Sports specialty stores and 10.7 5.8 catalogues, stadium stores, and professional sports teams and their staffs Other Various institutions, organizations 11.5 6.3 and individuals ------ ----- $183.3 100.0% ====== =====
The following sets forth the amount and percentage of net sales for each of the periods indicated (dollars in thousands):
FISCAL YEAR ENDED, -------------------------------------------- JUNE 30, 1995 JUNE 30, 1996 JUNE 27, 1997 -------------- -------------- -------------- Resort............................. $ 60,047 40.5% $ 67,739 40.0% $ 66,906 36.5% Corporate.......................... 38,316 25.9% 47,167 27.9% 56,179 30.6% Bookstore.......................... 37,823 25.5% 37,733 22.3% 38,053 20.8% Sports Specialty................... 3,154 2.1% 6,342 3.7% 10,678 5.8% Other.............................. 8,856 6.0% 10,340 6.1% 11,482 6.3% -------- -------- -------- Total.............................. $148,196 $169,321 $183,298 ======== ======== ========
31 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 1997 net sales of $66.9 million, accounted for 36.5% of total net sales. The Resort division's net sales have grown from $50.2 million in fiscal 1994 to $66.9 million in fiscal 1997. The division's net sales have remained relatively constant as a percentage of total net sales, decreasing slightly from 38.9% in fiscal 1994 to 36.5% in fiscal 1997. 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 1997 net sales of $56.2 million, accounted for 30.6% of total net sales. The Corporate division's net sales have grown from $30.2 million in fiscal 1994 to $56.2 million in fiscal 1997. The division's net sales as a percentage of total net sales have increased from 23.4% in fiscal 1994 to 30.6% in fiscal 1997, 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 on an exclusive basis. Approximately 85% of the division's sales are directly to corporations and the remaining 15% are to jobbers, who then resell the Company's products to corporations. Jobbers are people who buy goods in quantity from manufacturers and sell them directly to dealers. 32 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 1997, Tandem Marketing accounted for approximately $4.9 million, or 8.7%, of the Corporate division's net sales, of which approximately 68% 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 1997 net sales of $38.0 million, accounted for 20.8% of total net sales. The College Bookstore division's net sales have grown from $35.9 million in fiscal 1994 to $38.0 million in fiscal 1997. 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 20.8% in fiscal 1997. 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. Sports Specialty Division. The Sports Specialty division, with fiscal 1997 net sales of $10.7 million, accounted for 5.8% 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 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. 33 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. 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. 34 HISTORICAL AND PROJECTED COLLEGE AND UNIVERSITY ENROLLMENT LOGO 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. 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 (STUDENTS IN MILLIONS) 35 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 27% of net sales for fiscal 1997. Current styles offered by the Company include classic crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops, vests, henleys and bottoms. Products are constructed of a wide range of quality fabrics including combed cotton, textured fleece, ribbed knit cotton and inside out fleece. The resulting product line offers customers a variety of styles ranging from relaxed, functional looks to more sophisticated, casual looks. Outerwear. The Company's outerwear products represented approximately 31% of net sales for fiscal 1997. 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 25% of net sales for fiscal 1997. 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 13% of net sales for fiscal 1997. 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 4% of net sales for fiscal 1997. 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 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 (approximately 77%) of the Company's blanks are contract manufactured 36 in various off-shore plants. The Company's imported items are currently manufactured in Taiwan, Korea, Malaysia, Hong Kong, Singapore, Indonesia, Pakistan, China, Honduras, Israel, Fiji and Sri Lanka. The Company continually evaluates its sourcing options and strives to maintain a concentration of no more than 20% sourced product from any one particular foreign country. During fiscal 1997, approximately 70% of the foreign supplied product was provided by Malaysia, Taiwan, Honduras and Korea, while concentrations from the other named foreign countries made up the remaining 30%. In fiscal 1997, approximately 23% of its blanks were 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:
MARKET PRIMARY COMPETITORS ------ ------------------- Highly fragmented--primarily local and regional compet- Resort itors Corporate HA-LO Marketing, Hermann Marketing, Swingster (American Marketing Industries) College Bookstore Champion Products, Jansport (VF Corp.), Cotton Exchange, Russell Athletic, M.V. Sports Sports Specialty Champion Products, Russell Corporation, Starter
Competition in each of the Company's markets generally is based on product design and decoration, customer service and overall product quality. The Company believes that it has been able to compete successfully because of its ability to create diverse and innovative designs, provide excellent customer service, leverage its GEAR brand name and differentiate its products on the basis of quality. EMPLOYEES The Company employs over 680 people at its two facilities in Lenexa, Kansas, of which approximately 35 are members of management, 285 are involved in either product design, customer service, sales support or administration and 360 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. 37 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 Richmont Apparel Group f.k.a. Softwear Athletics, Inc. ("Softwear") to produce and distribute GEAR For Sports(R)J 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 has entered into a three-year extension of the license 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 1997, net sales under the Company's 256 active licensing agreements totaled $25.0 million, or approximately 14% of the Company's net sales. In fiscal 1997, $18.5 million of College Bookstore division net sales, representing approximately 48.6% of the division's net sales and 10.1% of total net sales, were recorded under this division's 208 licensing agreements. In addition, in fiscal 1997, $5.3 million of Sports Specialty division net sales, representing approximately 50.0% of the division's net sales and 2.9% 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. 38 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 October 1, 1997:
NAME AGE POSITION WITH COMPANY ---- --- --------------------- 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 Vice President and Director John W. Jordan II....... 49 Director David W. Zalaznick...... 43 Director
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 Vice President and 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. 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 the Company. 39 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 arm's-length transaction to a nonaffiliated party may require the remaining stockholders to sell their stock on the same terms and conditions and (iv) grant each Stockholder piggyback registration rights to participate in certain registrations initiated by the Company. The Stockholders Agreement also contains certain material governance provisions which, among other things, (i) provide for the election of three directors (the "Management Directors") nominated by the Management Investors, three directors (the "Jordan Directors") nominated by the Jordan Investors and one director nominated by the Stockholders, (ii) prohibit the removal of the Management Directors other than by the Management Investors or the Jordan Directors other than by the Jordan Investors and (iii) require the approval of at least five directors of certain fundamental transactions affecting the Company, including any proposed dissolution, amendment to the Certificate of Incorporation or by-laws or merger, consolidation or sale of all or substantially all of the assets of the Company. The provisions described under "Stockholders Agreement" represent all of the material provisions of such agreement. DIRECTOR COMPENSATION Each director of the Company receives $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.
FISCAL OTHER ANNUAL POSITION YEAR SALARY BONUS COMPENSATION(1) -------- ------ -------- -------- --------------- Robert M. Wolff........................ 1997 $147,498 $ 0 $16,822 Chairman 1996 240,000 0 40,019 1995 240,000 288,000 41,518 John L. Menghini....................... 1997 $249,038 $300,000 $14,773 President and Chief 1996 225,000 300,000 31,136 Operating Officer 1995 225,000 300,000 32,502 Robert G. Shaw......................... 1997 $159,615 $120,000 $14,773 Senior Vice President and 1996 150,000 120,000 31,353 Chief Financial Officer 1995 125,000 100,000 32,558 Larry D. Graveel....................... 1997 $179,615 $120,000 $17,809 Senior Vice President 1996 170,000 120,000 27,416 1995 145,000 120,000 28,915 Michael H. Gary........................ 1997 $185,769 $120,000 $18,973 Senior Vice President 1996 150,000 120,000 28,579 1995 125,000 100,000 30,078
- -------- (1) Other annual compensation consists of car allowances, profit sharing, group medical benefits and individual beneficiary life insurance premiums paid by the Company. 40 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. Wolff Noncompetition Agreement. Effective upon the consummation of the Transactions, the Company 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 for a ten-year period ending on the tenth anniversary of the Acquisition, (ii) disclose at any time other than to the Company any Confidential Information (as defined in the Wolff Noncompetition Agreement) and (iii) engage in any business with the Company 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, the Company 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), the Company 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. 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 EBITDA (as defined in the Incentive Plan), if certain EBITDA targets are met. 41 PRINCIPAL STOCKHOLDERS The table below sets forth as of October 1, 1997 certain information regarding beneficial ownership of the common stock of Holdings held by (i) each of the Company's directors and executive officers who own shares of common stock of Holdings, (ii) all directors and executive officers of the Company as a group and (iii) each person known by Holdings to own beneficially more than 5% of its common stock. The Company believes that each individual or entity named has sole investment and voting power with respect to shares of common stock of Holdings indicated as beneficially owned by them, except as otherwise noted.
AMOUNT OF BENEFICIAL OWNERSHIP(1) ------------------- NUMBER OF PERCENTAGE SHARES OWNED -------- ---------- EXECUTIVE OFFICERS AND DIRECTORS: Robert M. Wolff(2)(3)...................................... 60.0000 3.0% John L. Menghini(2)(4)..................................... 257.0000 12.9 Robert G. Shaw(2)(5)....................................... 235.0000 11.8 Larry D. Graveel(2)(6)..................................... 110.0000 5.5 Michael H. Gary(2)(7)...................................... 110.0000 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).................................. 50.0000 2.5 All directors and executive officers as a group (8 persons).................................................. 978.6300 48.9 OTHER PRINCIPAL STOCKHOLDERS: MCIT PLC(10)............................................... 500.0000 25.0 Leucadia Investors, Inc.(11)............................... 125.0000 6.3
- -------- (1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. As of February 27, 1997, there were 2,000 shares of common stock of Holdings 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, New York 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, New York 10019. (11) The principal address of Leucadia Investors, Inc. is 315 Park Avenue South, New York, New York 10010. 42 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 the 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 43 certain 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) on or before November 16, 1997, file the Registration Statement with the Commission and (ii) on or before January 15, 1998, 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 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 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 44 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 5:00 p.m., New York City time, on , 1997; 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 , 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, $50,000,000 initial Accreted Value of the Old Notes is outstanding. This Prospectus, together with the Letter of Transmittal, is first being sent on or about , 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 45 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 State Street Bank and Trust Company (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 Instruction" 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 representative 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. 46 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 meeting the requirements of the Securities Act 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 an Accreted Value equal to that of the surrendered Old Note. Accordingly, registered Holders of New Notes on the relevant record date for the first interest accretion date following the consummation of the Exchange Offer will receive accretion from the most recent date to which interest has accreted on the Old Notes, or, if no interest has on the Old Notes, from October 23, 1997. Old Notes accepted for exchange will cease to accrete 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 accretion on such Old Notes otherwise recognizable on any interest accretion 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 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 47 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 the 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. 48 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 Holdings 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 49 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. EXCHANGE AGENT State Street Bank and Trust Company 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: State Street Bank and Trust Company, Exchange Agent: By Registered or By Overnight Courier or Hand: Certified Mail: State Street Bankand Trust Company Two International Place *State Street Bankand Trust Company 61 Broadway, Concourse Level Corporate Trust Window New York, New York 10006 *only during business hours State Street Bankand Trust Company P.O. Box 778 Boston, MA 02102-0078 Attn: Kellie Mullen or Boston, MA 02110 Attn: Kellie Mullen By Facsimile for Eligible Institutions: (617) 664-5395 For confirmation call: (617) 664-5587 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 $100,000. 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. 50 APPRAISAL RIGHTS HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER. 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 acquired 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 meeting the requirements of the Securities Act 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 jurisdiction 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. 51 DESCRIPTION OF NOTES GENERAL The Old Notes were and the New Notes will be issued pursuant to the indenture (the "Indenture") between Holdings and State Street Bank and Trust Company, as trustee (the "Trustee"), in a private transaction that is not subject to the registration requirements of the Securities Act. 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." Under certain circumstances, Holdings will be able to designate any of its Subsidiaries as Non-Restricted Subsidiaries. Non-Restricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. As of date of the Indenture, none of Holdings' Subsidiaries will be Non-Restricted Subsidiaries. The Old Notes were and the New Notes will be general unsecured obligations of Holdings, will rank pari passu in right of payment to all existing and future senior indebtedness of Holdings and will rank senior in right of payment to all subordinated indebtedness of Holdings. As obligations of a holding company, the Notes will be effectively subordinated to all obligations of the Subsidiaries of Holdings, including the Senior Subordinated Notes and the Credit Agreement. The Old Notes were and the New Notes will be issued at a substantial discount from their principal amount and will mature on September 15, 2009. The Notes will accrete from September 17, 1997 at a rate of 11.375%, compounded semi-annually, to an aggregate principal amount of $108,467,780 on September 15, 2004. Thereafter, the Notes will accrue interest at the rate of 11.375% per annum, payable semi-annually in cash on March 15 and September 15 of each year, commencing on March 15, 2005, to holders of record on the immediately preceding September 1 and March 1. 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 September 15, 2004. Interest will be computed on the basis of a 360-day year of twelve 30-day months. All references to the principal amount of the Notes herein are, unless otherwise indicated, references to the principal amount at final maturity. The Notes will be issued in denominations of $1,000 principal amount 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 Holdings 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 Holdings, 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. Holdings may change the Paying Agent or Registrar without prior notice to holders of Notes, and Holdings or any of its Subsidiaries may act as Paying Agent or Registrar. REDEMPTION OF NOTES Optional Redemption. Except as set forth below, the Notes may not be redeemed at the option of Holdings prior to September 15, 2002. During the 12- month period beginning on September 15 of the years indicated below, the Notes will be redeemable, at the option of Holdings, in whole or in part, on at least 30 but not more 52 than 60 days' notice to each holder of Notes to be redeemed in cash, at the redemption prices (expressed as percentages of the Accreted Value for all redemption dates prior to September 15, 2004 and of the principal amount for all redemption dates including September 15, 2004 and hereafter) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the redemption date:
YEAR PERCENTAGE ---- ---------- 2002.......................... 105.688% 2003.......................... 103.792% 2004.......................... 101.896% 2005 and thereafter........... 100.000%
Notwithstanding the foregoing, on or after March 15, 1998 and prior to September 15, 2002, Holdings may (but shall not have the obligation to) redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the of the Accreted Value (determined at the date of redemption) thereof, with the net proceeds of one or more Equity Offerings of Holdings or the Company; provided, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. In addition, upon the occurrence of a Change of Control on or after March 15, 1998 and prior to September 15, 2002, Holdings, at its option, may redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof. The Company shall give not less than 30 and not more than 60 days' notice of such redemption within 30 days following a Change of Control. The restrictions on optional redemptions contained in the Indenture do not limit Holdings' 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," Holdings is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 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 Holdings 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 100% of the Accreted Value (determined at the date of redemption) thereof (if such offer is prior to September 15, 2004) or 100% of the outstanding principal amount thereof (if such offer is on or after September 15, 2004), plus any accrued and unpaid interest and Liquidated Damages, if any. Holdings 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 Holdings. Except as described under "--Change of Control," the Indenture does not contain provisions that permit the holders of Notes to require Holdings 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 Holdings, management of Holdings or an affiliate of Holdings, if such transaction does not result in a Change of Control. In addition, the ability of Holdings to repurchase Notes following a Change of Control will be limited by Holdings' then-available resources. The Change of Control provisions may not be waived by the Board of Directors of Holdings or the Trustee without the consent of holders of at least a majority in principal amount of the Notes. See "--Amendment, Supplement and Waiver." Holdings expects that a Change of Control would constitute a default under certain indebtedness of Holdings' Subsidiaries. The occurrence of a Change of Control may also have an adverse impact on the ability of Holdings to obtain additional financing in the future. The ability of holders of Notes to require that Holdings 53 purchase Notes upon a Change of Control may deter persons from effecting a takeover of Holdings. 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 Holdings 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 Holdings 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 any Restricted Subsidiary) providing for Net Proceeds in excess of $4.0 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 Holdings 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 Holdings 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 Holdings 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 Holdings 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 Indebtedness of Holdings' 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 Holdings 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 Holdings 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 Holdings' or such Restricted Subsidiary's most recent balance sheet or in the Notes thereto, excluding contingent liabilities and trade payables) of Holdings 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 Holdings or any such Restricted Subsidiary from such transferee that are promptly, but in no event more than 90 days after receipt, converted by Holdings 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 $15.0 million (such date being an "Asset Sale Trigger Date"), Holdings 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 the Accreted Value (determined at the date of redemption) thereof to the Purchase Date (if such Purchase Date is prior to September 15, 2004) or 100% of the outstanding principal amount thereof to the Purchase Date (if such Purchase Date is on or after September 15, 2004), plus any accrued and unpaid interest and Liquidated Damages, if any, 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, Holdings may use such remaining amount for general corporate purposes. If the Accreted Value or aggregate principal amount, as the case may be, 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 based upon their Accreted Value or principal amount, as applicable, as described below under "Selection and Notice." Upon completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. 54 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, Holdings 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. On the Purchase Date for any Offer, Holdings 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 or Accreted Value, as applicable, 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, provided that each new Note will be in a principal amount of $1,000 or an integral multiple thereof. Holdings will publicly announce the results of the Offer on or as soon as practicable after the Purchase Date. Holdings will comply with any tender offer rules under the Act which may then be applicable, including Rule 14e-1, in connection with an offer required to be made by Holdings 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, Holdings 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 and Liquidated Damages, if any, shall cease to accrue on the Notes (and the Accreted Value will cease to accrete if prior to September 15, 2004) 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 covenants: Limitation on Restricted Payments. The Indenture provides that Holdings 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 Holdings' or any Restricted Subsidiary's Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of Holdings 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 Holdings or any of its Restricted Subsidiaries, other than any such Equity Interests purchased from Holdings 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 55 retire for value any Subordinated Indebtedness of Holdings, 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, Holdings 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 (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 Holdings (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 Holdings' 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 Holdings from the issue or sale of Equity Interests of Holdings 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) $7.5 million; plus (4) the amount by which the principal amount of and any accrued interest on Indebtedness of any Restricted Subsidiary is reduced on Holdings' consolidated balance sheet upon the conversion or (other than by a Restricted Subsidiary) subsequent to the date of original issuance of the Notes of any Indebtedness of Holdings or any Restricted Subsidiary (not held by Holdings or any Restricted Subsidiary) for Equity Interests (other than Disqualified Stock) of Holdings (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 Holdings or any Restricted Subsidiary (to persons other than Holdings 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 $15.0 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 Holdings or a Restricted Subsidiary, the portion of the net cash proceeds or fair market value of securities or properties paid or transferred to Holdings 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 $15.0 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); 56 (iii) the repurchase, redemption, retirement or acquisition of Equity Interests of Holdings or the Company from the executives, management, employees or consultants of Holdings or its Restricted Subsidiaries in an aggregate amount not to exceed $10.0 million; (iv) any loans, advances, distributions or payments from Holdings to its Restricted Subsidiaries, or any loans, advances, distributions or payments by a Restricted Subsidiary to Holdings or to another Restricted Subsidiary, in each case pursuant to intercompany Indebtedness, intercompany management agreements and other intercompany agreements and obligations; (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 Holdings' Obligations to pay such fees under the TJC Agreement shall be subordinated expressly to Holdings' 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 Holdings or any Restricted Subsidiary in for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of Holdings) of other Equity Interests of Holdings (other than any Disqualified Stock) or the redemption, repurchase, retirement or other acquisition of any Equity Interests of any Restricted Subsidiary in for, or out of the proceeds of, the substantially concurrent sale (other than to Holdings or a Subsidiary of Holdings) 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 with the net cash proceeds from an issuance of permitted Refinancing Indebtedness or the substantially concurrent sale (other than to a Subsidiary of Holdings) of Equity Interests of Holdings (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 Holdings or any Restricted Subsidiary, provided, that if such sale, transfer or disposition constitutes an Asset Sale, Holdings complies with the "Asset Sale" provisions of the Indenture; (x) any Restricted Investment constituting securities or instruments of a person issued in for trade or other claims against such person in connection with a financial reorganization or restructuring of such person; (xi) payments in connection with the Offering, including, but not limited to, the expenses of the Offering; (xii) payments of fees, expenses and indemnities to the directors of Holdings and its Restricted Subsidiaries; (xiii) payments in respect of the Wolff Noncompetition Agreement; and (xiv) shareholder loans in an aggregate principal amount not to exceed $1.0 million. Limitation on Incurrence of Indebtedness. The Indenture provides that Holdings will not, and will not permit any Restricted Subsidiary to, issue any Indebtedness (other than the Indebtedness represented by the Notes) unless Holdings' Cash Flow Coverage Ratio for its four full fiscal quarters next preceding the date such additional Indebtedness is issued would have been at least 1.5 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. 57 The foregoing limitations will not apply to the issuance of: (i) Indebtedness of Holdings and/or its Restricted Subsidiaries under Credit Facilities in an aggregate principal amount at any one time outstanding (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of Holdings and/or any of its Restricted Subsidiaries thereunder) not to exceed the greater of (A) $135 million and (B) the sum of: (1) 85% of the book value of accounts receivable of Holdings and its Restricted Subsidiaries on a consolidated basis and (2) 65% of the book value of the inventories of Holdings 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 $160 million at any one time outstanding (less the amount of any permanent reductions as set forth under "Asset Sales"); (ii) Indebtedness of Holdings 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 $10.0 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 Holdings and its Restricted Subsidiaries in an aggregate principal amount up to $35 million (all or any portion of which may be issued as additional Indebtedness under Credit Facilities), 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 $160 million at any one time outstanding (less the amount of any permanent reductions as set forth under "Asset Sales"); and (iv) Other Permitted Indebtedness. Limitation on Liens. The Indenture will provide that Holdings 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. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Indenture will provide that Holdings 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 Holdings or any Restricted Subsidiary, or pay any Indebtedness owed to, Holdings or any Restricted Subsidiary, (b) make loans or advances to Holdings, or (c) transfer any of its properties or assets to Holdings, 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;" (iii) customary provisions restricting subletting or assignment of any lease or license of Holdings 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 Holdings or any Restricted Subsidiary at the time of such acquisition, which 58 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 Holdings or any Restricted Subsidiary, which encumbrance or restriction applies solely to the assets of Holdings or such Restricted Subsidiary being sold in such transaction. Nothing contained in this covenant shall prevent Holdings or any Restricted Subsidiary 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 Holdings or any of its Restricted Subsidiaries that are subject to Permitted Liens. Limitation on Transactions With Affiliates. The Indenture provides that neither Holdings 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 Holdings 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 Holdings will not, and will not permit any Restricted Subsidiary to, engage in any Affiliate Transaction involving aggregate payments or other transfers by Holdings and its Restricted Subsidiaries in excess of $7.5 million (including cash and non-cash payments and benefits valued at their fair market value by the Board of Directors of Holdings in good faith) unless Holdings delivers to the Trustee: (i) a resolution of the Board of Directors of Holdings 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 Holdings 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: 59 (1) transactions between Holdings 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 Holdings or any Restricted Subsidiary as determined in good faith by Holdings' Board of Directors or executives; or (5) 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. Designation of Restricted and Non-Restricted Subsidiaries. The Indenture provides that, subject to the exceptions described below, from and after the date of original issuance of the Notes, Holdings 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) Holdings 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 Holdings 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 Holdings in good faith) of the Equity Interests of such Subsidiary held by Holdings and its Restricted Subsidiaries on such date, and (ii) the amount of the Investments determined in accordance with GAAP made by Holdings and any of its Restricted Subsidiaries in such Subsidiary. A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary. Holdings 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) Holdings 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 Holdings stating that the Board of Directors has made such designation in accordance with the Indenture, and Holdings 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. As of the Closing Date, all Subsidiaries of Holdings will be Restricted Subsidiaries. MERGER OR CONSOLIDATION The Indenture provides that Holdings 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 60 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 Holdings, 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 Holdings 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 Holdings for such four quarter period. The limitations in the Indenture on Holdings' ability to make a Disposition described in this paragraph do not restrict Holdings' 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, Holdings 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 Holdings is subject to the reporting requirements of Section 13 or 15(d) of the Act, Holdings shall file with the Commission (unless the Commission will not accept such filing) the annual reports, quarterly reports and other documents relating to Holdings and its Restricted Subsidiaries that Holdings would have been required to file with the Commission pursuant to Section 13 or 15(d) if Holdings were subject to such reporting requirements. Holdings 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 Act. In addition, Holdings has 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 provides 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; (b) a default in payment when due of principal or premium, if any, with respect to the Notes; (c) the failure of Holdings 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 Holdings 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 Holdings or any Restricted Subsidiary (or the payment of which is guaranteed by Holdings 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 $12.5 million; (e) a failure by Holdings or any Restricted Subsidiary to pay final judgments (not covered by insurance) aggregating in excess of $7.5 million which judgments a court of competent jurisdiction does not rescind, annul or stay within 45 days after their entry; 61 and (f) certain events of bankruptcy or insolvency involving Holdings or any Significant Subsidiary. 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 Holdings with the intention of avoiding payment of the premium that Holdings 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 least 25% in principal amount of the Notes then outstanding notify Holdings of the Default and Holdings 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 at maturity of the then outstanding Notes may declare all Notes to be due and payable by notice in writing to Holdings and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice") and the principal of (or, if prior to September 15, 2004, the Accreted Value of), premium, if any, and accrued and unpaid interest and Liquidated Damages, if any, shall become immediately due and payable, 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, if prior to September 15, 2004, the Accreted Value), 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. Holdings is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and upon an officer of Holdings 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 Holdings shall have any liability for any Obligations of Holdings 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 Holdings' 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. 62 SATISFACTION AND DISCHARGE OF THE INDENTURE Holdings at any time may terminate all of its obligations under the Notes 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 of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes). Holdings 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"). Holdings may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If Holdings exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If Holdings 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 Holdings' 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, Holdings 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 (or, if prior to September 15, 2004, the Accreted Value) 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 Exchange 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 Holdings 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 Holdings and the date the Exchange 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 Exchange 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 Exchange Notes then outstanding under the Indenture. Without the consent of any holder of Exchange Notes, Holdings and the Trustee may amend or supplement the Indenture or the Exchange 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 63 by a successor corporation of Holdings' obligations to the holders of Exchange 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 Exchange Notes. Without the consent of each holder of Exchange Notes affected, Holdings may not (i) reduce the principal amount at maturity of Exchange 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 Exchange Notes, or alter the redemption provisions with respect thereto (other than the provisions relating to the covenants described above under the caption "--Mandatory Offers to Purchase Exchange Notes--Change of Control" and "--Asset Sales") or the price at which Holdings is required to offer to purchase the Exchange Notes; (iii) reduce the principal amount at maturity of or change the fixed maturity of the Exchange Notes; (iv) make the Exchange Notes payable in money other than stated in the Exchange Notes; (v) make any change in the provisions concerning waiver of Defaults or Events of Default by holders of the Exchange Notes, or rights of holders of the Exchange 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 Exchange Notes. CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, if it becomes a creditor of Holdings, 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 Exchange 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 Exchange 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 Depository 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 exchange 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") 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 64 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 ro 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 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 65 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. 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. "Accreted Value" means, as of any date of determination prior to September 15, 2004, the sum of (a) the initial offering price of each Note and (b) that portion of the excess of the principal amount of each Note over such initial offering price as shall have been accreted thereon through such date, such amount to be so accreted on a daily basis at the rate of 11.375% per annum of the initial offering price of the Notes, compounded semi-annually on each September 15, and each March 15, from the date of issuance of the Notes through the date of determination computed on the basis of a 360-day year of twelve 30-day months. The Accreted Value of any Notes on or after September 15, 2004 shall be 100% of the principal amount thereof. "Affiliate" means any of the following: (i) any person directly or indirectly controlling or controlled by or under direct or indirect common control with Holdings, (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 Holdings 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 Holdings, (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 Holdings or a Restricted Subsidiary to Holdings 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 Holdings 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 Holdings 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) or (xiii) 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 Holdings' board of directors or any authorized committee of such board of directors. "Capital Stock" means any and all shares, interests, participation or other equivalents (however designated) of corporate stock, including any preferred stock. 66 "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), 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 Holdings 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)), 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 Holdings 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 Holdings, (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 Holdings (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 Holdings (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, (v) the first day on which a majority of the members of the Board of Directors of Holdings are not Continuing Directors or (vi) the first day on which Holdings ceases to be the owner of record of 100% of the Voting Stock of GFSI. 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 Holdings 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. 67 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 Holdings' 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 Holdings to repurchase such Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of Holdings and its Subsidiaries to another person may be uncertain. "Closing Date" means the date on which the Units were issued. "Commission" means the U.S. Securities and Exchange Commission. "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 or any other refinancing of Indebtedness will be excluded. "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 of 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 of 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. 68 "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of Holdings 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. "Credit Facilities" means, with respect to Holdings and its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "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 Holdings or GFSI, as applicable, 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. "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. "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 Holdings or the Restricted Subsidiaries or the retention of consultants, executives, officers or employees by Holdings or the Restricted Subsidiaries. "Indebtedness" means, with respect to any person, any indebtedness, whether or not contingent, in respect of borrowed money or evidenced by bonds, Notes, 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 69 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. "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. "Issue Date" means the date upon which the Units were exchanged for the Old Notes. "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 Holdings) 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 Holdings 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 investment banking fees and sales commissions), (ii) taxes paid or payable as a result thereof, (iii) any portion of cash proceeds that Holdings 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 Holdings 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 70 deduction or appropriate amounts to be provided by Holdings 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 Holdings 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. "Non-Restricted Subsidiary" means any Subsidiary of Holdings 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 Holdings 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 Holdings 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 Holdings and its Restricted Subsidiaries; (v) Indebtedness of Holdings 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 Holdings or a Restricted Subsidiary) or (x) of the second sentence of the "Limitation on 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 Holdings and its Restricted Subsidiaries and Holdings and its Restricted Subsidiaries have no Obligations with respect to such Indebtedness; (vii) Indebtedness of Holdings and its Restricted Subsidiaries under Hedging Obligations; (viii) Indebtedness of Holdings 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 Holdings and its Restricted Subsidiaries in connection with performance, surety, statutory, appeal or similar bonds in the ordinary course of business; (x) Indebtedness of Holdings 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; 71 (xi) The guarantee by Holdings or any of the Restricted Subsidiaries of Indebtedness of Holdings or a Restricted Subsidiary of Holdings 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 Liens" means: (i) Liens securing Indebtedness of Holdings or any Restricted Subsidiary that was permitted to be incurred pursuant to clauses (i) and (iii) of the second paragraph of the covenant entitled "Limitation on Incurrence of Indebtedness;" (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; (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 Holdings 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 Holdings 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 Holdings 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; 72 (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 Indebtedness permitted by the terms of the Indenture; (xviii) Liens in favor of Holdings 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 $3.0 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 Holdings 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 Holdings on 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 Holdings 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 Credit Facilities, and (iii) any additional Indebtedness issued to pay premiums and fees in connection with clauses (i) and (ii). 73 "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 Holdings; 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. "Restricted Subsidiary" means: (i) any Subsidiary of Holdings existing on the date of original issuance of the Notes, and (ii) any other Subsidiary of Holdings formed, acquired or existing after the date of original issuance of the Notes that is designated as a "Restricted Subsidiary" by Holdings 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 Holdings that has been redesignated by Holdings 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 Holdings 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 the same thing as it does in "Description of Units--Certain Definitions." "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 Holdings 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 created or evidencing the same, or pursuant to which the same is outstanding, designates such Obligations as subordinated or junior in right of payment to the Notes. "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). 74 "TJC Agreement" means the Management Consulting Agreement among Holdings, GFSI 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 between Holdings and Robert M. Wolff, relating to certain covenants not to compete with the business of Holdings, as in effect on the date of issuance of the Notes. 75 DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a summary of important terms of certain indebtedness of the Company: CREDIT AGREEMENT Concurrently with the completion of the GFSI Offering, GFSI entered into the Credit Agreement with The First National Bank of Chicago ("FNBC"), as contractual representative, and other lenders thereunder. The 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 the 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 the Closing of the Transactions. See "The Transactions." GFSI will pay interest (i) under each of Term Loan a and the Revolver based on, at GFSI's option, either of FNBC's base rate plus 1.25% or the Eurodollar Rate (as defined in the Credit Agreement) plus 2.25% and (ii) under Term Loan B based on, at GFSI'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 GFSI's Leverage Ratio (as defined in the New Credit Agreement). a commitment fee of 0.50% will be paid by GFSI for unutilized commitments under the Revolver, subject to reduction based upon GFSI's Leverage Ratio. GFSI's obligations under the Credit Agreement are secured by a security interest in all of GFSI's assets. In addition, GFSI's obligations under the Credit Agreement are guaranteed by substantially all of GFSI's future subsidiaries. The 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 Subordinated Discount Notes and incurring additional indebtedness. The Credit Agreement also contains customary events of default, including, as material events of default, without limitation, change of control. Holdings and GFSI were not in violation of any covenant under any agreement with respect to the Existing Indebtedness and are currently in compliance with all of the covenants contained in the Credit Agreement. Concurrently with the closing of the Old Offering, GFSI entered into an amendment to the Credit Agreement in order to change certain definitions, obtain consents for the Old Offering and change various representations and covenants to allow for the Old Offering. GFSI SENIOR SUBORDINATED NOTES On February 27, 1997, GFSI issued the GFSI Senior Subordinated Notes pursuant to an indenture, in a private transaction that was not subject to the registration requirements of the Securities Act. The GFSI Senior Subordinated Notes were then exchanged for similar Senior Subordinated Notes which were registered under the Securities Act on July 24, 1997. The GFSI Senior Subordinated Notes were limited to $125 million aggregate principal amount and bear interest at 9 5/8% payable semi-annually in cash in amounts on March 1 and September 1 in each year. The GFSI Senior Subordinated Notes mature on March 1, 2007. The GFSI Senior Subordinated Notes are subordinated to the prior payment in full in cash or Marketable Securities (as defined in the indenture) of all Senior Indebtedness (as defined in the indenture). The GFSI Senior Subordinated Notes are fully and unconditionally guaranteed by GFSI's Restricted Subsidiaries (as defined in the indenture). The remaining terms of the indenture governing the GFSI Senior Subordinated Notes are similar to the Indenture. 76 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 Holdings, 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 GFSI, its financial and business affairs, its relationships with its lenders and stockholders, and the operation and expansion of its business. The TJC Agreement expires in 2007, but is automatically renewed for successive one-year terms, unless either party provides written notice of termination 60 days prior to the scheduled renewal date. For the first two years, the TJC Agreement provides for an annual consulting fee of $500,000 payable on a quarterly basis. For the remaining term of the TJC Agreement, 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 EBITDA (as defined in the TJC Agreement), provided that in years three through five of the TJC Agreement, the annual fee does not exceed $750,000 and thereafter the annual fee does not exceed $1.0 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 GFSI and (ii) a financial consulting fee of up to 1.0% of any debt, equity or other financing arranged by Holdings or GFSI with the assistance of JMC. Both such fees are subject to Board of Directors approval. In connection with the Transactions, GFSI 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 GFSI. 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, GFSI 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 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, GFSI 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 GFSI 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 GFSI. The Tax Sharing Agreement does not give rise to any conflicts of interest as GFSI will only pay Holdings to the extent of Holdings' tax liability attributable to the operations of GFSI. 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 three fiscal years ended June 30, 1996, the Company had purchased $5.3 million of embroidered products under the Memorandum and the Company purchased $4.6 million during fiscal 1997. 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. Menghini, who are principals of Kansas Custom Embroidery and Impact Design, Inc., respectively, are also directors of the Company. Payments for embroidery services are made from the Company to the Affiliates. 77 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 the Company, which unanimously, including all disinterested members, approved the Memorandum. The Memorandum will be subject to the future review of the Board of Directors of the Company 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, was paid off subsequent to year end while the Kansas Loan, which was executed on August 12, 1996, was paid off on June 17, 1997. The Impact Loan was repaid 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 payment of principal of $525,000 subsequent to year end. 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, the Company 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 for a ten-year period ending on the tenth anniversary of the Acquisition, (ii) disclose at any time other than to the Company any Confidential Information (as defined in the Wolff Noncompetition Agreement) and (iii) engage in any business with the Company 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 to 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), the Company 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 the 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 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 78 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:
LOAN AMOUNT INTEREST RATE ----------- ------------- 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 ========
Management Stock Purchases. On July 1, 1995, Mr. Gary and Mr. Menghini purchased 6,000 and 7,000 shares of the common stock of Holdings (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 EBITDA (as defined in the Incentive Plan), if certain EBITDA targets are met. Indemnification Agreements. Simultaneously with the consummation of the GFSI Offering, the Company and each of its directors entered into indemnification agreements. The indemnification agreements provide that GFSI will indemnify the directors against certain liabilities (including settlements) and expenses actually and reasonably incurred by them in connection with any threatened or pending legal action, proceeding or investigation (other than actions brought by or in the right of the Company) to which any of them is, or is threatened to be, made a party by reason of their status as a director, officer or agent of the Company, or serving at the request of the Company in any other capacity for or on behalf of the Company; provided that (i) such director acted in good faith and in a manner not opposed to the best interest of the Company, (ii) with respect to any criminal proceedings had no reasonable cause to believe his or her conduct was unlawful, (iii) such director is not finally adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company, unless the court views in light of the circumstances the director is nevertheless entitled to indemnification, and (iv) the indemnification does not relate to any liability arising under Section 16(b) of the Exchange Act, or the rules or regulations promulgated thereunder. With respect to any action brought by or in the right of the Company, directors may also be indemnified to the extent not prohibited by applicable laws or as determined by a court of competent jurisdiction against expenses actually and reasonably incurred by them in connection with such action if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the Company. Future Transactions. The Company has adopted a policy, effective simultaneously with the consummation of the GFSI 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. 79 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 meeting the requirements of the Securities Act 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 , 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 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 and 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. 80 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS GENERAL The following discussion is a summary of the material United States federal income tax considerations relevant to the acquisition, ownership and disposition of the New Notes acquired in the Exchange Offer by holders of Old Notes, but does not purport to be a complete analysis of all potential tax effects. To the extent that it relates to matters of law or legal conclusions, this summary constitutes the opinion of Mayer, Brown & Platt. The discussion is based upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service ("Service") rulings and pronouncements and judicial decisions all in effect as of the date hereof, all of which are subject to change at any time, and any such change may be applied retroactively in a manner that could adversely affect a holder of the New Notes. The discussion does not address all of the federal income tax consequences that may be relevant to a holder in light of such holder's particular circumstances or to holders subject to special rules, such as certain financial institutions, insurance companies, dealers in securities and persons holding the New Notes as part of a "straddle," "hedge" or "conversion transaction." Moreover, the effect of any applicable state, local or foreign tax laws is not discussed. The discussion deals only with New Notes held as "capital assets" within the meaning of section 1221 of the Code. Unless otherwise indicated, the term "Holder" as used herein means a "U.S. Holders," which is a beneficial owner of a New Note who or which is for U.S. federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or of any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a "U.S. Trust." A U.S. Trust is (a) for taxable years beginning after December 31, 1996, or if the trustee of a trust elects to apply the following definition to an earlier taxable year ending after August 20, 1996, any trust if, and only if, (i) a court within the United States is able to exercise primary supervision over the administration of the trust and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust and (b) for all other taxable years, any trust whose income is includible in gross income for U.S. federal income tax purposes regardless of its source. The term U.S. Holder also includes certain former U.S. citizens whose income and gain on the New Notes will be subject to U.S. taxation. As used herein, the term "Non-U.S. Holder" means a beneficial owner of a New Note that is not a U.S. Holder. Holdings has not sought and will not seek any rulings from the Service with respect to any position of Holdings discussed below. There can be no assurance that the Service will not take a different position from Holdings concerning aspects of the tax consequences of the acquisition, ownership or disposition of the New Notes or that any such position would not be sustained. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS. CONSEQUENCES OF THE EXCHANGE OFFER 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 an exchanging Holder for U.S. 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; (iii) the basis of the New Note will be the same as the basis for the Old Note; and (iv) the original issue discount ("OID") on the New Note will be the same as on the Old Note. The Exchange Offer will result in no federal income tax consequences to a nonexchanging Holder of Old Notes. 81 CLASSIFICATION OF NOTES Although the characterization of an instrument as debt is a facts and circumstances determination that cannot be predicted with certainty, the Old Notes and the New Notes (collectively, the "Notes") should be treated as debt for federal income tax purposes. Accordingly, Holdings intends to treat the Notes as debt for federal income tax purposes, and the remainder of this discussion assumes that such treatment will be respected. LIQUIDATED DAMAGES Payments on Registration Default. Because the Notes provide for the payment of additional amounts of interest under the circumstances described in "The Exchange Offer--Registration Rights; Liquidated Damages," the Notes will be subject to the Treasury Regulations that apply to debt instruments that provide for one or more contingent payments. Under those Treasury Regulations, however, a payment is not a contingent payment merely because of a contingency that, as of the issue date, is either "remote" or "incidental." Holdings intends to take the position that, solely for these purposes, the payment of such additional interest is a remote or incidental contingency, in which case the possibility of such payment would not, as of the issue date, cause the Notes to be treated as having been issued with original issue discount, and the rules described below under "--Consequences of Holding New Notes" would apply. Holdings' determination that such payments are a remote or incidental contingency for these purposes is binding on a Holder, unless such Holder discloses in the proper manner to the Service that it is taking a different position. If Holdings becomes obligated to pay additional interest as a result of a Registration Default, a Holder would generally be required to include any such amounts in income as ordinary income when received or accrued, in accordance with such Holder's method of accounting for federal income tax purposes. In addition, the Notes would be treated as having been reissued for purposes of applying the OID rules. If, at the time of such deemed reissuance, the possibility that Holdings would be required to make additional payments of interest is not a remote or incidental contingency, a Holder could be required to accrue all payments on the Notes (including amounts that would otherwise constitute de minimus OID and projected payments of additional interest) on a constant yield basis (including Holders who otherwise use a cash method of accounting for federal income tax purposes), and in certain circumstances to include market discount in income sooner than otherwise required and to treat as interest income any gain recognized on the disposition of the debt instrument (rather than as capital gain). CONSEQUENCES OF HOLDING NEW NOTES Original Issue Discount. If the stated redemption price at maturity of the New Notes exceeds their issue price by more than a de minimis amount, the New Notes will be treated as having OID equal to the entire amount of such excess. Holdings intends to treat the Old Exchange attributable to the Subordinated Note portion of the Unit exchanged for Old Notes as a non-event (i.e., not resulting in an "exchange") for federal income tax purposes; rather, to that extent, Holdings will treat such Old Notes as continuations of the Subordinated Discount Notes. Holdings intends to take the position that the Old Notes received in the Old Exchange for the Preferred Stock are part of the same "issue" as the Old Notes exchanged for the Subordinated Discount Notes. If such treatment is respected, for federal income tax purposes, the Old Notes, whether exchanged for the Preferred Stock or the Subordinated Discount Notes, and the New Notes will be treated as having the same issue price as the Subordinated Discount Notes. Holdings intends to take the position that the Subordinated Discount Notes have an issue price equal to their Issue Price. In addition, the original issue discount on Old Notes will be the same as the original issue discount on the Subordinated Discount Notes exchange for such Old Notes. Since the portion of the Old Notes received in exchange for the Preferred Stock will have been acquired in a taxable exchange, however the holding period of the portion of the Old Notes received for the Preferred Stock, and hence of the New Notes received in exchange for such Old Notes, will start on the date following the Old Exchange, and the basis of such portion of the New Notes will equal the adjusted issue price of the Old Notes as of the date of the Old Exchange. 82 The Service might take a different position, however, as to whether the Old Notes exchanged for Preferred Stock and the Old Notes exchanged for the Subordinated Discount Notes are part of the same "issue." If the Service takes the view that an Old Note exchanged for the Preferred Stock (a "Preferred Stock Exchange Note") is not part of the same "issue" as an Old Note exchanged for the Subordinated Discount Notes (a "Subordinated Discount Exchange Note"), and such view is respected, the tax characteristics of the Preferred Stock Exchange Notes might be different from those of the Subordinated Discount Exchange Notes and such Preferred Stock Exchange Notes might trade separately. In such event, if the Preferred Stock Exchange Notes are deemed to be traded on an established securities market on or at any time during the 60-day period ending 30 days after their issue date, the issue price of the Preferred Stock Exchange Notes would be their fair market value as determined as of their issue date (the first date on which a substantial amount of the Old Notes is issued). Subject to certain limitations described in the applicable Treasury regulations, the Preferred Stock Exchange Notes will be deemed to be traded on an established securities market if, among other things, price quotations are readily available from dealers, brokers or traders or the Preferred Stock Exchange Notes are listed on certain exchanges or interdealer quotation systems. Similarly, if the Units, but not the Old Notes issued and exchanged therefor, are deemed to be traded on an established securities market at the time of the Old Exchange, then the issue price of each Preferred Stock Exchange Note would be the fair market value of the portion of the Units exchanged therefor at the time of the Old Exchange. In the event that neither the Preferred Stock nor the Units are deemed to be traded on an established securities market, the issue price of the Preferred Stock Exchange Notes would be determined under the rules of Section 1274. Under Section 1274, the issue price of the Preferred Stock Exchange Notes generally would be their "stated principal amount" or, in the event the Preferred Stock Exchange Notes do not bear "adequate stated interest" within the meaning of Section 1274, their "imputed principal amount," which is generally the sum of the present values of all payments due under the Preferred Stock Exchange Notes, discounted from the date of payment to their issue date at the appropriate "applicable federal rate." Payments and Accruals on New Notes. The stated redemption price at maturity of the New Notes will equal the total of all payments required to be made thereon, other than payments of qualified stated interest. Qualified stated interest generally is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate. Therefore, because no interest is required to be paid in cash on the New Notes until March 15, 2005, the New Notes should be treated as having been issued without any qualified stated interest. Accordingly, the sum of all interest payable pursuant to the stated interest rate on the New Notes over the entire term should be treated as part of the stated redemption price at maturity. A Holder of a New Note will be required to include OID in income periodically over the term of an New Note before receipt of the cash or other payment attributable to such income. In general, a Holder must include in gross income for federal income tax purposes the sum of the daily portions of OID with respect to the New Notes for each day during the taxable year or portion of a taxable year on which such Holder holds the New Note ("Accrued OID"). The daily portion is determined by allocating to each day of any accrual period within a taxable year a pro rata portion of an amount equal to the adjusted issue price of the New Note at the beginning of the accrual period multiplied by the yield to maturity of the New Note. For purposes of computing OID, Holdings will use six-month accrual periods which end on the date in the calendar year corresponding to the maturity date of the New Notes and the date six months prior to such maturity date, with the exception of a short initial accrual period. The adjusted issue price of a New Note at the beginning of any accrual period is the issue price of the New Note increased by the Accrued OID for all prior accrual periods (less any cash payments on the New Notes other than qualified stated interest). Under these rules, Holders will have to include in gross income increasingly greater amounts of OID in each successive accrual period. Each payment made under a New Note (except for payments of qualified stated interest) will be treated first as a payment of OID to the extent of OID that has accrued as of the date of payment and has not been allocated to prior payments and second as a payment of principal. Optional Redemption. Holdings' option to redeem the New Notes at any time on or after March 15, 1998 should be treated as a "call option" within the meaning of the OID Regulations. See "Description of Notes--Redemption of Notes--Optional Redemption." As a result, Holdings would be presumed under the OID 83 Regulations to exercise its option to redeem the New Notes if by utilizing the date of exercise of a call option as the maturity date and the amount for which the New Notes could be redeemed in accordance with the terms of the redemption feature (that is, the principal amount plus redemption premium, if any, plus accrued interest) as the stated redemption price at maturity, the yield on the New Notes would be lower than such yield would be if the option was not exercised. Because the exercise by Holdings of its call option at any time on or after March 15, 1998 and before September 15, 2005 would result in a higher yield than if such call option were not exercised, such call option should be presumed to not be exercised under the OID Regulations. In addition to the optional redemption described above, a Holder will have the right to tender New Notes to Holdings for redemption should Holdings experience a Change of Control. See "Description of Notes--Mandatory Offers to Purchase Notes." Such additional redemption rights should not affect, and will be treated by Holdings as not affecting, the determination of the yield or maturity of the New Notes. TAXABLE DISPOSITION OF NEW NOTES Generally, any sale or redemption of New Notes will result in taxable gain or loss equal to the difference between the amount of cash or other property received (except to the extent the consideration received is attributable to qualified stated interest not previously taken into account, which consideration is treated as interest received) and the Holder's adjusted tax basis in the New Notes. A Holder's initial tax basis in a New Note will be the sum of (1) the Holder's basis in the Subordinated Note portion of the Unit for which the Old Note was issued (and, if the Old Exchange is treated as an exchange for federal income tax purposes, such basis will be increased by the amount of gain, if any, recognized by such Holder on the Old Exchange with respect to such Subordinated Note and reduced by the fair market value of (x) the excess, if any, of the "principal amount" of the Old Notes received by such Holder in the Old Exchange for Subordinated Discount Notes over the "principal amount" of the Subordinated Discount Notes given up in the Old Exchange, and (2) the issue price of the portion of the Old Note that is attributable to the Preferred Stock portion of the Unit. A Holder's adjusted tax basis will be the Holder's initial tax basis, increased by any Accrued OID with respect to any New Note includable in such Holder's gross income and decreased by the amount of any cash payments (other than payments of qualified stated interest) received by such Holder regardless of whether such payments are denominated as interest. Any gain or loss upon a sale or disposition of an New Note by an original Holder will generally be capital gain or loss. The recently enacted Taxpayer Relief Act of 1997 made certain changes to the Code with respect to taxation of capital gains of taxpayers other than corporations that are U.S. Holders. In general, the maximum tax rate for non-corporate taxpayers on long-term capital gains has been lowered to 20% from the previous 28% rate for most capital assets (including the New Notes) held for more than 18 months. For taxpayers in the 15% regular tax bracket, the maximum tax rate on long-term capital gains is now 10%. Capital gain on such assets having a holding period of more than one year but not more than 18 months will be subject to a maximum tax rate of 28%. Treatment of New Notes Purchased at a Premium or Market Discount. A Holder that purchases or otherwise acquires an New Note at a premium (defined under the OID Regulations as an amount paid in excess of all amounts payable on the instrument after the purchase other than qualified stated interest) will not be subject to the OID rules, and may elect to amortize the "amortizable bond premium" (defined generally under the Code as an amount paid in excess of the amount payable at maturity), in which case the amount required to be included in the Holder's income each year with respect to interest on the New Note will be reduced by the amount of amortizable bond premium allocable (based on the Holder's yield to maturity) to such year. Any such election shall apply to all bonds (other than bonds the interest on which is excludable from gross income) held by the Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by the Holder and is irrevocable without the consent of the Service. A Holder that purchases a New Note issued with OID at an acquisition premium (defined under the OID Regulations as an amount paid in excess of its adjusted issue price but less than or equal to all amounts payable on the instrument after the purchase other than qualified stated interest) will be subject to the OID rules, but will 84 proportionately reduce the daily portions of OID includible in income to reflect the premium paid relative to issue price. In lieu of such offset, the Holder may compute accruals by treating the purchase price as the issue price and applying the constant yield method. If a Holder of a New Note that had an initial tax basis in such New Note which is less than the issue price of such New Note, subsequently disposes of such New Note, holds it until maturity or receives a principal payment, any gain upon a sale or other disposition (including certain nontaxable dispositions such as a gift and the receipt of principal payments) will be recognized and treated as ordinary income to the extent of any "market discount" accrued for the period that such Holder holds the New Note. Market discount generally will equal the excess, if any, of the adjusted basis that the New Note would have in the hands of the original Holder (or in the case of a New Note issued with the original issue discount, the issue price plus the aggregate amount of original issue discount previously accrued thereon) over the purchaser's basis in the New Note immediately after such purchaser acquired the New Note. In general, market discount on a New Note will be treated as accruing ratably over the term of such New Note, or at the irrevocable election of the Holder, under a constant yield method. A Holder of a New Note with market discount may be required to defer, until the maturity of the New Note or its earlier disposition in a taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such New Note. Such Holder may instead elect to include market discount in income as it accrues, in which case the rule described above regarding deferral of interest deductions will not apply. This election to include market discount in income currently, once made, applies to all market discount obligations acquire on or after the first taxable year to which the election applies, and may not be revoked without the consent of the Service. NON-U.S. HOLDERS Interest and OID on New Notes. Payments of interest and Accrued OID on the New Notes by Holdings or any paying agent to a beneficial owner of a New Note that is a Non-U.S. Holder will not be subject to U.S. federal withholding tax, provided that, (i) such Holder does not own, actually or constructively, 10 percent or more of the total combined voting power of all classes of stock of Holdings entitled to vote; (ii) such Holder is not, for U.S. federal income tax purposes, a controlled foreign corporation related, directly or indirectly, to Holdings through stock ownership; (iii) such Holder is not a bank receiving interest described in Section 881(c)(3)(A) of the Code; and (iv) certain certification requirements (summarized below) are met. If a Non- U.S. Holder of a New Note is engaged in a trade or business in the United States, and if interest or OID on the New Note is effectively connected with the conduct of such trade or business (and, if certain tax treaties apply, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder) the Non-U.S. Holder, although exempt from U.S. withholding tax, will generally be subject to regular U.S. income tax on such interest or OID in the same manner as if it were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% (or such lower rate provided by an applicable treaty) of its effectively connected earnings and profits for the taxable year, subject to certain adjustments. For purposes of the branch profits tax, interest or OID on an New Note will be included in the earnings and profits of such Non-U.S. Holder if such interest or OID is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States. Under current Treasury Regulations, in order to obtain the exemption from withholding tax described in the first sentence of the preceding paragraph, either (i) the beneficial owner of a New Note must certify on Internal Revenue Service Form W-8 or a substitute form that is substantially similar to Form W- 8, under penalties of perjury, to Holdings or a paying agent, as the case may be, that such owner is a Non-U.S. Holder and must provide such owner's name and address or (ii) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "Financial Institution") and holds the New Note on behalf of the beneficial owner thereof must certify, under penalties of perjury, to Holdings or paying agent, as the case may be, that such certificate has been received from the 85 beneficial owner by it or by a Financial Institution between it and the beneficial owner and must furnish the payor with a copy thereof. A certificate described in this paragraph is effective only with respect to payments of interest or Accrued OID made to the certifying Non-U.S. Holder after delivery of the certificate in the calendar year of its delivery and the two immediately succeeding calendar years. In lieu of the certificate described in this paragraph, a Non-U.S. Holder engaged in a trade or business in the United States (with which interest payments or OID accruals on the New Note are effectively connected) must provide to Holdings a properly executed Internal Revenue Service Form 4224 in order to claim an exemption from withholding tax. On October 14, 1997, the Service published in the Federal Register final regulations (the "1997 Final Regulations") which affect the United States taxation of Non-U.S. Holders. The 1997 Final Regulations are effective for payments after December 31, 1998, regardless of the issue date of the instrument with respect to which such payments are made, subject to certain transition rules (see below). The discussion under this heading and under "Backup Withholding and Information Reporting," below, is not intended to be complete discussion of the provisions of the 1997 Final Regulations, and holders of Notes are urged to consult their tax advisors concerning the tax consequences of their investment in light of the 1997 Final Regulations. The 1997 Final Regulations provide documentation procedures designed to simplify compliance by withholding agents. The 1997 Final Regulations generally do not affect the documentation rules described above, but added other certification options. Under one such option, a withholding agent will be allowed to rely on an intermediary withholding certificate furnished by a "qualified intermediary" (as defined below) on behalf of one or more beneficial owners (or other intermediaries) without having to obtain the beneficial owner certificate described above. "Qualified intermediaries" include: (i) foreign financial institutions or foreign clearing organizations (other than a U.S. branch or U.S. office of such institution or organization) or (ii) foreign branches or offices of U.S. financial institutions or foreign branches or offices of U.S. clearing organizations, which, as to both (i) and (ii), have entered into withholding agreements with the Service. In addition to certain other requirements, qualified intermediaries must obtain withholding certificates, such as revised Internal Revenue Service Form W-8 (see below), from each beneficial owner. Under another option, an authorized foreign agent of a United States withholding agent will be permitted to act on behalf of the United States withholding agent, provided certain conditions are met. For purposes of the certification requirements, the 1997 Final regulations generally treat as the beneficial owners of payments on a Note those persons that, under United States tax principles, are the taxpayers with respect to such payments rather than persons such as nominees or agents legally entitled to such payments. In the case of payments to an entity classified as a foreign partnership under United States tax principles, the partners rather than the partnership, generally will be required to provide the required certifications to qualify for the withholding exemption described above. A payment to a United States partnership, however, is treated for these purposes as payment to a United States payee, even if the partnership has one or more foreign partners. The 1997 Final Regulations provide certain presumptions with respect to withholding for holders not furnishing the required certifications to qualify for the withholding exemption described above. In addition, the 1997 Final Regulations will replace a number of current tax certification forms (including Internal Revenue Service Form W-8) with a single, revised Internal Revenue Service Form W-8 (which, in certain circumstances, requires information in addition to that previously required). Under the 1997 Final Regulations, this Form w-8 will remain valid until the last day of the third calendar year following the year in which the certificate is signed. Under the 1997 Final Regulations, withholding of United States federal income tax may apply to payments on a taxable sale or other disposition of a Note by a Non-U.S. Holder who does not provide appropriate certification to the withholding agent with respect to such transaction. The 1997 Final Regulations provide transition rules concerning existing certificates, such a Internal Revenue Service Form W-8. Valid withholding certificates that are held on December 31, 1998 will generally remain valid until the earlier of December 31, 1999 or the date of expiration of the certificate under the law in effect prior to January 1, 1999. Further, certificates dated prior to January 1, 1998 will generally remain valid until the end of 1998, irrespective of the fact that their validity expires during 1998. 86 Disposition of New Notes. Under current law, a Non-U.S. Holder of a New Note generally will not be subject to U.S. federal income tax on any gain recognized on the sale, exchange or other disposition of such New Note, unless (i) the gain is effectively connected with the conduct of a trade or business in the United States of the non-U.S. Holder (and, if certain tax treaties apply, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder); (ii) the Non-U.S. Holder is an individual who holds the New Note as a capital asset, is present in the United States for 183 days or more in the taxable year of the disposition and either (a) such individual has a U.S. "tax home" (as defined for U.S. federal income tax purposes) or (b) the gain is attributable to an office or other fixed place of business maintained in the United States by such individual; or (iii) the non-U.S. Holder is subject to tax pursuant to the Code provisions applicable to certain U.S. expatriates. In the case of a Non-U.S. Holder that is described under clause (i) above, its gain will be subject to the U.S. federal income tax on net income that applies to U.S. persons and, in addition, if such Non-U.S. Holder is a foreign corporation, it may be subject to the branch profits tax as described above. An individual Non-U.S. Holder that is described under clause (ii) above will be subject to a flat 30% tax on gain on the derived from the sale, which may be offset by U.S. capital losses (notwithstanding the fact that he or she is not considered a U.S. resident). Thus, individual Non-U.S. Holders who have spent 183 days or more in the United States in the taxable year in which they contemplate a sale of an New Note are urged to consult their tax advisers as to the tax consequences of such sale. A New Note held by an individual who is not a U.S. citizen or resident (as specially defined for United States federal estate tax purposes) at the time of his death will not be subject to U.S. federal estate tax as a result of such individual's death, provided that, at the time of such individual's death, the individual does not own, actually or constructively, 10 percent or more of the total combined voting power of all classes of stock of Holdings entitled to vote and payments with respect to such New Note would not have been effectively connected with the conduct by such individual of a trade or business in the United States. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDINGS AND TO CORPORATE HOLDERS The New Notes will constitute "applicable high yield discount obligations" ("AHYDOs") if the yield to maturity of such New Notes is equal to or greater than the sum of the relevant applicable federal rate (the "AFR") plus five percentage points. The relevant AFR for debt instruments issued in September 1997 is 6.45% compounded semi-annually. If the yield to maturity on the New Notes were to equal or exceed the sum of the AFR plus five percentage points, such New Notes would constitute AHYDOs. Therefore, a portion of the tax deductions that would otherwise be available to Holdings in respect of such New Notes would be deferred, which, in turn, would reduce the after-tax cash flows of Holdings. If the New Notes were to constitute AHYDOs, Holdings would not be entitled to deduct OID that accrues with respect to such New Notes until amounts attributable to OID are paid in cash. If the yield to maturity of the New Notes were to equal or exceed the sum of the relevant AFR plus six percentage points (the "Excess Yield"), the "disqualified portion" of the OID accruing on such New Notes would be characterized as a non-deductible dividend with respect to Holdings and also may be treated as a dividend distribution solely for purposes of the dividends received deduction of Sections 243, 246 and 246A of the Code with respect to Holders which are corporations. In general, the "disqualified portion" of OID for any accrual period will be equal to the product of (i) as a percentage determined by dividing the Excess Yield by the yield to maturity; and (ii) the OID for the accrual period. Subject to otherwise applicable limitations, such a corporate holder would be entitled to a dividends received deduction with respect to the disqualified portion of the accrued OID if Holdings has sufficient current or accumulated "earnings and profits." To the extent that Holdings's earnings and profits are insufficient, any portion of the OID that otherwise would have been recharacterized as a dividend for purposes of the dividends-received deduction will continue to be taxed as ordinary OID income in accordance with the rules described above in "--Acquisition and Holding of New Notes--Original Issue Discount." Assuming that Holdings' position with respect to the issue price of the Old Notes described above in "--Acquisition and Holding of New Notes-- Original Issue Discount" is sustained, the New Notes will be treated as being issued on the same issue date and at the same issue price as the Subordinated Discount Notes. Since the yield to maturity of the Subordinated Discount Notes was less than the AFR plus five percentage points, the yield to maturity on the New Notes should be less than the AFR plus 87 five percentage points. However, if Holdings' position with respect to the issue price of the Old Notes were not sustained, it would be impossible to determine at the present time whether the yield to maturity on the New Notes would equal or exceed the sum of the AFR plus five or six percentage points. BACKUP WITHHOLDING TAX AND INFORMATION REPORTING Under current United States federal income tax law, information reporting requirements apply to interest (including OID) and principal payments made to, and to the proceeds of sales before maturity by, certain non-corporate persons. In addition, a 31% backup withholding tax applies if a non-corporate person (i) fails to furnish such person's Taxpayer Identification Number ("TIN") (which, for an individual, is his or her Social Security Number) to the payor in the manner required, (ii) furnishes an incorrect TIN and the payor is so notified by the Service, (iii) is notified by the Service that such person has failed properly to report payments of interest and dividends or (iv) in certain circumstances, fails to certify, under penalties of perjury, that such person has not been notified by the Service that such person is subject to the backup withholding for failure properly to report interest and dividend payments. Backup withholding does not apply with respect to payments made to certain exempt recipients, such as corporations and tax- exempt organizations. In the case of a Non-U.S. Holder, under current United States federal income tax law backup withholding and information reporting do not apply to payments of principal and interest (including OID) with respect to a Note, or to payments on the sale, exchange, redemption or retirement of a Note, if such Holder has provided the required certification under penalties of perjury that such Holder is a Non-U.S. Holder or has otherwise established an exemption. Under current United States federal income tax law, (i) principal or interest payments (including OID) with respect to a Note collected outside the United States by a foreign office of a custodian, nominee or broker acting on behalf of a beneficial owner of a Note and (ii) payments on the sale, exchange, redemption or retirement of a Note to or through a foreign office of a broker are not generally subject to backup withholding or information reporting. However, if such custodian, nominee or broker is a United States person, a controlled foreign corporation for United States tax purposes, or a foreign person 50% of more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period, such custodian, nominee or broker may be subject to certain information reporting (but not backup withholding) requirements with respect to such payments, unless such custodian, nominee or broker has in its records documentary evidence that the beneficial owner is not a United States person and certain conditions are met or the beneficial owner otherwise establishes an exemption. In the case of a Non-U.S. Holder, under the 1997 Final Regulations, backup withholding and information reporting will not apply to payments of principal and interest (including OID) with respect to a Note if such Holder provides the required certification to establish an exemption from the withholding of the United States federal income tax or otherwise establishes an exemption. In the case of a Non-U.S. Holder, under the 1997 Final Regulations, backup withholding and information reporting will not apply to payments of principal and interest (including OID) with respect to a Note if such Holder provides the required certification to establish an exemption from the withholding of the United States federal income tax or otherwise establishes an exemption. Under the 1997 Final Regulations, payments of principal and interest (including OID) with respect to a Note made to a custodian, nominee or broker will not be subject to backup withholding or information reporting, irrespective of the place of payment or the location of the office of the custodian, nominee or broker, although payments of interest (including OID) with respect to a Note paid to a foreign intermediary (whether or not a qualified intermediary) will be subject to withholding of United States federal income tax at the rate of 30% unless the beneficial owner (whether or not a United States person) establishes an exemption by furnishing a withholding certificate or other appropriate documentation. Unless the beneficial owner establishes an exemption, a payment by a custodian, nominee or broker may be subject to information reporting and, unless (i) the payment 88 has been subject to withholding of United States federal income tax at the rate of 30% or (ii) the payment is made outside the United States to an offshore account in a financial institution that maintains certain procedure related to account documentation, to backup withholding as well. Under the 1997 Final Regulations, payments on the sale, exchange, redemption or retirement of a Note to or through a broker may be subject to information reporting and backup withholding unless (i) the transaction is effected outside the United States and the broker is not a United States person, a controlled foreign corporation for United States tax purposes, a United States branch of a foreign back or foreign insurance company, a foreign partnership controlled by United States persons or engaged in a United States trade or business or a foreign person 50% or more of whose gross income is effectively connected with the conduct of a United States trade or business for a specified three-year period or (ii) the beneficial owner otherwise establishes an exemption. Backup withholding tax is not an additional tax. Rather, any amounts withheld from a payment to a person under the backup withholding rules are allowed as a refund or a credit against such person's United States federal income tax, provided that the required information is furnished to the Service. INFORMATION REPORTING Holdings is required to furnish certain information to the Service and will furnish annually to record holders of the New Notes information with respect to dividends or interest paid, or OID accruing, as the case may be, on the New Notes during the calendar year. The information with respect to OID (if any) accruing on the New Notes will be based on the adjusted issue price of the New Notes and will be applicable if the holder is an original holder of the New Notes who acquired the Old Notes in exchange for the Units. Subsequent holders who purchase New Notes for an amount other than the adjusted issue price and/or on a date other than the last day of an accrual period will be required to determine for themselves the amount of OID, if any, they are required to include in gross income for federal income tax purposes. LEGAL MATTERS Certain legal matters with respect to the Notes will be passed upon for the Company by Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt also represents TJC and its affiliates from time to time in connection with its various acquisitions and divestitures. EXPERTS The financial statements of GFSI Holdings, Inc. and subsidiary as of June 30, 1996 and June 27, 1997 and for the years then ended included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. The financial statements of Winning Ways as of and for the year 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, Holdings 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 Holdings. In connection with its audit for the fiscal year ended June 30, 1995 and through January 2, 1997, Holdings 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 89 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. Holdings currently engages Deloitte & Touche LLP as its independent auditors. During the most recent fiscal year and through the date of this Registration Statement, Holdings 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 t 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. 90 GFSI HOLDINGS, INC. AND SUBSIDIARY UNAUDITED PRO FORMA FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) The following sets forth the Unaudited Pro Forma Balance Sheet and the Unaudited Pro Forma Statement of Income of GFSI Holdings, Inc. and subsidiary (the "Company") giving effect to the transactions described in Note 1 of the Notes to the Unaudited Pro Forma Financial Statements as if such transactions had been consummated on June 27, 1997 (in the case of the Unaudited Pro Forma Balance Sheet) and at the beginning of the earliest period presented (in the case of the Unaudited Pro Forma Statement of Income). The Unaudited Pro Forma Financial Statements of the Company do not purport to present the financial position or results of operations of Holdings 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 Winning Ways has been accounted for as a leveraged recapitalization, and accordingly, the accompanying Unaudited Pro Forma Financial Statements reflect no change in the accounting basis of GFSI's assets and liabilities for financial accounting purposes. P-1 GFSI HOLDINGS, INC. AND SUBSIDIARY UNAUDITED PRO FORMA BALANCE SHEET JUNE 27, 1997
PRO FORMA ADJUSTMENT ------------------------------------------- HISTORICAL DR CR PRO FORMA ---------- ------- ------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents...... $ 1,117 $ 788(2) $ 758(2) $ 1,147 Accounts receivable............ 23,705 23,705 Inventories.................... 37,562 37,562 Deferred income taxes.......... 927 927 Prepaid expenses and other current assets................ 1,286 1,286 --------- ------- ------- --------- Total current assets......... 64,597 788 758 64,627 PROPERTY, PLANT AND EQUIPMENT, NET............................. 21,548 21,548 OTHER ASSETS: Deferred financing costs....... 10,004 275(3) 344(3) 9,935 Other.......................... 4 4 --------- ------- ------- --------- TOTAL............................ $ 96,153 $ 1,063 $ 1,102 $ 96,114 ========= ======= ======= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable............... $ 12,198 $ 12,198 Accrued interest payable....... 4,720 4,720 Accrued expenses............... 5,543 $ 483(4) 5,060 Income taxes payable........... 200 138(5) 62 Current portion of long-term debt.......................... 3,375 3,375 --------- ------- ------- --------- Total current liabilities.... 26,036 621 25,415 DEFERRED INCOME TAXES............ 1,177 1,177 REVOLVING CREDIT AGREEMENT....... 3,000 3,000 LONG-TERM DEBT................... 211,625 25,000(6) $50,000(6) 236,625 OTHER LONG-TERM OBLIGATIONS...... 450 450 REDEEMABLE PREFERRED STOCK....... 28,080 25,000(7) 3,080 STOCKHOLDERS' EQUITY (DEFICIT): Common stock................... Additional paid-in-capital..... 200 200 Notes receivable from stockholders.................. (788) 788(2) Accumulated deficit............ (173,627) 206(3) (173,833) --------- ------- ------- --------- Net stockholders' equity (deficit)................... (174,215) 206 788 (173,633) --------- ------- ------- --------- TOTAL............................ $ 96,153 $50,827 $50,788 $ 96,114 ========= ======= ======= =========
See Notes to Unaudited Pro Forma Financial Statements. P-2 GFSI HOLDINGS, INC. AND SUBSIDIARY UNAUDITED PRO FORMA STATEMENT OF INCOME YEAR ENDED JUNE 27, 1997 (IN THOUSANDS)
PRO FORMA ADJUSTMENT ----------------------------------------- PRO HISTORICAL DR CR FORMA ---------- ------- ------ -------- Net Sales........................... $183,297 $183,297 Cost of Sales....................... 102,606 102,606 -------- ------- ------ -------- Gross Profit...................... 80,691 80,691 Operating expenses: Selling........................... 18,433 18,433 General and administrative........ 26,319 $ 593(8) $ 676(8) 26,236 -------- ------- ------ -------- 44,752 593 676 44,669 -------- ------- ------ -------- Operating income.................... 35,939 593 676 36,022 Other income/(expense): Interest expense.................. (9,098) 18,780(9) 2,863(9) (25,015) Other............................. 99 99 -------- ------- ------ -------- (8,999) 18,780 2,863 (24,916) -------- ------- ------ -------- Income before income taxes and extraordinary item................. 26,940 19,373 3,539 11,106 Provision for income taxes.......... (1,440) 3,002(10) (4,442) -------- ------- ------ -------- Income before extraordinary item.... $ 25,500 $22,375 $3,539 $ 6,664 ======== ======= ====== ========
See Notes to Unaudited Pro Forma Financial Statements. P-3 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (IN THOUSANDS) 1. Presentation and Transactions: The unaudited pro forma financial statements assume the following transactions occurred on June 27, 1997 for the purpose of the unaudited pro forma balance sheet and the beginning of the earliest period presented for purposes of the unaudited pro forma statement of income. 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 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 Winning Ways was $242.3 million consisting of $173.2 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 indebtedness of Winning Ways 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 GFSI (the "Equity Contribution"); (ii) GFSI consummated the GFSI Offering; and (iii) GFSI entered into the 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 of the Acquisition. 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. On September 17, 1997 Holdings completed the offering of Units consisting of $25.0 million 11.375% Subordinated Notes due 2009 and $25.0 million 11.375% Series D Preferred Stock due 2009. The Units were exchangeable at the option of Holdings, into 11.375% Series A Senior Discount Notes due 2009. On October 23, 1997 Holdings exercised its option to exchange the Units for the Series A Discount Notes. Holdings did not receive any proceeds from the sale or exchange of the Units. The Series A Senior Discount Notes contained registration rights which Holdings is satisfying by the Exchange Offer. 2. The pro forma adjustment to cash. Repayment of notes receivable from stockholders, as described in Note 1.................................................................... $788 ==== Payment of fees and expenses associated with the transactions......... $275 Payment of accrued interest expense on Holdings Subordinated Notes.... 483 ---- Proforma adjustment................................................... $758 ====
3. The pro forma adjustments to deferred financing costs represent the capitalization of fees and expenses associated with the Exchange using existing cash in the Company and the write-off of financing costs allocated to the Holdings Subordinated Notes. 4. The pro forma adjustment to accrued expenses represents the payment of accrued interest on the Holdings Subordinated Notes. P-4 5. The pro forma adjustment to income taxes payable represents the reduction of income taxes due to write-off of deferred financing costs on the Holdings Subordinated Notes. 6. The pro forma adjustments to long-term debt represent the issuance of Subordinated Discount Notes and the elimination of the Holdings Subordinated Notes with the exchange transactions described in Note 1. 7. The pro forma adjustment to redeemable preferred stock represents the elimination of Holdings Preferred Stock with the exchange transactions described in Note 1. 8. The pro forma adjustment to general and administrative expense:
YEAR ENDED JUNE 27, 1997 ------- Additional general and administrative expense related to: Consulting fee to The Jordan Company............................ $ 333 Board of Directors fees......................................... 93 Wolff non-competition payments.................................. 167 ------- Pro forma adjustment.......................................... $ 593 ======= Elimination of general administrative expense related to: Officers life insurance premiums................................ $ (289) Expenses of corporate jet not retained by Company............... (153) Depreciation on corporate jet not retained by Company........... (234) ------- Pro forma adjustment.......................................... $ (676) ======= 9. The pro forma adjustments to interest expense: YEAR ENDED JUNE 27, 1997 ------- Elimination of interest expense relating to Winning Ways, Inc.'s prior debt agreements: Repay prior 10.125% credit agreement............................ $ (255) Repay prior line of credit agreement............................ (583) Repay prior 10.28% mortgage loan................................ (647) Repay prior 5.78% industrial revenue bonds...................... (11) Repay prior short-term borrowings............................... (345) Elimination of interest expense related to the Holdings Subordinated Notes: Repayment of the Holdings Subordinated Notes.................... (1,011) Amortization of deferred issuance costs related to the Holdings Subordinated Notes............................................. (11) ------- Pro forma adjustment.......................................... $(2,863) ======= Additional interest expense related to: Issuance of the Subordinated Discount Notes (11.375%)........... $ 5,849 Amortization of deferred issuance costs related to the Subordinated Discount Notes.................................... 133 Issuance of the GFSI Senior Subordinated Notes (9.625%)......... 8,021 Amortization of deferred issuance costs related to the GFSI Subordinated Notes............................................. 428 Issuance of Term Loans assuming 8.13% interest rate............. 3,549 Issuance of Revolver assuming 7.94% interest rate............... 142 Amortization of deferred issuance costs related to New Credit Agreement...................................................... 336 Commitment fees related to New Credit Agreement................. 93 Letter of credit fees related to New Credit Agreement........... 229 ------- Pro forma adjustment.......................................... $18,780 =======
P-5 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 year ended June 27, 1997. Such amounts are excluded from the accompanying pro forma income statement as it is considered a non- recurring charge. 10. 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. P-6 GFSI HOLDINGS, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- INDEPENDENT AUDITORS' REPORT.............................................. F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets--June 30, 1996 and June 27, 1997............ F-4 Consolidated Statements of Income--Years Ended June 30, 1995 and 1996 and June 27, 1997...................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity (Deficit)-- Years Ended June 30, 1995 and 1996 and June 27, 1997................... F-6 Consolidated Statements of Cash Flows--Years Ended June 30, 1995 and 1996 and June 27, 1997................................................. F-7 Notes to Consolidated Financial Statements.............................. F-8
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors GFSI Holdings, Inc. and subsidiary Lenexa, Kansas We have audited the accompanying consolidated balance sheet of GFSI Holdings, Inc. and subsidiary ("Holdings") as of June 27, 1997 and June 30, 1996, and the related consolidated statements of income, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of Holdings' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Holdings as of June 27, 1997, and June 30, 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As described in Note 1 to the financial statements, GFSI, Inc., a wholly owned subsidiary of Holdings, completed recapitalization transactions on February 27, 1997 which included the merger of Winnings Ways, Inc. with and into GFSI, Inc., with GFSI, Inc. as the surviving entity. DELOITTE & TOUCHE LLP Kansas City, Missouri August 22, 1997 F-2 INDEPENDENT AUDITORS' REPORT Board of Directors Winning Ways, Inc. Lenexa, Kansas We have audited the accompanying statements of income, stockholders' equity and cash flows of Winning Ways, Inc. (the "Company") for the year 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 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 1995 financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended June 30, 1995 in conformity with generally accepted accounting principles. Donnelly Meiners Jordan Kline Kansas City, Missouri July 26, 1996 F-3 GFSI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND JUNE 27, 1997
JUNE 30, JUNE 27, ASSETS 1996 1997 ------ ----------- ----------- Current Assets: Cash and cash equivalents............................ $ 139,977 $ 1,116,512 Accounts receivable net of allowance for doubtful accounts of $472,092 and $579,093 at June 30, 1996 and June 27, 1997................................... 22,583,452 23,705,589 Inventories, net..................................... 27,782,953 37,561,766 Deferred income taxes................................ 926,606 Prepaid expenses..................................... 802,311 1,286,646 ----------- ----------- Total current assets............................... 51,308,693 64,597,119 Property, plant and equipment, net..................... 23,038,589 21,547,857 Other assets: Deferred financing costs, net of accumulated amortization of $51,459 and $394,264 at June 30, 1996 and June 27, 1997.............................. 88,883 10,004,390 Cash value of life insurance, net of related policy loans of $90,117 at June 30, 1996................... 4,267,871 Other................................................ 7,269 3,995 ----------- ----------- 4,364,023 10,008,385 ----------- ----------- Total.............................................. $78,711,305 $96,153,361 =========== ===========
See notes to consolidated financial statements. F-4 GFSI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND JUNE 27, 1997
JUNE 30, JUNE 27, LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1996 1997 ---------------------------------------------- ----------- ------------- Current liabilities: Short-term borrowings............................ $ 7,000,000 $ -- Accounts payable................................. 9,667,536 12,199,032 Accrued interest expense......................... 22,908 4,719,282 Accrued expenses................................. 5,266,090 5,543,206 Income taxes payable............................. 200,000 Current portion of long-term debt................ 1,658,160 3,375,000 ----------- ------------- Total current liabilities...................... 23,614,694 26,036,520 Deferred income taxes.............................. 1,176,972 Revolving credit agreement......................... 3,000,000 Long-term debt..................................... 20,617,878 211,625,000 Other long-term obligations........................ 450,000 Redeemable preferred stock: Series A 12% Cumulative Preferred Stock, $0.1 par value, 13,500 shares issued and outstanding, entitled in liquidation to $14,040,000.......... 14,040,000 Series B 12% Cumulative Preferred Stock, $0.1 par value, 11,000 shares issued and outstanding, entitled in liquidation to $11,440,000.......... 11,440,000 Series C 12% Cumulative Preferred Stock, $0.1 par value, 2,500 shares issued and outstanding, entitled in liquidation to $2,600,000........... 2,600,000 Stockholders' equity (deficit): Winning Ways, Inc. Common stock $.10 par value, 2,000,000 shares authorized, 1,491,000 shares issued at June 30, 1996......................... 149,100 Series A Common Stock, $0.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding at June 27, 1997.................... 10 Series B Common Stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued and outstanding at June 27, 1997.................... 10 Additional paid-in capital....................... 1,585,691 200,080 Notes receivable from stockholders............... (788,500) Retained earnings (accumulated deficit).......... 35,045,220 (173,626,731) ----------- ------------- 36,780,011 (174,215,131) Less treasury stock, at cost 261,250 shares at June 30, 1996.......................................... (2,301,278) ----------- ------------- Total stockholders' equity (deficit)........... 34,478,733 (174,215,131) ----------- ------------- Total.......................................... $78,711,305 $ 96,153,361 =========== =============
See notes to consolidated financial statements. F-5 GFSI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JUNE 30, 1995 AND 1996 AND JUNE 27, 1997
JUNE 30, JUNE 30, JUNE 27, 1995 1996 1997 ------------ ------------ ------------ Net sales............................ $148,196,394 $169,320,620 $183,297,733 Cost of sales........................ 84,869,223 97,307,746 102,606,239 ------------ ------------ ------------ Gross profit..................... 63,327,171 72,012,874 80,691,494 Operating expenses Selling............................ 14,884,100 16,963,137 18,432,943 General and administrative......... 19,544,325 22,216,193 26,319,209 ------------ ------------ ------------ 34,428,425 39,179,330 44,752,152 ------------ ------------ ------------ Operating income................. 28,898,746 32,833,544 35,939,342 Other income (expense): Interest expense................... (2,522,054) (2,608,154) (9,098,218) Other.............................. (156,869) 490 99,326 ------------ ------------ ------------ (2,678,923) (2,607,664) (8,998,892) ------------ ------------ ------------ Income before income taxes and extraordinary item.................. 26,219,823 30,225,880 26,940,450 Provision for income taxes........... (1,440,000) ------------ ------------ ------------ Income before extraordinary item..... 26,219,823 30,225,880 25,500,450 Extraordinary item, net of tax benefit of $989,634................. (1,484,451) ------------ ------------ ------------ Net income........................... 26,219,823 30,225,880 24,015,999 Preferred stock dividends............ (1,080,000) ------------ ------------ ------------ Net income attributable to common shareholders........................ $ 26,219,823 $ 30,225,880 $ 22,935,999 ============ ============ ============ Supplemental information: Income before income taxes and extraordinary item................ $ 26,219,823 $ 30,225,880 $ 26,940,450 Pro forma income tax provision..... 10,750,000 12,393,000 11,045,000 ------------ ------------ ------------ Pro forma income before extraordinary item................................ $ 15,469,823 $ 17,832,880 $ 15,895,450 ============ ============ ============
See notes to consolidated financial statements. F-6 GFSI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1995 AND 1996 AND JUNE 27, 1997
GFSI GFSI HOLDINGS, HOLDINGS, INC. INC. WINNING RETAINED NOTES SERIES A SERIES B WAYS, INC. ADDITIONAL EARNINGS RECEIVABLE COMMON COMMON COMMON PAID-IN (ACCUMULATED TREASURY FROM STOCK STOCK STOCK CAPITAL DEFICIT) STOCK STOCKHOLDERS TOTAL --------- --------- ---------- ----------- ------------- ----------- ------------ ------------- Balance, July 1, 1994................ $ 149,100 $ 420,746 $ 31,461,792 $(2,602,375) $ 29,429,263 Purchase of treasury stock.............. (3,958) (3,958) Reissuance of treasury stock..... 462,000 126,000 588,000 Net income.......... 26,219,823 26,219,823 Dividends declared.. (24,126,887) (24,126,887) --- --- ---------- ----------- ------------- ----------- --------- ------------- Balance, June 30, 1995................ 149,100 882,746 33,554,728 (2,480,333) 32,106,241 Reissuance of treasury stock..... 702,945 179,055 882,000 Net income.......... 30,225,880 30,225,880 Dividends declared.. (28,735,388) (28,735,388) --- --- ---------- ----------- ------------- ----------- --------- ------------- Balance, June 30, 1996................ 149,100 1,585,691 35,045,220 (2,301,278) 34,478,733 Reissuance of treasury stock..... 1,134,396 267,791 1,402,187 Net income.......... 24,015,999 24,015,999 Distributions to Winning Ways, Inc. shareholders....... (47,807,375) (47,807,375) Distributions and recapitalization of Winning Ways, Inc.. (149,100) (2,720,087) (182,327,938) 2,033,487 (183,163,638) Issuance of GFSI Holdings, Inc. Series A and B Common Stock (net of issuance costs of $1,472,637)..... $10 $10 200,080 (1,472,637) $(788,500) (2,061,037) Accrued dividends on redeemable preferred stock.... (1,080,000) (1,080,000) --- --- ---------- ----------- ------------- ----------- --------- ------------- Balance, June 27, 1997................ $10 $10 $ $ 200,080 $(173,626,731) $ $(788,500) $(174,215,131) === === ========== =========== ============= =========== ========= =============
See notes to consolidated financial statements. F-7 GFSI HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995 AND 1996 AND JUNE 27, 1997
JUNE 30, JUNE 30, JUNE 27, 1995 1996 1997 ----------- ----------- ------------ Cash flows from operating activities: Net income............................ $26,219,823 $30,225,880 $ 24,015,999 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................... 2,850,834 3,191,595 3,174,863 Amortization of deferred financing costs................................ 9,356 9,356 394,264 (Gain) loss on sale or disposal of property, plant and equipment........ 156,869 1,009 (11,659) Deferred income taxes................. 250,366 Increase in cash value of life insurance............................ (519,580) (331,967) (1,041,343) Extraordinary loss on early extinguishment of debt............... 2,473,192 Changes in operating assets and liabilities: Accounts receivable, net............. (4,993,971) (4,502,972) (1,122,137) Inventories, net..................... (1,873,099) 1,701,718 (9,778,813) Prepaid expenses, other current assets and other assets............. 271,658 665,925 (481,061) Income taxes payable................. 200,000 Accounts payable, accrued expense, and other long-term obligations..... 1,783,226 3,039,727 7,954,986 ----------- ----------- ------------ Net cash provided by operating activities......................... 23,905,116 34,000,271 26,028,657 ----------- ----------- ------------ Cash flows from investing activities: Proceeds from sales of property, plant and equipment........................ 733,698 131,032 948,993 Proceeds from surrender or transfer of cash value of life insurance......... 5,309,214 Purchases of property, plant and equipment............................ (4,988,639) (2,611,019) (2,615,228) ----------- ----------- ------------ Net cash provided by (used in) investing activities................ (4,254,941) (2,479,987) 3,642,979 ----------- ----------- ------------ Cash flows from financing activities: Issuance of revolving credit agreement............................ 3,000,000 Net changes to short-term borrowings.. 6,200,000 (1,000,000) (7,000,000) Issuance of senior subordinated notes................................ 125,000,000 Issuance of subordinated notes........ 25,000,000 Issuance of New Credit Agreement...... 67,000,000 Payments on long-term debt............ (2,326,424) (2,639,378) (24,276,038) Cash paid for penalties related to early extinguishment of debt......... (2,390,546) Cash paid for financing costs......... (10,398,654) Distributions to Winning Ways, Inc. shareholders......................... (24,126,887) (28,735,388) (47,807,375) Distribution and recapitalization of Winning Ways, Inc.................... (183,163,638) Issuance of GFSI Holdings, Inc. Common Stock......................... (1,272,537) Issuance of redeemable preferred stock................................ 26,211,500 Proceeds from sale of treasury stock.. 588,000 882,000 1,402,187 Purchase of treasury stock............ (3,958) ----------- ----------- ------------ Net cash used by financing activities.......................... (19,669,269) (31,492,766) (28,695,101) ----------- ----------- ------------ Net increase (decrease) in cash...... (19,094) 27,518 976,535 Cash and cash equivalents: Beginning of period................... 131,553 112,459 139,977 ----------- ----------- ------------ End of period......................... $ 112,459 $ 139,977 $ 1,116,512 =========== =========== ============ Supplemental cash flow information: Interest paid......................... $ 2,496,989 $ 2,628,291 $ 4,074,961 =========== =========== ============ Supplemental schedule of non-cash financing activities: Notes receivable from sale of stock... $ 788,500 ============ Accrual of preferred stock dividends.. $ 1,080,000 ============
F-8 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1996 AND JUNE 27, 1997 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" or the "Company") and GFSI, Inc. ("GFSI"), a wholly owned subsidiary of Holdings, to effect the acquisition of Winning Ways. On February 27, 1997, pursuant to the acquisition agreement, Holdings and GFSI 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 by Holdings to GFSI, along with the balance of the equity contribution, as described below. The aggregate purchase price for Winning Ways was $242.3 million, consisting of $173.1 million in cash at closing, a post-closing payment at April 30, 1997 of $10.0 million and the repayment of $59.2 million of Winning Ways' existing indebtedness. To finance the Acquisition, including approximately $11.5 million of related fees and expenses: (i) the Jordan Company, its affiliates and 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 GFSI (the "Equity Contribution"); (ii) GFSI 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) GFSI issued $125.0 million of Senior Subordinated 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 above are reflected in the accompanying audited financial statements of Holdings as of and for the year ended June 27, 1997 as a leveraged recapitalization under which the existing basis of accounting for Winning Ways was continued for financial accounting and reporting purposes. The historical financial information presented herein includes the operations and activities of Winning Ways through February 27, 1997 and the merged entity 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: New Credit Agreement............................................ $ 68.0 New Senior Subordinated Notes due 2007.......................... 125.0 Subordinated notes to a Jordan Investor......................... 25.0 Issuance of GFSI Holdings, Inc. preferred and common stock...... 26.4 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 ======
F-9 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Subsequent to the recapitalization transactions described above, GFSI is a wholly-owned subsidiary of Holdings. Holdings is dependent upon the cash flows of GFSI to provide funds to service $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 GFSI and Holdings, GFSI is obligated to pay accrued and unpaid interest on the Holdings Subordinated Notes under certain limited circumstances. Additionally, Holdings' cumulative preferred stock dividends will total $3.2 million annually. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS--Holdings' through its wholly-owned subsidiary, GFSI, is a leading designer, manufacturer and marketer of high quality, custom designed sports wear and active wear bearing names, logos and insignia of resorts, corporations, colleges and professional sports. The Company's customer base is spread throughout the United States. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiary, GFSI, Inc. All significant intercompany accounts and transactions have been eliminated. FISCAL YEAR--During 1997, Holdings converted its fiscal year to a 52/53 week fiscal year which ends on the Friday nearest June 30. Previously, Holdings' fiscal year ended June 30. The twelve month periods ended June 30, 1995 and 1996 and June 27, 1997 contain 52 weeks, respectively. CASH AND CASH EQUIVALENTS--Holdings considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. INVENTORIES--Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Included in inventories are markdown allowances of $1,922,038 and $305,608 at June 27, 1997 and June 30, 1996, respectively. PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are recorded at cost. Major renewals and betterments that extend the life of the asset are capitalized; other repairs and maintenance are expensed when incurred. Depreciation and amortization are provided for on the straight-line method over the following estimated useful lives: Buildings and improvements..................................... 40 years Furniture and fixtures......................................... 3-10 years
LONG-LIVED ASSETS--During fiscal 1997, Holdings adopted 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. Under SFAS No. 121, impairment losses are recognized when information indicates the carrying amount of long-lived assets, identifiable intangibles and goodwill related to those assets will not be recovered through future operations or disposal based upon a review of expected undiscounted cash flows. The adoption of this statement had no effect on Holdings' consolidated financial statements. 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. F-10 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS--Holdings is a party to an interest rate swap agreement and an interest rate cap agreement. Income or expense resulting from interest rate swap and cap 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 and cap agreements that are not matched with specific liabilities are recorded at fair value, with changes in the fair value recognized in current operations. Gains and losses on terminations of interest rate swap and cap agreements are recognized as other income (expense) when terminated in conjunction with the retirement of the associated debt. Gains and losses on terminated agreements are deferred and amortized in those cases where the underlying debt is not retired. Redesignations which are appropriately matched against underlying debt instruments will continue to qualify for settlement accounting. ADVERTISING COSTS--All costs related to advertising Holdings' products are expensed in the period incurred. Advertising expenses totaled $865,341, $1,011,784 and $1,383,261 for the years ended June 30, 1995 and 1996 and June 27, 1997, respectively. INCOME TAXES--Effective July 1, 1982, GFSI's predecessor, Winning Ways, Inc., elected to be taxed under the S-Corporation provisions of the Internal Revenue Code which provide that, in lieu of corporate income taxes, the shareholders are taxed on the Company's taxable income. Therefore, no provision or liability for income taxes is reflected in the accompanying financial 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, GFSI 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. 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 for all periods. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS--SFAS No. 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. The Statement is effective for Holding's fiscal 1998 financial statements, including interim periods; earlier application is not permitted. Management does not expect the implementation of this Statement to have a material impact on its 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 Holding's fiscal 1998 financial statements. Management does not expect the implementation of this Statement to have a material impact on its financial position of results of operations. SFAS No. 131, Disclosure 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 F-11 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 Holding's fiscal 1998 financial statements. Management does not expect the implementation of the disclosure requirements of this Statement to have a material impact on its financial statements. 3. PROPERTY, PLANT AND EQUIPMENT
JUNE 30, JUNE 27, 1996 1997 ----------- ----------- Land............................................. $ 2,442,373 $ 2,442,373 Buildings and improvements....................... 18,392,598 19,108,548 Furniture and fixtures........................... 16,722,972 14,150,193 ----------- ----------- 37,557,943 35,701,114 Less accumulated depreciation.................... 14,521,591 15,186,104 ----------- ----------- 23,036,352 20,515,010 Construction in progress......................... 2,237 1,032,847 ----------- ----------- $23,038,589 $21,547,857 =========== ===========
The net book value of assets under capital lease were and $1,576,876 and $0 at June 30, 1996 and June 27, 1997, 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 was based on a 40 basis point spread over bankers acceptance, federal funds, or LIBOR rates adjusted daily. The line was 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 $7,000,000 at June 30, 1996. Letters of credit against this line for unshipped merchandise aggregated $23,512,080 at June 30, 1996. As discussed in Note 11 to the financial statements, the floating interest rate on the above line of credit was 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 fluctuated based on the Company's anticipated level of short term borrowings with the maximum notional amount equaling $19,900,000. This interest rate swap agreement was terminated on February 27, 1997 in conjunction with the recapitalization transactions and related early retirement of debt. The $300,000 gain realized on the terminated swap was deferred and will be amortized over the life of the New Credit Agreement. 5. REVOLVING CREDIT AGREEMENT In conjunction with the recapitalization transactions (see Note 1), the Company replaced the $40,000,000 unsecured line of credit described in Note 4 with a $50,000,000 secured line of credit (the "Line") with floating interest of 7.938% at June 30, 1997. The Line is secured by substantially all of GFSI's property, plant and equipment and matures in December of 2002. The Line is subject to certain restrictions and covenants, among them being the maintenance of certain financial ratios, the most restrictive of which require GFSI to maintain a F-12 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) fixed charge coverage ratio greater than 1.0 to 1.0, an interest expense coverage ratio of greater than 1.2 to 1.0 and a maximum leverage ratio of less than 6.5 to 1.0. GFSI is limited with respect to the making of payments (dividends and distributions); the incurrence of certain liens; the sale of assets under certain circumstances; certain transactions with affiliates; certain consolidations, mergers, and transfers; and the use of loan proceeds. Borrowings against this Line totaled $3,000,000 at June 27, 1997. Letters of credit against this line at June 27, 1997, for unshipped merchandise aggregated $27,234,109. Stand-by letters of credit issued against the Line at June 27, 1997, aggregated $2,541,257. 6. LONG-TERM DEBT Long-term debt consists of:
JUNE 30, JUNE 27, 1996 1997 ----------- ------------ Senior Subordinated Notes, 9.625% interest rate, due 2007................................................. $125,000,000 Term Loan A, variable interest rate, 7.938% at June 27, 1997, due 2002................................... 40,000,000 Term Loan B, variable interest rate, 8.438% at June 27, 1997, due 2004................................... 25,000,000 Subordinated Notes to Affiliate, 12.0% interest rate, due 2008............................................. 25,000,000 10.125% credit agreement with bank to borrow up to $10,000,000, unsecured, payable in monthly principal installments of $119,048 plus interest (paid off February 27, 1997)................................... $ 4,285,714 Floating interest $10,000,000 line of credit agreement, interest was 5.71% at June 30, 1996 (paid off February 27, 1997)............................... 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 (paid off February 27, 1997)................. 9,550,324 Capital lease obligation securing 5.78% industrial revenue bonds, payable in amounts equal to the principal and interest payments due on the bonds (paid off February 27, 1997)......................... 440,000 ----------- ------------ 22,276,038 215,000,000 Less current portion.................................. 1,658,160 3,375,000 ----------- ------------ $20,617,878 $211,625,000 =========== ============
On February 27, 1997, 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 $25,000,000 ("Term Loan B" and collectively, with Term Loan A, the "Term Loans") and (iii) the $50,000,000 secured line of credit (see Note 5). 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, plant and equipment of Holding's wholly-owned subsidiary, GFSI, and is subject to general and financial covenants that place certain restrictions on GFSI. GFSI is limited with respect to the making of payments (dividends and distributions) to Holdings; the incurrence of certain liens; the sale of assets under certain circumstances; certain transactions with affiliates; certain consolidations, mergers, and transfers; and the use of loan proceeds. As discussed in Note 11 to the financial statements, the floating interest rate on the $10,000,000 line of credit agreement was partially converted to a fixed interest rate of 5.62% by a $7,000,000 notional amount F-13 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) interest rate swap agreement terminating on November 18, 2000. The floating interest rate was based generally on the higher of the corporate base rate or 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. As also discussed in Note 11 to the financial statements, a portion of the floating interest rate on the Term Loans has been capped at 7.50% by a $19,000,000 notional amount interest rate cap agreement maturing in March of 1999. On February 27, 1997, GFSI issued the 9.625% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") in the aggregate principal amount of $125,000,000 in a Regulation 144A private placement. Proceeds from the Senior Subordinated Notes were also used to finance the transactions described in Note 1 to the financial statements. GFSI's Registration Statement on Form S-4 was declared effective on July 24, 1997, providing for the exchange of the Senior Subordinated Notes registered under the Securities Act, for the Regulation 144A private placement Senior Subordinated Notes. Interest on the Senior Subordinated Notes is payable semi-annually in cash in arrears on September 1 and March 1, commencing September 1, 1997. The Senior Subordinated Notes mature on March 1, 2007 and are redeemable, in whole or in part, at the option of GFSI at any time on or after March 1, 2002 at the redemption prices listed below:
YEAR PERCENTAGE ---- ---------- 2002........................................................... 104.813% 2003........................................................... 103.208% 2004........................................................... 101.604% 2005 and thereafter............................................ 100.000%
At any time prior to March 1, 2000, GFSI may redeem up to 40% of the original aggregate principal amount of the Senior Subordinated Notes with the net proceeds of one or more equity offerings at a redemption price equal to 110% of the principal amount plus any accrued and unpaid interest to the date of redemption. Upon the occurrence of a change of control, GFSI will be required, subject to certain conditions, to make an offer to purchase the Senior Subordinated Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase. The Senior Subordinated Notes are senior unsecured obligations of GFSI and pursuant to the terms of the Senior Subordinated Notes indenture, rank pari passu in right of payment to any future subordinated indebtedness of the Company, and effectively rank junior to secured indebtedness of GFSI, including borrowings under the New Credit Agreement. The Senior Subordinated Notes Indenture includes covenants that, among other things, limit payments of dividends and other restricted payments and the incurrence of additional indebtedness. As of June 27, 1997, the Company was in compliance with all such covenants. On February 27, 1997, Holdings issued the 12% Subordinated Notes due 2009 (the "Subordinated Notes") in the aggregate principal amount of $25,000,000 to an affiliate of the Jordan Company. Proceeds from the Subordinated Notes were also used to finance the transactions described in Note 1 to the financial statements. Interest on the Subordinated Notes is payable semi-annually in cash in arrears on October 31 and April 30, commencing April 30, 1997. As mentioned on Note 1 to the financial statements, GFSI is obligated to pay accrued and unpaid interest on the Subordinated Notes. The Subordinated Notes mature on April 30, 2008; prepayments may be made at any time in multiples of $1,000. Prepayment is required upon a change in control of Holdings, as defined in the agreement. F-14 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Subordinated Notes are unsecured obligations of Holdings and pursuant to the terms of the Subordinated Notes purchase agreement, effectively rank junior to the other unsecured debt of GFSI, including the Senior Subordinated Notes, and the secured indebtedness of GFSI, including borrowings under the New Credit Agreement. The Subordinated Notes purchase agreement includes certain affirmative and negative covenants. As of June 27, 1997, the Company was in compliance with all such covenants. Aggregate maturities of the Holdings' long-term debt as of June 27, 1997 are as follows assuming a 52/53 week fiscal year:
FISCAL YEAR AMOUNT ----------- ------------ 1998......................................................... $ 3,375,000 1999......................................................... 4,875,000 2000......................................................... 6,125,000 2001......................................................... 7,625,000 2002......................................................... 9,500,000 Thereafter................................................... 183,500,000 ------------ Total.................................................... $215,000,000 ============
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 fiscal year ended June 27, 1997 of $2,474,085 ($1,484,451 on an after- tax basis). This loss consisted of $83,538 ($50,123 on an after-tax basis) of deferred financing costs charged off related to the repayment of GFSI's debt and a prepayment penalty of $2,390,546 ($1,434,328 on an after-tax basis) incurred in connection with the prepayment of GFSI's then existing first mortgage loan. Included in the foregoing schedule of long-term debt is the following capital lease information on the Company's manufacturing and distribution facility. At June 27, 1997, no capital lease obligations were outstanding.
JUNE 30, 1996 -------- Total minimum lease payments.................................... $479,657 Less amounts representing interest.............................. 39,657 -------- Present value of net minimum lease payments..................... $440,000 ========
7. 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 GFSI 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-15 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. REDEEMABLE PREFERRED STOCK In connection with the recapitalization transactions described in Note 1 to the financial statements, the Company issued 27,000 shares of Cumulative Preferred Stock, 13,500 shares as Series A 12% Cumulative Preferred Stock, 11,000 shares as Series B 12% Cumulative Preferred Stock, and 2,500 shares as Series C 12% Cumulative Preferred Stock (which along with the Series A and Series B Preferred Stock shall be collectively referred to as the "Preferred Stock"). The holders of Preferred Stock are entitled to annual cash dividends of $120 per share, payable on March 1 of each year, in accordance with the terms set forth in the Articles of Incorporation. The liquidation preference for each share of Preferred Stock is $1,000 plus any accrued and unpaid dividends. Mandatory redemption of the liquidation preference plus any accrued and unpaid dividends occurs on March 1, 2009. 9. PROFIT SHARING PLAN During fiscal 1996, the Company provided a non-contributory defined contribution profit sharing plan (the "Plan") covering all eligible employees. Contributions were at the discretion of the Board of Directors and totaled $875,756 for the year ended June 30, 1996. On August 1, 1996, the Plan was amended to include employee directed contributions with an annual 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 $131,843 and $443,624, respectively, for the year ended June 27, 1997. 10. INCOME TAXES The provision for income taxes for the year ended June 27, 1997 consists of the following:
JUNE 27, 1997 ---------- Current income tax provision.................................. $ 200,000 Deferred income tax provision................................. 250,366 ---------- Total income tax provision................................ $ 450,366 ========== Allocated to: Operating activities........................................ $1,440,000 Extraordinary loss.......................................... (989,634) ---------- Total income tax provision $ 450,366 ==========
The income tax provision differs from amounts computed at the statutory federal income tax rate as follows:
JUNE 27, 1997 ------------------ AMOUNT % ----------- ----- Income tax provision at the statutory rate.......... $ 9,429,158 35.0% Income attributable to S-Corporation earnings....... (9,146,583) (34.0)% Change in tax status to C-Corporation............... 993,621 3.7% Effect of state income taxes, net of federal benefit............................................ 163,804 0.6% ----------- ----- $1,440,000 5.3% =========== =====
F-16 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The sources of the differences that give rise to the deferred income tax assets and liabilities as of June 27, 1997, along with the income tax effect of each, are as follows:
JUNE 27, 1997 DEFERRED INCOME TAX ---------------------- ASSETS LIABILITIES ---------- ----------- Accounts receivable................................ $ 247,215 Inventory valuation................................ 244,624 Property, plant, and equipment..................... $1,611,484 Accrued expenses................................... 547,449 Net operating loss carry forward................... 259,271 Other.............................................. 62,559 Valuation allowance................................ ---------- ---------- Total.......................................... $1,361,118 $1,611,484 ========== ==========
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company engages in transactions which result in off-balance sheet risk. Interest rate swap and cap agreements are 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. Interest rate cap agreements are contractual agreements in which a premium is paid to reduce the impact of rising interest rates on floating rate debt. The notional principal amount does not represent a cash requirement, but merely serves as the amount used, along with the reference rate, to calculate contractual payments. Because the instrument is a contract or agreement rather than a cash market asset, the financial derivative transactions described above are referred to as "off-balance sheet" instruments. The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap agreements only with major financial institutions. The Company's interest rate swap agreements are used in conjunction with on- balance sheet liabilities and were as follows:
WEIGHTED AVERAGE CONTRACT OR ESTIMATED INTEREST RATE NOTIONAL FAIR ------------------ AMOUNT VALUE RECEIVABLE PAYABLE ----------- --------- ---------- ------- Swaps: June 30, 1996.................. $21,900,000 $850,000 5.39% 5.62% June 27, 1997.................. 7,000,000 156,000 5.55 5.62 Cap: June 27, 1997.................. $19,000,000 >7.50
GFSI has entered into two swap agreements to exchange fixed interest rates for floating rate debt payments. One agreement carries a notional amount of $7,000,000 and terminates on November 18, 2000, as further described in Note 6 to the financial statements. The notional amount of the other interest rate swap agreement fluctuates based on GFSI's anticipated level of short-term borrowing with the maximum notional amount equaling $19,900,000, as further described in Note 4 to the financial statements. This agreement was entered into in January 1995 to be effective July 1, 1996; however, this agreement was terminated on February 27, 1997. F-17 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) GFSI has a 7.50% interest rate cap agreement which is used to effectively cap the interest rate on a portion of GFSI's floating rate term loans. The interest rate cap agreement has a notional amount of $19,000,000 as of June 27, 1997. The cap matures March 31, 1999. 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires that GFSI disclose estimated fair values for its financial instruments which include cash and cash equivalents, accounts receivables, short-term borrowings, accounts payables, long-term debt and interest rate swap agreements. CASH AND CASH EQUIVALENTS--The carrying amount reported on the balance sheet represents the fair value of cash and cash equivalents. ACCOUNTS RECEIVABLE--The carrying amount of accounts receivable approximates fair value because of the short-term nature of the financial instruments. SHORT-TERM BORROWINGS AND REVOLVING CREDIT AGREEMENT--Short-term borrowings and revolving credit agreement 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. DERIVATIVE FINANCIAL INSTRUMENTS--Quoted market prices or dealer quotes are used to estimate the fair value of interest rate swap and cap agreements. The following summarizes the estimated fair value of financial instruments, by type:
JUNE 30, 1996 JUNE 27, 1997 ----------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ------------ ------------ Assets and Liabilities: Cash and cash equivalents.. $ 139,977 $ 139,977 $ 1,116,512 $ 1,116,512 Accounts receivable........ 22,583,452 22,583,452 23,705,589 23,705,589 Short-term borrowings...... 7,000,000 7,000,000 Accounts payable........... 9,667,536 9,667,536 12,199,032 12,199,032 Revolving credit agreement. 3,000,000 3,000,000 Long-term debt............. 22,276,038 24,562,702 215,000,000 215,000,000 Off-balance sheet financial instruments: Interest Rate Swap Agreements (Asset/(Liability))....... 850,000 156,000 Interest Rate Cap Agreement (Asset/(Liability))....... --
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. F-18 GFSI HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) 13. 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, $3,080,718 and $4,566,713 for the years ended June 30, 1995 and 1996 and June 27, 1997, respectively. During the year ended June 27, 1997, 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 which approximated market value. As of June 27, 1997, the remaining balance outstanding on the notes was $525,000. All outstanding balances were paid subsequent to year end. During fiscal 1997, the cash value of life insurance on officers was liquidated into cash or transferred to the respective individuals at carrying value. The net proceeds to the Company totaled $5,309,214 for the year ended June 27, 1997. Prior to June 27, 1997, a shareholder purchased the corporate aircraft from the Company for approximately $898,000 in cash, resulting in no gain or loss to the Company. In connection with the recapitalization transactions on February 27, 1997, Holdings entered into an agreement with an affiliate to render services to the Company, including consultation on its financial and business affairs, its relationship with its lenders and stockholders, and the operation and expansion of the business. In connection with the recapitalization transactions, the Company paid the affiliate $3.25 million pursuant to the terms of the agreement. These fees are included as deferred financing costs in the accompanying financial statements. In addition, the Company incurred consulting fees total $166,667 for the year ended June 27, 1997, which are included in general and administrative expenses in the accompanying financial statements. Effective upon the consummation of the recapitalization transactions on February 27, 1997, Holdings entered into a noncompete agreement with a shareholder. In exchange for the covenant not to compete, the shareholder will be paid $250,000 per annum for a period of ten years. At June 27, 1997, $83,333 of expense related to this agreement is included in general and administrative expenses in the accompanying financial statements. The Subordinated Notes, as described in Note 6 to the financial statements, have been issued to an affiliate of the Jordan Company. Interest expense paid and accrued to the Jordan Company affiliate totaled $517,000 and $493,000, respectively, as of and for the year ended June 27, 1997. F-19 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURI- TIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC- TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM- PLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUB- SEQUENT TO THE DATE HEREOF. ----------------- TABLE OF CONTENTS
PAGE ---- Summary................................................................... 1 Risk Factors.............................................................. 13 The Transactions.......................................................... 21 Use of Proceeds........................................................... 22 Capitalization............................................................ 22 Selected Historical Financial Data........................................ 23 Management's Discussion and Analysis of Results of Operations and Financial Condition...................................................... 25 Business.................................................................. 30 Management................................................................ 39 Principal Stockholders.................................................... 42 The Exchange Offer........................................................ 43 Description of Notes...................................................... 52 Description of Certain Indebtedness....................................... 76 Certain Transactions...................................................... 77 Plan of Distribution...................................................... 80 Certain Federal Income Tax Consideration.................................. 81 Legal Matters............................................................. 89 Auditors.................................................................. 89 Available Information..................................................... 90 Unaudited Pro Forma Combined Financial Statements......................... P-1 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GFSI HOLDINGS, INC. 11.375% SERIES B SENIOR DISCOUNT NOTES DUE 2009 ----------------- PROSPECTUS ----------------- , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) the Delaware General Corporation Law (Section 145) gives Delaware corporations broad powers to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that the person is or was a director, officer, employee or agent of the registrant, or is or was serving at the request of the registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, so long as such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant. For actions, or suits by or in the right of the registrant, no indemnification is permitted in respect of any claim, issue or matter as to which such person is adjudged to be liable to the registrant, unless, and only to the extent that, the Delaware Court of Chancery or the court in which such action or suit was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court deems proper. Section 145 also authorizes the registrant to buy directors' and officers' liability insurance and gives a director, officer, employee or agent of the registrant who has been successful on the merits or otherwise in defense of any action, suit or proceeding of a type referred in the preceding paragraph the right to be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Any indemnification (unless ordered by a court) will be made by the registrant only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because the person has note the applicable standard of conduct set forth above. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or is such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. Such indemnification is not exclusive of any other rights to which those indemnified my be entitled under any by-laws, agreement, vote of stockholders or otherwise. (b) The Purchase Agreement and the Registration Rights Agreement (the Forms of which are included as Exhibits 1 and 4.4 to this registration statement) provide for the indemnification under certain circumstances of the registrant, its directors and certain of its officers by the Underwriters. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits: A list of the exhibits included as part of this registration statement is Contained on the Exhibit Index and is incorporated herein by reference. (b) Financial Statement Schedules:
PAGE ---- Independent Auditors' Report on Schedule S-1 Schedule I Parent Company Condensed Balance Sheet as of June 27, 1997 and Condensed Income Statement and Condensed Statement of Cash Flows for the period from February 27, 1997 (date operations commenced) to June 27, 1997 S-2
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not required, are inapplicable or the required information has already been provided elsewhere in the registration statement. II-1 ITEM 22. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration: (i) To include any prospectus in which offers or sales are being made, a post-effective amendment to this registration statement: (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant, will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (d) The registrant had not entered into any arrangement or understanding with any person to distribute the securities to be received in the Exchange Offer and to the best of the registrant's information and belief, each person participating in the Exchange Offer is acquiring the securities in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the securities to be received in the Exchange Offer. In this regard, the registrant will make each person participating in the Exchange Offer aware (through the Exchange Offer Prospectus or otherwise) that if the Exchange Offer is being registered for the purpose of secondary resales, any security holder using the exchange offer to participate in a distribution of the securities to be acquired in the registered exchange offer (1) could not rely on the staff position enunciated in Exxon Capital Holdings Corporation (available April 13, 1989) or similar letters and (2) must comply with registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. The registration acknowledges that such a secondary resale transaction should be covered by an effective registration statement containing the selling securityholder information required by Item 4\507 of Regulation S-K. II-2 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE NEW YORK, ON OCTOBER 27, 1997. GFSI Holdings, Inc. /s/ A. Richard Caputo, Jr. By: _________________________________ A. Richard Caputo, Jr. Vice President and Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS A. RICHARD CAPUTO, JOHN L. MENGHINI AND ROBERT G. SHAW, AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN THIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND ANY AND ALL DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM ANY AND ALL ACTS AND THINGS REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFORMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM, OR HIS SUBSTITUTE OR NOMINEE, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON OCTOBER 27, 1997.
SIGNATURE TITLE --------- ----- /s/ Robert M. Wolff Chairman and a Director ___________________________________________ Robert M. Wolff /s/ John L. Menghini President, Chief Operating Officer and a ___________________________________________ Director (Principal Executive Officer) John L. Menghini /s/ Robert G. Shaw Senior Vice President, Finance and a ___________________________________________ Director (Principal Financial and Robert G. Shaw Accounting Officer) /s/ Larry D. Graveel Senior Vice President, Merchandising and a ___________________________________________ Director Larry D. Graveel /s/ A. Richard Caputo, Jr. Vice President and a Director ___________________________________________ A. Richard Caputo, Jr. /s/ John W. Jordan II Director ___________________________________________ John W. Jordan II /s/ David W. Zalaznick Director ___________________________________________ David W. Zalaznick
II-3 INDEPENDENT AUDITORS' REPORT Board of Directors GFSI Holdings, Inc. and subsidiary Lenexa, Kansas We have audited the consolidated financial statements of GFSI Holdings, Inc., and subsidiary as of the June 27, 1997 and June 30, 1996, and for the years then ended, and have issued our report thereon August 22, 1997. Our audit also included the financial statement schedule which follows. The financial statement schedule is the responsibility of management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information therein set forth. Deloitte & Touche LLP Kansas City, Missouri August 22, 1997 S-1 SCHEDULE I GFSI HOLDINGS, INC. AND SUBSIDIARY PARENT COMPANY ONLY CONDENSED BALANCE SHEET JUNE 27, 1997
ASSETS - ------ Current assets: Accounts receivable, net....................................... $ 18,185 Income tax receivables......................................... 137,750 ------------- 155,935 Deferred tax assets.............................................. 259,271 Deferred financing costs......................................... 343,583 ------------- $ 758,789 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities--accrued expenses............................ $ 483,333 Negative investment in GFSI, Inc................................. 121,410,587 Long-term debt................................................... 25,000,000 Redeemable preferred stock....................................... 28,080,000 Stockholders' deficit: Common stock................................................... 20 Accumulated deficit............................................ (173,426,651) Notes receivable from stockholders............................. (788,500) ------------- Total stockholders' deficit.................................. (174,215,131) ------------- $ 758,789 =============
S-2 SCHEDULE I GFSI HOLDINGS, INC. AND SUBSIDIARY PARENT COMPANY ONLY CONDENSED INCOME STATEMENT PERIOD FROM FEBRUARY 27, 1997 (DATE OPERATIONS COMMENCED) TO JUNE 27, 1997 Other income (expense)............................................. $ 18,185 Interest expense................................................... (1,010,737) ----------- Loss before income taxes and equity in net income of GFSI, Inc..... (992,552) Income tax benefit................................................. 397,021 ----------- Loss before equity in net income of GFSI, Inc...................... (595,531) Equity in net income of GFSI, Inc.................................. 24,611,530 ----------- Net income......................................................... 24,015,999 Preferred stock dividends ......................................... (1,080,000) ----------- Net income attributable to common shareholders..................... $22,935,999 ===========
S-3 SCHEDULE I GFSI HOLDINGS, INC. AND SUBSIDIARY PARENT COMPANY ONLY CONDENSED STATEMENT OF CASH FLOWS PERIOD FROM FEBRUARY 27, 1997 (DATE OPERATIONS COMMENCED) TO JUNE 27, 1997 Cash flows from operating activities: Net income...................................................... $ 24,015,999 Adjustments to reconcile net income to net cash provided by operating activities: Deferred tax provision......................................... (259,271) Equity in net income of GFSI, Inc.............................. (24,611,530) Distributions received from GFSI, Inc.......................... 870,987 Changes in: Accounts receivable........................................... (18,185) Income tax receivable......................................... (137,750) Accrued expenses.............................................. 483,333 ------------ Net cash provided by operating activities.................... 343,583 ------------ Cash flows from investing activities--Equity contribution to GFSI, Inc....................................................... (49,938,963) ------------ Net cash used in investing activities........................ (49,938,963) ------------ Cash flows from financing activities: Issuance of subordinated notes.................................. 25,000,000 Issuance of redeemable preferred stock.......................... 27,000,000 Issuance of common stock, net of offering costs................. (2,061,037) Cash paid for financing costs................................... (343,583) ------------ Net cash provided by financing activities.................... 49,595,380 ------------ Net change in cash............................................... -- ------------ Cash, beginning of period........................................ -- ------------ Cash, end of period.............................................. $ -- ------------
S-4 EXHIBIT INDEX
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 1 Purchase Agreement, dated September 17, 1997, by and among GFSI Holdings, Inc., and Donaldson, Lufkin & Jenrette Securities Corporation 2.1 Agreement for Purchase and Sale of Stock, dated January 24, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. (incorporated by reference to Exhibit 2.1 to GFSI, Inc.'s Form S-4 Registration Statement (File No. 333-24189, the "GFSI S- 4") 2.2 Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated February 27, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. (incorporated by reference to Exhibit 2.2 to the GFSI S-4) 3.1 Certificate of Incorporation of GFSI Holdings, Inc. 3.2 Bylaws of GFSI Holdings, Inc. 4.1 Indenture, dated September 17, 1997, between GFSI Holdings, Inc. and State Street Bank and Trust Company, as Trustee 4.2 Global Series A Senior Discount Note 4.3 Form Global Series B Senior Discount Note 4.4 Registration Rights Agreement, dated September 17, 1997, by and among GFSI Holdings, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation 5 Opinion of Mayer, Brown & Platt 8 Tax Opinion (included as part of Exhibit 5) 10.1 Credit Agreement, dated February 27, 1997, between GFSI, Inc., the lenders listed thereto and The First National Bank of Chicago, as Agent (incorporated by reference to Exhibit 10.1 to the GFSI S-4) 10.2 Amendment No. 1 to Credit Agreement, dated September 17, 1997, by and among GFSI, Inc., the lenders listed thereto and The First National Bank of Chicago, as Agent 10.3 Tax Sharing Agreement, dated February 27, 1997, between GFSI, Inc. and GFSI Holdings, Inc. (incorporated by reference to Exhibit 10.6 to the GFSI S-4) 10.4 Management Consulting Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and TJC Management Corporation (incorporated by reference to Exhibit 10.7 to the GFSI S-4) 10.5 Employment Agreement, dated February 27, 1997, between GFSI, Inc. and Robert M. Wolff (incorporated by reference to Exhibit 10.8 to the GFSI S-4) 10.6 Noncompetition Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and Robert M. Wolff (incorporated by reference to Exhibit 10.9 to the GFSI S- 4) 10.7 Form of Indemnification Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and its director and executive officers (incorporated by reference to Exhibit 10.10 to the GFSI S-4) 10.8 Form of Promissory Note, dated February 27, 1997, between GFSI Holdings, Inc. and the Management Investors (incorporated by reference to Exhibit 10.13 to the GFSI S-4)
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION NUMBER ------- ----------- ---------- 12 Statement re: Computation of Ratios 23.1 Consent of Mayer, Brown & Platt (included in the opinion filed as Exhibit 5) 23.2 Consent of Deloitte & Touche LLP 23.3 Consent of Donnelly Meiners Jordan and Kline 24 Power of Attorney (included on the signature page in Part II of the Registration Statement) 25 Statement of Eligibility of Trustee 27 Financial Data Schedule 99 Form of Letter of Transmittal
EX-1 2 PURCHASE AGREEMENT Exhibit 1 Execution Copy ================================================================================ GFSI HOLDINGS, INC. THE SELLING SECURITYHOLDERS NAMED HEREIN ________________________________________ 50,000 Exchangeable Units Consisting of $25,000,000 Aggregate Principal Amount of 11 3/8% Subordinated Discount Notes due 2009 and 25,000 Shares of 11 3/8% Series D Preferred Stock due 2009 ________________________________________ ___________________ PURCHASE AGREEMENT DATED AS OF SEPTEMBER 12, 1997 ___________________ Donaldson, Lufkin & Jenrette Securities Corporation ================================================================================ September 12, 1997 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: GFSI Holdings, Inc., a Delaware corporation ("HOLDINGS"), MCIT PLC, as holder of the 11 3/8% Subordinated Discount Notes due 2009 (the "HOLDINGS SUBORDINATED NOTES") of Holdings and the holders (together with MCIT PLC, the "SELLING SECURITYHOLDERS") of all of the outstanding shares of Holdings' 11 3/8% Cumulative Preferred Stock due 2009, par value $0.01 per share (the "HOLDINGS PREFERRED STOCK"), propose to issue and sell 50,000 Exchangeable Units (the "UNITS"), each consisting of $500.00 principal amount upon issue of the Holdings Subordinated Notes and 0.50 of a share of the Holdings Preferred Stock, to Donaldson, Lufkin & Jenrette Securities Corporation (the "INITIAL PURCHASER"). The Holdings Subordinated Notes will be issued pursuant to an Indenture (the "SUBORDINATED NOTE INDENTURE"), dated September 17, 1997, between Holdings and Fleet National Bank, as trustee (the "TRUSTEE"). Each Unit will, at the option of Holdings, be exchangeable for 11 3/8% Senior Discount Notes due 2009 (the "SERIES A NOTES") of Holdings no earlier than ten days after the issuance of the Units. The Series A Notes and the Series B Notes (as defined) will be issued pursuant to an indenture (the "INDENTURE") between Holdings and the Trustee, dated September 17, 1997. 1. ISSUANCE OF SECURITIES. The Units will be offered and sold to the Initial Purchaser pursuant to an exemption from the registration requirements under the Securities Act of 1933, as amended (the "ACT"). Holdings has prepared a preliminary offering memorandum, dated September 12, 1997 (the "PRELIMINARY OFFERING MEMORANDUM"), and a final offering memorandum, dated September 12, 1997 (the "OFFERING MEMORANDUM" and, together with the Preliminary Offering Memorandum, the "OFFERING DOCUMENTS"), relating to Holdings and the Units. Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Act, the Units, the Holdings Subordinated Notes, the Holdings Preferred Stock and the Series A Notes (and all securities issued in exchange therefor or in substitution thereof) shall bear the following legend: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF HOLDINGS THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE 1 REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF HOLDINGS SO REQUESTS), (2) TO HOLDINGS OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, Holdings and the Selling Securityholders agree to issue and sell to the Initial Purchaser, and the Initial Purchaser agrees to purchase from Holdings and the Selling Securityholders, 50,000 Units at a purchase price of $972.50 per Unit (the "PURCHASE PRICE") as set forth on Schedule I hereto. 3. TERM OF OFFERING. The Initial Purchaser has advised Holdings that the Initial Purchaser will make offers (the "EXEMPT RESALES") of the Units purchased by the Initial Purchaser hereunder on the terms set forth in the Offering Memorandum, as amended or supplemented, solely to (i) persons (each, a "144A PURCHASER") whom the Initial Purchaser reasonably believes to be "qualified institutional buyers" as defined in Rule 144A under the Act ("QIBs") and (ii) non-U.S. persons outside the United States in reliance upon Regulation S ("REGULATION S") under the Act (such persons specified in clauses (i) and (ii) being referred to herein as the "ELIGIBLE PURCHASERS"). The Initial Purchaser will offer the Units to Eligible Purchasers initially at a price equal to $1,000 per Unit. Such price may be changed at any time without notice. Holders (including subsequent transferees) of the Units or the Series A Notes, as applicable, will have the registration rights regarding the Series A Notes set forth in the registration rights agreement (the "REGISTRATION RIGHTS AGREEMENT"), to be dated the Closing Date (as defined), in substantially the form of Exhibit A hereto, for so long as such Series A Notes constitute "TRANSFER RESTRICTED SECURITIES" (as defined in the Registration Rights Agreement). Pursuant to the Registration Rights Agreement, Holdings will agree to file with the Securities and Exchange Commission (the "COMMISSION"), under the circumstances set forth therein, (i) a registration statement under the Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") relating to (A) Holdings' 11 3/8% Series B Senior Discount Notes due 2009 (the "SERIES B NOTES" and, together with the Series A Notes, the "NOTES") to be offered in exchange for the Series A Notes (such offer to exchange being referred to as the "REGISTERED EXCHANGE OFFER") and/or (ii) a shelf registration statement pursuant to Rule 415 under the Act (the "SHELF REGISTRATION STATEMENT" and together with the Exchange Offer Registration Statement, the "REGISTRATION STATEMENTS") relating to the resale by certain holders of the Series A Notes, and to use their best efforts to cause such Registration Statements to be declared effective. The Holdings Preferred Stock, the Holdings Subordinated Notes and the Units are hereinafter referred to collectively as the Securities. This Agreement, the Subordinated Note Indenture, the Indenture and the Registration Rights Agreement are hereinafter referred to collectively as the "OPERATIVE DOCUMENTS." 4. DELIVERY AND PAYMENT. Delivery to the Initial Purchaser by Holdings and the Selling Securityholders of, and payment by the Initial Purchaser for, the Units shall be made at 9:00 A.M., New York City time, on September 17, 1997 (or such other date as Holdings, the Selling Securityholders and the Initial Purchaser may agree) (the "CLOSING DATE") at the offices of Mayer, Brown & Platt, 1675 Broadway, New York, New York 10019. 2 One or more Units in definitive form (the "GLOBAL UNIT"), registered in the name of Cede & Co., as nominee of the Depository Trust Company ("DTC"), representing all of the Units sold pursuant to Exempt Resales, shall be delivered by Holdings and the Selling Securityholders to the Initial Purchaser, against payment by the Initial Purchaser of the purchase price thereof by wire transfer of immediately available funds to an account designated by Holdings and the Selling Securityholders at least one business day prior to the Closing Date. The Global Unit shall be made available to the Initial Purchaser for inspection at the offices of DLJ not later than 9:30 a.m. on the business day immediately preceding the Closing Date. 5. AGREEMENTS OF HOLDINGS. Holdings agrees with the Initial Purchaser: (a) To advise the Initial Purchaser promptly and, if requested by the Initial Purchaser, to confirm such advice in writing, (i) of receipt of any notification with respect to the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of any of the Securities for offering or sale in any jurisdiction designated by the Initial Purchaser pursuant to Section 5(f), or the initiation of any proceeding for such purpose by any state securities commission or other regulatory authority, and (ii) of the happening of any event that makes any statement of a material fact made in the Offering Documents (or any amendment or supplement thereto) untrue or that requires the making of any additions to or changes in the Offering Documents (or any amendment or supplement thereto) in order to make the statements therein, in the light of the circumstances in which they are made, not misleading. Holdings shall use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption from qualification of the Securities under any state securities or Blue Sky laws, and, if at any time any state securities commission or other regulatory authority shall issue any stop order or order suspending the qualification or exemption from qualification of any of the Securities under any state securities or Blue Sky laws, Holdings shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to the Initial Purchaser, without charge, as many copies of the Offering Documents, and any amendments or supplements thereto, as the Initial Purchaser may reasonably request. Holdings consents to the use of the Offering Documents, and any amendments or supplements thereto, by the Initial Purchaser in connection with Exempt Resales. (c) Not to amend or supplement the Offering Memorandum, whether before or after the Closing Date, unless (i) the Initial Purchaser has been previously advised thereof, and (ii) the Initial Purchaser has not reasonably objected thereto (unless in the opinion of counsel to Holdings such amendment or supplement is necessary, in the judgment of counsel to Holdings, to make the statements made in the Offering Memorandum not misleading); and to prepare, promptly upon the Initial Purchaser's request, any amendment or supplement to the Offering Memorandum that the Initial Purchaser deems necessary or advisable in connection with Exempt Resales (except to the extent any such amendment or supplement requested would, in the judgment of counsel to Holdings, render the statements made in the Offering Memorandum, as proposed to be amended or supplemented, misleading). (d) If, after the date hereof, in the opinion of counsel for the Initial Purchaser, any event shall occur as a result of which it becomes necessary to amend or supplement the Offering Memorandum to comply with any law or to make the statements therein, in the light of the circumstances at the time that the Offering Memorandum are delivered to an Eligible Purchaser which is a prospective purchaser, not misleading, to promptly (i) prepare an appropriate amendment or supplement to the Offering Memorandum so that the statements in the Offering Memorandum, as so amended or supplemented, will comply with all applicable laws and will not, in the light of the circumstances at the time it is so delivered, be misleading, and (ii) furnish the 3 Initial Purchaser with such number of copies of the Offering Memorandum, as amended or supplemented, as the Initial Purchaser may reasonably request. (e) Prior to the earlier of consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement if, in the reasonable judgment of the Initial Purchaser, the Initial Purchaser or any of its affiliates (as such term is defined in the rules and regulations under the Act) are required to deliver an offering memorandum in connection with sales of, or market-making activities with respect to, the Securities or the Notes, (A) to periodically amend or supplement the Offering Memorandum so that the information contained in the Offering Memorandum complies with the requirements of Rule 144A of the Act, (B) to amend or supplement the Offering Memorandum when necessary to reflect any material changes in the information provided therein so that the Offering Memorandum will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances existing as of the date the Offering Memorandum are so delivered, not misleading and (C) to provide the Initial Purchaser with copies of each such amended or supplemented Offering Memorandum, as the Initial Purchaser may reasonably request. Following the consummation of the Exchange Offer or the effectiveness of a Shelf Registration Statement and for so long as the Notes are outstanding if, in the reasonable judgment of the Initial Purchaser, the Initial Purchaser or any of its affiliates (as such term is defined in the rules and regulations under the Act) are required to deliver a prospectus in connection with sales of, or market-making activities with respect to, the Notes, (A) to periodically amend the applicable registration statement so that the information contained therein complies with the requirements of Section 10(a) of the Act, (B) to amend the applicable registration statement or supplement the related prospectus or the documents incorporated therein when necessary to reflect any material changes in the information provided therein so that the registration statement and the prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing as of the date the prospectus is so delivered, not misleading and (C) to provide the Initial Purchaser with copies of each amendment or supplement filed and such other documents as the Initial Purchaser may reasonably request. The Selling Securityholders, Holdings, and GSFI, Inc., a Delaware corporation and wholly owned Subsidiary of Holdings (the "COMPANY"), hereby expressly acknowledge that the indemnification and contribution provisions of Section 9 hereof are specifically applicable and relate to each offering document, registration statement, prospectus, amendment or supplement referred to in this Section 5(e). (f) To (i) cooperate with the Initial Purchaser and counsel for the Initial Purchaser in connection with the qualification of the Securities for offer and sale by the Initial Purchaser under the state securities or Blue Sky laws of such jurisdictions as the Initial Purchaser may request, (ii) continue such qualification in effect so long as required for Exempt Resales of the Securities and (iii) file such consents to service of process or other documents as may be necessary in order to effect such qualification; provided that in no event shall Holdings be obligated to qualify to do business in any jurisdiction where it is not now so qualified, or take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) So long as any of the Securities or the Notes are outstanding, to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and, during the period of three years following the date of this Agreement, to deliver to the Initial Purchaser, promptly upon their becoming available, (i) copies of all 4 current, regular and periodic reports filed by Holdings and the Company with any securities exchange or with the Commission or any governmental authority succeeding to any of the Commission's functions, and (ii) copies of each report or other publicly available information of Holdings and the Company mailed to the holders of the Securities or Notes, as applicable, and such other publicly available information concerning Holdings and its subsidiaries as the Initial Purchaser may request. (h) To use the proceeds from the sale of the Units in the manner specified in the Offering Documents (and any amendments or supplements thereto) under the caption "Use of Proceeds." (i) Not to claim voluntarily, and to resist actively any attempts to claim, the benefit of any usury laws against the holders of the Securities or the Notes. (j) Except as otherwise agreed to by the parties hereto, to pay all costs, expenses, fees and taxes incident to: (1) the preparation, printing, filing and distribution under the Act of the Offering Documents (including financial statements and exhibits) and all amendments and supplements to any of them; (2) the printing and delivery of the Operative Documents, the Securities, the Notes, the preliminary and supplemental Blue Sky memoranda and all other agreements, memoranda, correspondence and other documents printed and delivered in connection herewith and with the Exempt Resales (including in each case any disbursements of counsel to the Initial Purchaser relating to such printing and delivery); (3) the issuance and delivery of the Securities and the Notes; (4) the registration or qualification of the Securities and the Notes for offer and sale under the securities or Blue Sky laws of the several states (including in each case the fees and disbursements of counsel to the Initial Purchaser relating to such registration or qualification and memoranda relating thereto); (5) furnishing such copies of the Offering Documents (including all documents incorporated by reference therein) and all amendments and supplements thereto as may be requested for use in connection with the Exempt Resales; (6) the rating of the Securities and the Notes by rating agencies, if any; (7) all expenses and listing fees in connection with the application for quotation of the Securities and the Notes in the National Association of Securities Dealers, Inc. Automated Quotation System - PORTAL ("PORTAL"); (8) all fees and expenses (including fees and expenses of counsel) of Holdings in connection with approval of the Securities and the Notes by DTC for "book-entry" transfer; and (9) the performance by Holdings of its other obligations under this Agreement. (k) If this Agreement shall be terminated pursuant to any of the provisions hereof 5 (otherwise than a default by the Initial Purchaser) or if for any reason Holdings or the Selling Securityholders shall be unable or unwilling to perform their respective obligations hereunder, Holdings shall, except as otherwise agreed by the parties hereto, reimburse the Initial Purchaser for the fees and expenses to be paid or reimbursed pursuant to Section 5(j) above, and reimburse the Initial Purchaser for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of counsel to the Initial Purchaser) incurred by the Initial Purchaser in connection with the transactions contemplated by this Agreement. (l) Prior to the Closing Date, to furnish to the Initial Purchaser, as soon as they have been prepared by Holdings, a copy of any consolidated financial statements of Holdings for any period subsequent to the period covered by the financial statements appearing in the Offering Documents. (m) Not to distribute prior to the Closing Date any offering material in connection with the offering and sale of the Units other than the Offering Documents. (n) Not to sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Act) that would be integrated with the sale of the Units in a manner that would require the registration under the Act of the sale to the Initial Purchaser or the Eligible Purchasers of Units. (o) For so long as any of the Securities or the Notes remain outstanding and during any period in which Holdings is not subject to Section 13 or 15(d) of the Exchange Act, to make available to any Eligible Purchaser or beneficial owner of the Securities or the Notes in connection with any sale thereof and any prospective purchaser of such Securities or such Notes from such Eligible Purchaser or beneficial owner, the information required by Rule 144A(d)(4) under the Act. (p) To comply with its agreements in the Registration Rights Agreement, and all agreements set forth in the representation letters of Holdings to DTC relating to the approval of the Securities and the Notes by DTC for "book-entry" transfer. (q) To cause the Registered Exchange Offer, if available, to be made in the appropriate form, as contemplated by the Registration Rights Agreement, to permit registration of the Series B Notes to be offered in exchange for the Series A Notes and to comply with all applicable federal and state securities laws in connection with the Registered Exchange Offer. (r) To use its best efforts to effect the inclusion of the Securities and the Notes in PORTAL. (s) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by Holdings prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Units. (t) During the period beginning from the date hereof and continuing to and including the date that is 180 days after the Closing Date, not to offer, sell, contract to sell or otherwise dispose of, except as provided hereunder, any securities of Holdings (other than the Series B Notes) that are substantially similar to the Units or the Notes including but not limited to any securities (other than the Units) that are convertible into or exchangeable for, or that represent the right to receive, Units or Notes or any such substantially similar securities (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without the prior written 6 consent of the Initial Purchaser. (u) Not to cause any advertisement of the Units to be published in any newspaper or periodical or posted in any public place and not to issue any circular relating to the Units, except such advertisements that include the statements required by Regulation S. (v) If Holdings elects to exchange the Units for the Notes, to comply with all applicable federal and state securities laws in connection with such exchange. 6. REPRESENTATIONS AND WARRANTIES OF HOLDINGS. Holdings represents and warrants to the Initial Purchaser that: (a) The Offering Documents have been prepared in connection with the Exempt Resales. The Preliminary Offering Memorandum as of its date did not, and the Offering Memorandum as of its date does not and as of the Closing Date will not, and any amendment or supplement thereto will not, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph (a) shall not apply to statements or omissions in the Offering Documents (or any amendment or supplement thereto) based upon information relating to the Initial Purchaser furnished to Holdings in writing by or on behalf of the Initial Purchaser expressly for use therein. No stop order preventing the use of the any of the Offering Documents, or any amendment or supplement thereto, or any order asserting that any of the transactions contemplated by this Agreement are subject to the registration requirements of the Act, have been issued. (b) Each of Holdings and the Company has been duly organized and is validly existing and in good standing under the laws of its jurisdiction of incorporation, and has full corporate power and authority to carry on its business as it is currently being and is proposed to be conducted and to own, lease and operate its properties, and has been duly qualified and is in good standing as a foreign corporation registered to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not be reasonably likely to have a material adverse effect on the condition (financial or other), business, property, prospects, net worth or results of operations of Holdings and the Company, taken as a whole (a "MATERIAL ADVERSE EFFECT"). All of the outstanding shares of capital stock of Holdings have been duly authorized and validly issued, and are fully paid and nonassessable and not subject to preemptive or similar rights other than as set forth in the Operative Documents. The Company is the only subsidiary, direct or indirect, of Holdings. All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and are owned by Holdings free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature (each, a "Lien"). Holdings has all necessary corporate power and authority to enter into and perform its obligations under the Operative Documents and to issue, sell and deliver the Securities. The Company has all necessary corporate power and authority to enter into and perform its obligations under this Agreement. (c) Neither Holdings nor the Company is in violation of its charter or bylaws or in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, Note, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of Holdings and the Company, taken as a whole, to which Holdings or the Company is a party or by which Holdings or the Company or their respective property is bound. 7 (d) The execution, delivery and performance of the Operative Documents by Holdings, compliance by Holdings with the provisions of the Operative Documents and the Securities, the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated by the Operative Documents does not conflict with or constitute a breach of any of the terms or provisions of, or a default under, or result in the imposition of a lien or encumbrance on any properties of Holdings or the Company or an acceleration of indebtedness pursuant to, (i) the charter or bylaws of Holdings or the Company, (ii) any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument to which Holdings or the Company is a party or by which Holdings, the Company or their respective property is bound, or (iii) any law or administrative regulation applicable to Holdings, the Company or any of their respective assets or properties, or any judgment, order or decree of any court or governmental agency or authority entered in any proceeding to which Holdings or the Company was or is now a party or to which Holdings, the Company or their respective properties may be subject, except, in the case of clauses (ii) and (iii), for any such conflict, breach, default or imposition of a lien that would not be reasonably likely to have a Material Adverse Effect. No consent, approval, authorization or order of, or filing or registration with, any regulatory body, administrative agency, or other governmental agency (except as securities or Blue Sky laws of the various states may require) that has not been made or obtained is required for the execution, delivery and performance of the Operative Documents and the valid issuance and sale of the Securities. No consents or waivers from any person are required to consummate the transactions contemplated by the Operative Documents and the Offering Documents other than such consents and waivers as have been or, prior to the Closing Date, will be obtained, except where the failure to obtain any such consents or waivers, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. (e) This Agreement has been duly authorized and validly executed by each of Holdings and the Company and (assuming the due execution and delivery thereof by the Initial Purchaser) is a legally valid and binding obligation of Holdings and the Company, enforceable against each of them in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution. (f) The Units have been duly and validly authorized by Holdings and, when issued in accordance with their terms and delivered to and paid for by the Initial Purchaser in accordance with the terms hereof, the Units will conform to the description thereof in the Offering Memorandum, and will be legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (g) The Holdings Preferred Stock has been duly authorized and is fully paid, nonassessable and entitled to the rights, privileges and preferences set forth in the Certificate of Incorporation, as amended, of Holdings. The Holdings Preferred Stock conforms with the description thereof contained in the Offering Memorandum. (h) Holdings has duly authorized the Subordinated Note Indenture, and when Holdings has duly executed and delivered it (assuming the due authorization, execution and delivery thereof by the Trustee), the Subordinated Note Indenture will be a legally valid and binding obligation 8 of Holdings, enforceable against Holdings in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (i) Holdings has duly authorized the Holdings Subordinated Notes and, when issued and authenticated in accordance with the terms of the Subordinated Note Indenture and delivered by Holdings in accordance with the terms of the Subordinated Note Indenture, the Holdings Subordinated Notes will conform to the description thereof in the Offering Memorandum, and will be legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (j) Holdings has duly authorized the Indenture, and when Holdings has duly executed and delivered it (assuming the due authorization, execution and delivery thereof by the Trustee), the Indenture will be a legally valid and binding obligation of Holdings, enforceable against Holdings in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (k) Holdings has duly authorized the Series A Notes and, when issued and authenticated in accordance with the terms of the Indenture and delivered in exchange for the Units in accordance with the terms of such Units, the Series A Notes will conform to the description thereof in the Offering Memorandum, and will be legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (l) Holdings has duly authorized the Series B Notes and, when issued and authenticated in accordance with the terms of the Registration Rights Agreement and the Indenture, the Series B Notes will conform to the description thereof in the Offering Memorandum, and will be legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity). (m) Holdings has duly authorized the Registration Rights Agreement, and when Holdings has executed and delivered it (assuming the due execution and delivery thereof by the Initial Purchaser), the Registration Rights Agreement will be a legally valid and binding obligation of Holdings, enforceable against Holdings in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution. 9 (n) There is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending or, to the knowledge of Holdings, threatened or contemplated to which Holdings or the Company is or may be a party or to which the business or property of Holdings or the Company is or may be subject, (ii) no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or, to the best knowledge of Holdings or the Company, proposed by any governmental body and (iii) no injunction, restraining order or order of any nature issued by a federal or state court of competent jurisdiction to which Holdings or the Company is or may be subject that, in the case of clauses (i), (ii) and (iii) above, (A) is required to be disclosed in the Offering Memorandum and that is not so disclosed, (B) would be reasonably likely to have a Material Adverse Effect, (C) would interfere with or adversely affect the issuance and sale of the Securities or (D) in any manner draw into question the validity of the Operative Documents or the Securities. (o) No holder of any security of Holdings has any right to require registration of any security of Holdings. (p) Neither Holdings nor the Company is involved in any material labor dispute nor, to the knowledge of Holdings, is any material dispute threatened which, if such dispute were to occur, would be reasonably likely to have a Material Adverse Effect. (q) Neither Holdings nor the Company has violated any safety or similar law applicable to its business, nor any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules and regulations promulgated thereunder, except for such instances of noncompliance that, either singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. (r) Except as set forth in the Offering Memorandum, each of Holdings and the Company is in compliance with all applicable existing federal, state, local and foreign laws and regulations (collectively, "ENVIRONMENTAL LAWS") relating to protection of human health or the environment or imposing liability or standards of conduct concerning any Hazardous Material (as defined below), except for such instances of noncompliance that, either singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. The term "HAZARDOUS MATERIAL" means (i) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (ii) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environmental Law. Except as set forth in the Offering Memorandum, there is, to the best knowledge and information of Holdings, no alleged or potential liability (including, without limitation, alleged or potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) of Holdings or the Company arising out of, based on, or resulting from (1) the presence or release into the environment of any Hazardous Material at any location currently or previously owned by Holdings or the Company or at any location currently or previously used or leased by Holdings or the Company, or (2) any violation or alleged violation of any Environmental Law, except in each case with respect to clause (1) and (2), alleged or potential liabilities that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. 10 (s) Each of Holdings and the Company owns or possesses the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names (collectively, "INTELLECTUAL PROPERTY") presently or proposed to be employed by it in connection with the businesses now or proposed to be operated by it, except where the failure to own or possess such Intellectual Property would not, either singly or in the aggregate, be reasonably likely to have a Material Adverse Effect, and neither Holdings nor the Company has received any notice that its use of any Intellectual Property allegedly infringes upon, or conflicts with, rights asserted by others, except for such instances that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect if an unfavorable decision, judgment, ruling or finding is rendered against Holdings or the Company. (t) All income tax returns required to be filed by Holdings or the Company in any jurisdiction have been filed, and all material taxes (including, but not limited to, withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from any taxing authority) have been paid other than those (i) being contested in good faith and for which adequate reserves have been provided, or (ii) currently payable without penalty or interest. (u) Except as set forth in the Offering Memorandum or that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect, (i) each of Holdings and the Company has (1) such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("PERMITS") as are necessary to own, lease and operate its respective properties and to conduct its business as presently conducted, and (2) fulfilled and performed all of its material obligations with respect to the Permits, and (ii) no event has occurred that would allow, or after notice or lapse of time would allow, revocation or termination of any Permit or that would result in any other material impairment of the rights granted to Holdings or the Company under any Permit, and Holdings has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any Permit. (v) Except as set forth in the Offering Memorandum or that, singly or in the aggregate, would not be reasonably likely to have a Material Adverse Effect, (i) each of Holdings and the Company has good and marketable title, free and clear of all liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, to all property and assets described in the Offering Memorandum as being owned by it, (ii) each lease to which Holdings or the Company is a party is valid and binding and no default has occurred or is continuing thereunder and (iii) each of Holdings and the Company enjoys peaceful and undisturbed possession under all such leases to which it is a party as lessee. (w) Each of Holdings and the Company maintains adequate insurance for its businesses and the value of its properties (including, without limitation, public liability insurance, third party property damage insurance and replacement value insurance), and all such insurance is outstanding and in force as of the date hereof. (x) The financial statements, together with related schedules and notes forming part of the Offering Documents (and any amendment or supplement thereto), present fairly the consolidated financial position, results of operations and changes in financial position of Holdings on the basis stated in the Offering Documents at the respective dates or for the respective periods to which they apply, and such financial statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed in the Offering Documents. The other financial and statistical information and data set forth in the Offering Documents (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared 11 on a basis consistent with such financial statements and the books and records of Holdings. (y) Each of Holdings and the Company maintains a system of internal accounting controls sufficient to provide assurance that: (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; and (3) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect thereto. (z) Subsequent to the dates for which information is given in the Offering Documents and up to the Closing Date, unless set forth in the Offering Memorandum: (1) neither Holdings nor the Company has incurred any liabilities or obligations, direct or contingent, which are material, individually or in the aggregate, to Holdings, nor entered into any material transactions not in the ordinary course of business; (2) there has not been any decrease in Holdings' capital stock or any increase in consolidated long-term indebtedness to meet working capital requirements or any material increase in consolidated short-term indebtedness of Holdings or any payment of or declaration to pay any dividends or any other distribution with respect to Holdings' capital stock, as the case may be; and (3) there has not been any event or series of events that would be reasonably likely to have a Material Adverse Effect. (aa) Prior to the issuance of the Units, (i) the present fair salable value of the assets of Holdings exceeded and will exceed the amount that will be required to be paid on, or in respect of, its debts and other liabilities (including contingent liabilities) as they become absolute and matured, (ii) the assets of Holdings do not constitute and will not constitute unreasonably small capital to carry out its businesses as conducted or as proposed to be conducted, and (iii) Holdings does not intend to, or believe that it will, incur debts or other liabilities beyond its ability to pay such debts and liabilities as they mature. Upon consummation of the Offering, (x) the present fair salable value of the assets of Holdings will exceed the amount that will be required to be paid on, or in respect of, its debts and other liabilities (including contingent liabilities) as they become absolute and matured, (y) the assets of Holdings will not constitute unreasonably small capital to carry out its businesses as conducted or as proposed to be conducted, and (iii) Holdings does not intend to, or believe that it will, incur debts or other liabilities beyond its ability to pay such debts and liabilities as they mature. (bb) None of Holdings, nor any agent thereof acting on its behalf, has taken, and none of them will take, any action that might cause this Agreement or the issuance or sale of the Units to violate Regulation G (12 C.F.R. Part 207), Regulation T (12 C.F.R. Part 220), Regulation U (12 C.F.R. Part 221) or Regulation X (12 C.F.R. Part 224) of the Board of Governors of the Federal Reserve System, in each case as in effect now or as the same may hereafter be in effect on the Closing Date. (cc) Holdings is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (dd) Each of Deloitte & Touche LLP and Donnelly Meiners Jordan Kline are independent public accountants with respect to Holdings and the Company as required by the Act. (ee) When the Units are issued and delivered pursuant to this Agreement, such Units, the Holdings Preferred Stock and the Holdings Subordinated Notes will not be of the same class (within the meaning of Rule 144A under the Act) as securities of Holdings that are listed on a national securities exchange registered under Section 6 of the Exchange Act or that are quoted in 12 a United States automated inter-dealer quotation system. (ff) Assuming (i) that the representations and warranties of the Initial Purchaser in Section 8 hereof are true, (ii) compliance by the Initial Purchaser with its covenants set forth in Section 8 hereof and (iii) that each of the Eligible Purchasers is a QIB or a non-U.S. person outside the United States, the purchase and resale of the Units pursuant hereto (including pursuant to the Exempt Resales) is exempt from the registration requirements of the Act. No form of general solicitation or general advertising was used by Holdings or any of its representatives (other than the Initial Purchaser, as to whom Holdings makes no representation) in connection with the offer and sale of the Units, including, but not limited to, articles, notices or other communications published in any newspaper, magazine, or similar medium or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. No securities of the same class as the Securities have been issued and sold by Holdings within the six-month period immediately prior to the date hereof. (gg) The execution and delivery of this Agreement and the other Operative Documents and the sale of the Units to be purchased by the Eligible Purchasers will not involve any prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. The representation made by Holdings in the preceding sentence is made in reliance upon and subject to the accuracy of, and compliance with, the representations and covenants made or deemed made by the Eligible Purchasers as set forth in the Offering Documents under the section entitled "Notice to Investors." 7. REPRESENTATIONS AND WARRANTIES OF THE SELLING SECURITYHOLDERS. Each of the Selling Securityholders represents and warrants to the Initial Purchaser as follows: (a) This Agreement has been duly authorized, executed and delivered by such Selling Securityholder. (b) Upon delivery of and payment for the Securities to be sold by such Selling Securityholder pursuant to this Agreement, good and clear title to such Securities will pass to the Initial Purchaser, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever. (c) The execution, delivery and performance of this Agreement by such Selling Shareholder, the compliance by such Selling Shareholder with all the provisions hereof and the consummation of the transactions contemplated hereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws or the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the organizational documents of such Selling Securityholder, if such Selling Securityholder is not an individual, or any indenture, loan agreement, mortgage, lease or other agreement or instrument to which such Selling Securityholder is a party or by which such Selling Securityholder or any property of such Selling Securityholder is bound or (iii) violate or conflict with any applicable law or any rule, regulation, judgement, order or decree of any court of any governmental body or agency having jurisdiction over such Selling Securityholder or any property of such Selling Securityholder. (d) Neither the Selling Securityholders nor anyone acting on their behalf has offered or sold any of the Securities by means of any "general solicitation" or "general advertising," as 13 such terms are defined in Regulation D under the Securities Act. (e) Neither the Selling Securityholders nor anyone acting on their behalf has offered any of the Securities to any person other than the Initial Purchaser. 8. REPRESENTATIONS AND WARRANTIES OF THE INITIAL PURCHASER. The Initial Purchaser represents and warrants to Holdings as follows: (a) The Initial Purchaser is a QIB with such knowledge and experience in financial and business matters as are necessary in order to evaluate the merits and risks of an investment in the Units. (b) The Initial Purchaser (i) is not acquiring the Units with a view to any distribution thereof or with any present intention of offering or selling any of the Units in a transaction that would violate the Act or the securities laws of any State of the United States or any other applicable jurisdiction, (ii) will be reoffering and reselling the Units only to QIBs in reliance on the exemption from the registration requirements of the Act provided by Rule 144A and to non-U.S. persons outside the United States in reliance on the exemption from the registration requirements of the Act provided by Regulation S and (iii) has not solicited and, unless and until the Units are registered under the Act, will not solicit any offer to buy or offer to sell the Units by means of any form of general solicitation or general advertising (as such terms are defined in Regulation D under the Act) or in any manner involving a public offering within the meaning of the Act. (c) The Initial Purchaser also understands that Holdings and, for purposes of the opinions to be delivered to the Initial Purchaser pursuant hereto, counsel to Holdings and counsel to the Initial Purchaser will rely upon the accuracy and truth of the foregoing representations and the Initial Purchaser hereby consents to such reliance. (d) The Initial Purchaser further agrees that, in connection with the Exempt Resales, it will solicit offers to buy the Units only from, and will offer to sell the Units only to, the Eligible Purchasers. The Initial Purchaser further agrees that it will offer to sell the Units only to, and will solicit offers to buy the Units only from, persons who in purchasing such Units will be deemed to have represented and agreed (1) if such Eligible Purchaser is a QIB, that it is purchasing the Units for its own account or an account with respect to which it exercises sole investment discretion and that its or such accounts are QIBs, (2) that such Units will not have been registered under the Act and may be resold, pledged or otherwise transferred, only (A) (I) inside the United States to a person who the seller reasonably believes is a "qualified institutional buyer" within the meaning of Rule 144A under the Act in a transaction meeting the requirements of Rule 144A, (II) in a transaction meeting the requirements of Rule 144 under the Act, (III) outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Act or (IV) in accordance with another exemption from the registration requirements of the Act (and based upon an opinion of counsel if Holdings so requests), (B) to Holdings or (C) pursuant to an effective registration statement under the Act, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction, and (3) that the holder will, and each subsequent holder is required to, notify any purchaser from it of the security evidenced thereby of the resale restrictions set forth in (2) above. Accordingly, the Initial Purchaser represents and agrees that neither it, its affiliates nor any persons acting on its or their behalf has engaged or will engage in any directed selling efforts within the meaning of Rule 901(b) of Regulation S with respect to the Units, and it, its affiliates and all persons acting on its or their behalf have complied and will comply with the offering restrictions requirements of Regulation S. 14 (e) The Initial Purchaser represents and agrees that the Units offered and sold in reliance on Regulation S have been and will be offered and sold only in offshore transactions and that such securities have been and will be represented upon issuance by a global security that may not be exchanged for definitive securities until the expiration of the restricted period (as defined in Regulation S) (except to the extent of any beneficial owners thereof who acquired an interest therein pursuant to another exemption from registration under the Act and who will take delivery of a beneficial ownership interest in a Rule 144A Global Note (as defined in the Indenture), as contemplated by the Indenture) and only upon certification of beneficial ownership of the securities by a non-U.S. person or a U.S. person who purchased such securities in a transaction that was exempt from the registration requirements of the Act. (f) The Initial Purchaser agrees that, at or prior to confirmation of a sale of Units (other than a sale pursuant to Rule 144A or pursuant to Paragraph (i) of this Section 8), it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Units from it during the Restricted Period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the Act and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Act. Terms used above have the meaning given to them by Regulation S." (g) The Initial Purchaser further agrees that it has not entered and will not enter into any contractual arrangement with respect to the distribution or delivery of the Units, except with its affiliates or with the prior written consent of Holdings. (h) Notwithstanding the foregoing, Units in registered form may be offered, sold and delivered by the Initial Purchaser in the United States and to U.S. persons pursuant to Section 3 of this Agreement without delivery of the written statement required by paragraph (f) of this Section 8. (i) The Initial Purchaser further represents and agrees that (i) it has not offered or sold and will not offer or sell any Units to persons in the United Kingdom prior to the expiry of the period of six months from the issue date of the Units, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Units in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of the Units to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom the document may otherwise lawfully be issued or passed on. (j) The Initial Purchaser agrees that it will not offer, sell or deliver any of the Units in any jurisdiction outside the United States except under circumstances that will result in compliance with the applicable laws thereof, and that it will take at its own expense whatever action is required to permit its purchase and resale of the Units in such jurisdictions. The Initial 15 Purchaser understands that no action has been taken to permit a public offering in any jurisdiction outside the United States where action would be required for such purpose. (k) The Initial Purchaser agrees not to cause any advertisement of the Units to be published in any newspaper or periodical or posted in any public place and not to issue any circular relating to the Units, except such advertisements that include the statements required by Regulation S. (l) The sale of the Units in offshore transactions pursuant to Regulation S is not part of a plan or scheme to evade the registration provisions of the Act. Terms used in this Section 8 that have meanings assigned to them in Regulation S are used herein as so defined. 9. INDEMNIFICATION. (a) The Selling Securityholders, to the extent of each such Selling Securityholder's pro rata share of the proceeds from the Offering as set forth on Schedule I hereto, Holdings and the Company, jointly and severally, agree to indemnify and hold harmless the Initial Purchaser and each person, if any, who controls the Initial Purchaser within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the Offering Documents (as amended or supplemented if Holdings shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Initial Purchaser furnished in writing to Holdings by the Initial Purchaser expressly for use therein; provided, however, that the indemnification provided by each of the Selling Securityholders shall only be with reference to information relating to each such Selling Securityholder furnished in writing by such Selling Securityholder expressly for use in the Offering Documents; provided further, however, that the indemnification contained in this paragraph (a) with respect to the Preliminary Offering Memorandum shall not inure to the benefit of the Initial Purchaser (or to the benefit of any person controlling the Initial Purchaser) on account of any such loss, claim, damage, liability or judgment (i) arising from the sale of the Units by the Initial Purchaser to any person if a copy of the Offering Memorandum shall not have been delivered or sent to such person, at or prior to the written confirmation of such sale, and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in the Preliminary Offering Memorandum was corrected in the Offering Memorandum, provided that Holdings has delivered the Offering Memorandum to the Initial Purchaser in requisite quantity on a timely basis to permit such delivery or sending or (ii) resulting from the use by the Initial Purchaser of any offering memorandum, registration statement or prospectus, or any amendment or supplement thereto, referred to in Section 5(e) hereof when, under Section 11 hereof, the Initial Purchaser was not permitted to do so. (b) In case any action shall be brought against the Initial Purchaser or any person controlling the Initial Purchaser, based upon any Offering Document or any amendment or supplement thereto and with respect to which indemnity may be sought against the Selling Securityholders, Holdings and the Company, the Initial Purchaser shall promptly notify Holdings in writing, and the Selling Securityholders, Holdings and the Company shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such indemnified party 16 and payment of all fees and expenses. The Initial Purchaser or any such controlling person shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the reasonable fees and expenses of such counsel shall be at the expense of the Initial Purchaser or such controlling person unless (i) the employment of such counsel has been specifically authorized in writing by Holdings, (ii) neither the Selling Securityholders, Holdings nor the Company has assumed the defense and employed counsel or (iii) the named parties to any such action (including any impleaded parties) include both the Initial Purchaser or such controlling person and the Selling Securityholders, Holdings or the Company, and the Initial Purchaser or such controlling person shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Selling Securityholders, Holdings or the Company (in which case the Selling Securityholders, Holdings and the Company shall not have the right to assume the defense of such action on behalf of the Initial Purchaser or such controlling person, it being understood, however, that the Selling Securityholders, Holdings and the Company shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for the Initial Purchaser and all such controlling persons, which firm shall be designated in writing by the Initial Purchaser, and that all such fees and expenses shall be reimbursed as they are incurred). The Selling Securityholders, Holdings and the Company shall not be liable for any settlement of any such action effected without the written consent of the Selling Securityholders, Holdings or the Company, but if settled with the Selling Securityholders', Holdings' or the Company's written consent, the Selling Securityholders, Holdings and the Company jointly and severally agree to indemnify and hold harmless the Initial Purchaser and any such controlling person from and against any loss or liability by reason of such settlement. Neither the Selling Securityholders, Holdings nor the Company shall, without the prior written consent of the Initial Purchaser effect any settlement of any pending or threatened proceeding in respect of which the Initial Purchaser is or could have been a party and indemnity could have been sought hereunder by the Initial Purchaser unless such settlement includes an unconditional release of the Initial Purchaser and each person controlling the Initial Purchaser from all liability on claims that are the subject matter of such proceeding. (c) The Initial Purchaser agrees to indemnify and hold harmless Holdings and the Selling Securityholders, each of their respective directors and officers, and any person controlling either of them within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (collectively the "ISSUER INDEMNIFIED PARTIES"), to the same extent as the foregoing indemnity from the Selling Securityholders, Holdings, and the Company to the Initial Purchaser but only with reference to information relating to the Initial Purchaser furnished in writing by the Initial Purchaser expressly for use in the Offering Documents. In case any action shall be brought against any Issuer Indemnified Party in respect of which indemnity may be sought against the Initial Purchaser, the Initial Purchaser shall have the rights and duties given to the Selling Securityholders, Holdings and the Company (except that if the Selling Securityholders, Holdings or the Company shall have assumed the defense thereof, the Initial Purchaser shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of the Initial Purchaser), and the Issuer Indemnified Parties shall have the rights and duties given to the Initial Purchaser by Section 9(b) hereof. (d) If the indemnification provided for in this Section 9 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, 17 claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Selling Securityholders, Holdings and the Company on the one hand and the Initial Purchaser on the other hand from the offering of the Units or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Selling Securityholders, Holdings and the Company on the one hand and the Initial Purchaser on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Selling Securityholders, Holdings and the Company on the one hand and the Initial Purchaser on the other hand shall be deemed to be in the same proportion as the total proceeds from the offering of the Units (before deducting expenses) received by Holdings and the Selling Securityholders, and the total discounts and commissions received by the Initial Purchaser, bear to the total price to investors of the Units, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Selling Securityholders, Holdings and the Company on the one hand and the Initial Purchaser on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Selling Securityholders, Holdings or the Company on the one hand or the Initial Purchaser on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Selling Securityholders, Holdings, the Company and the Initial Purchaser agree that it would not be just and equitable if contribution pursuant to this paragraph were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The losses, claims, damages, liabilities or judgments of an indemnified party referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, the Initial Purchaser shall not be required to contribute any amount in excess of the amount by which the discounts and commissions received by it exceeds the amount of any damages which the Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Each of the Selling Securityholders, Holdings and the Company hereby designates The Jordan Company, 9 West 57th Street, New York, New York 10019, as its authorized agent, upon which process may be served in any action, suit or proceeding which may be instituted in any state or federal court in the State of New York by the Initial Purchaser or person controlling the Initial Purchaser asserting a claim for indemnification or contribution under or pursuant to this Section 9, and the Selling Securityholders, Holdings and the Company will accept the jurisdiction of such court in such action, and waive, to the fullest extent permitted by applicable law, any defense based upon lack of personal jurisdiction or venue. A copy of any such process shall be sent or given to the Selling Securityholders, Holdings and the Company, at the address for notices specified in Section 11(a) hereof. (f) The indemnity and contribution agreements contained in this Section 9 are in addition to any liability which the indemnifying persons may otherwise have to the indemnified persons referred to above. 10. CONDITIONS OF THE INITIAL PURCHASER'S OBLIGATIONS. The obligation 18 of the Initial Purchaser to purchase the Units under this Agreement is subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of Holdings and the Selling Securityholders contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. Holdings shall have performed or complied with all of the agreements and satisfied all conditions to be performed, complied with or satisfied by it under this Agreement on or prior to the Closing Date. (b) (1) The Offering Memorandum shall have been printed and copies distributed to the Initial Purchaser not later than 9:00 a.m., New York City time, on the second business day following the date of this Agreement, or at such later date and time as the Initial Purchaser may approve in writing; (2) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Units or the sale of the Holdings Preferred Stock or the Holdings Subordinated Notes; and (3) at the Closing Date, (i) no stop order preventing the use of the Offering Documents, or any amendment or supplement thereto, or suspending the qualification or exemption from qualification of the Securities for sale in any jurisdiction designated by the Initial Purchaser pursuant to Section 5(f) hereof shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or, to the knowledge of Holdings be contemplated. (c) (1) Since the date of the latest balance sheet included in the Offering Documents, there shall not have been any event that had a Material Adverse Effect, or any development involving a prospective change that would be reasonably likely to have a Material Adverse Effect, whether or not arising in the ordinary course of business; (2) since the date of the latest balance sheet included in the Offering Documents, there has not been any change, or any development involving a prospective change, in the capital stock or in the long- term debt of Holdings or the Company from that set forth in the Offering Documents; (3) neither Holdings nor the Company shall have material liability or obligation, direct or contingent, other than those reflected in the Offering Memorandum; and (4) on the Closing Date, the Initial Purchaser shall have received a certificate dated the Closing Date, signed on behalf of Holdings by the undersigned officers of Holdings, confirming all matters set forth in Sections 9(a), (b), and (c) hereof. (d) The Initial Purchaser shall have received on the Closing Date an opinion (satisfactory to the Initial Purchaser and counsel to the Initial Purchaser) dated the Closing Date, of Mayer, Brown & Platt, counsel for Holdings, to the effect that: (1) Holdings has all necessary corporate power and authority to enter into and perform its obligations under the Operative Documents and to issue, sell and deliver the Units to the Initial Purchaser to be sold by the Initial Purchaser pursuant hereto; 19 (2) The Company and each of the Selling Securityholders has all necessary power and authority to enter into and perform its obligations under this Agreement; (3) No consent, approval, authorization or order of, or filing or registration with, any regulatory body, administrative agency, or other governmental agency (except as securities or Blue Sky laws of the various states may require) which has not been made or obtained is required for the execution, delivery and performance of the Operative Documents and the valid issuance and sale of the Securities to the Initial Purchaser as contemplated by this Agreement or the offering of the Securities as contemplated by the Offering Memorandum, except where the failure to obtain any such consents or waivers, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect or adversely effect the ability to consummate the Offering; (4) To the best of such counsel's knowledge, no consents or waivers from any person are required to consummate the transactions contemplated by the Operative Documents or the Offering Documents other than such consents and waivers as have been or will be obtained; (5) This Agreement has been duly authorized and validly executed by each of Holdings, the Company and the Selling Securityholders and (assuming the due execution and delivery thereof by the Initial Purchaser) is a legally valid and binding obligation of each of Holdings, the Company and the Selling Securityholders, enforceable against each of them in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution; (6) The Units have been duly and validly authorized by Holdings and, when issued in accordance with their terms and delivered to and paid for by the Initial Purchaser in accordance with the terms of this Agreement, the Units will conform to the description thereof in the Offering Memorandum, and will be legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution; (7) The Holdings Preferred Stock has been duly authorized and is full paid, nonassessable and entitled to the rights, priviledges and preferences set forth in the Certificate of Designations. The Holdings Preferred Stock conforms with the description thereof contained in the Offering Memorandum. (8) Holdings has duly authorized, executed and delivered the Subordinated Note Indenture, and (assuming the due authorization, execution and delivery thereof by the Trustee) the Subordinated Note Indenture is a legally valid and binding obligation of Holdings, enforceable against Holdings in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of 20 creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (9) The Holdings Subordinated Notes have been duly authorized, issued and authenticated in accordance with the Subordinated Note Indenture and conform to the description thereof in the Offering Memorandum, and are legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceable thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (10) Holdings has duly authorized, executed and delivered the Indenture, and (assuming due authorization, execution and delivery thereof by the Trustee) the Indenture is a legally valid and binding obligation of Holdings, enforceable against Holdings in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (11) Holdings has duly authorized the Series A Notes and, when issued and authenticated in accordance with the terms of the Indenture and delivered in exchange for the Units in accordance with the terms of such Units, the Series A Notes will conform to the description thereof in the Offering Memorandum, and will be the legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (12) Holdings has duly authorized the Series B Notes and, when issued and authenticated in accordance with the terms of the Registration Rights Agreement and the Indenture, the Series B Notes will conform to the description thereof in the Offering Memorandum, and will be the legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally and (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity); (13) Holdings has duly authorized, executed and delivered the Registration Rights Agreement, and (assuming the due execution and delivery thereof by the Initial Purchaser) the Registration Rights Agreement is a legally valid and binding obligation of Holdings, enforceable against Holdings in accordance with its terms, except as the enforceability thereof may be (i) subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect which affect the enforcement of creditors rights generally, (ii) limited by general principles of equity (whether considered in a proceeding at law or in equity) and (iii) limited by securities laws prohibiting or limiting the availability of, and public policy against, indemnification or contribution; (14) The statements under the captions "Certain Transactions," "Description of Units," "Description of Exchange Notes," "Description of Capital Stock," "Description of 21 Certain Indebtedness," and "Certain U.S. Federal Income Tax Considerations" in the Offering Memorandum, insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, are correct in all material respects; (15) Neither Holdings nor the Company is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (16) When the Units are issued and delivered pursuant to this Agreement, such Units, the Holdings Preferred Stock and the Holdings Subordinated Notes will not be of the same class (within the meaning of Rule 144A under the Act) as securities of Holdings that are listed on a national securities exchange registered under Section 6 of the Exchange Act or that are quoted in a United States automated inter- dealer quotation system; (17) The Subordinated Note Indenture is not required to be qualified under the Trust Indenture Act; (18) The Indenture is not required to be qualified under the Trust Indenture Act prior to the first to occur of (i) the Registered Exchange Offer and (ii) the effectiveness of the Shelf Registration Statement; (19) No registration under the Act of the Units is required for the sale of the Units to the Initial Purchaser as contemplated hereby or for the Exempt Resales (assuming (i) that the Eligible Purchasers who buy the Units in the Exempt Resales are QIBs or a non-U.S. person outside the United States and (ii) the accuracy of, and compliance with, the representations of the Initial Purchaser and those of Holdings and the Selling Securityholders contained in Sections 6, 7 and 8 hereof. In addition, such counsel shall state that it has participated in conferences with officers and other representatives of Holdings, representatives of the independent public accountants for Holdings, the Initial Purchaser's representatives and counsel for the Initial Purchaser, at which conferences the contents of the Offering Memorandum and related matters were discussed, and, although such counsel is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Offering Memorandum, and have not made any independent check or verification thereof, during the course of such participation (relying as to materiality to the extent such counsel deemed appropriate upon the statements of officers and other representatives of Holdings), no facts came to such counsel's attention that caused such counsel to believe that the Offering Memorandum, as of its date, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; it being understood that such counsel expresses no belief with respect to the financial statements, schedules and other financial and statistical data included in the Offering Memorandum or incorporated therein. (e) The Initial Purchaser shall have received on the Closing Date an opinion (satisfactory to the Initial Purchaser and counsel to the Initial Purchaser) dated the Closing Date of Rose, Brouillette & Shapiro, counsel for Holdings, to the effect that: (1) Each of Holdings and the Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has full corporate power and authority to carry on its respective business as it is currently being conducted and to own, lease and operate its respective properties, and, to the best 22 of such counsel's knowledge, is duly qualified and is in good standing as a foreign corporation registered to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not be reasonably likely to have a Material Adverse Effect; (2) All of the outstanding capital stock of Holdings has been duly authorized and validly issued and is fully paid and nonassessable and is not subject to preemptive or similar rights; (3) All of the outstanding capital stock of the Company has been duly authorized and validly issued and is fully paid and nonassessable, and is owned by Holdings free and clear of any Lien; (4) Neither Holdings nor the Company is in violation of its charter or bylaws, and, to the best knowledge of such counsel after due inquiry, neither Holdings nor the Company is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of Holdings or the Company, to which Holdings or the Company is a party or by which Holdings, the Company or their respective property is bound; (5) The execution, delivery and performance of the Operative Documents by Holdings, compliance by Holdings with the provisions thereof and the Securities, the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby and thereby does not conflict with or constitute a breach of any of the terms or provisions of, or a default under, or result in the imposition of a lien or encumbrance on any properties of Holdings or the Company, or an acceleration of indebtedness pursuant to, (1) the charter or bylaws of Holdings or the Company, (2) any bond, debenture, note, indenture, mortgage, deed of trust or other agreement or instrument known to such counsel after due inquiry to which Holdings or the Company is a party or by which Holdings, the Company or any of their respective property is bound, or (3) to the best of such counsel's knowledge, any law or administrative regulation applicable to Holdings, the Company or any of their respective assets or properties, or any judgment, order or decree of any court or governmental agency or authority entered in any proceeding to which Holdings or the Company was or is now a party or to which Holdings, the Company or any of their respective property may be subject; (6) To the best knowledge of such counsel, after due inquiry, there is (i) no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, domestic or foreign, now pending, threatened or contemplated to which Holdings or the Company is or may be a party or to which the business or property of Holdings or the Company is or may be subject, (ii) no statute, rule, regulation or order that has been enacted, adopted or issued by any governmental agency or proposed by any governmental body, or (iii) no injunction, restraining order or order of any nature by a federal or state court of competent jurisdiction applicable to Holdings or the Company has been issued that, in the case of clauses (i), (ii) and (iii) above, (a) is required to be disclosed in the Offering Memorandum and that is not so disclosed, (b) would interfere with or adversely affect the issuance of the Securities, or (c) might invalidate any provision or the validity of the Operative Documents or the Securities; 23 (7) To the best knowledge of such counsel, there is no contract or document concerning Holdings or the Company of a character required to be described in the Offering Memorandum that is not so described or filed in a registration statement on Form S-4 if the Units were registered pursuant to the Act; (8) To the best knowledge of such counsel, after due inquiry, following consummation of the Offering, no holder of any security of Holdings has any right to require registration of any of Holdings' securities; (f) The Initial Purchaser shall have received on the Closing Date an opinion, dated the Closing Date, of Latham & Watkins, in form and substance satisfactory to the Initial Purchaser, and Holdings shall have provided Latham & Watkins such papers and information as it requests to enable it to pass upon the matters contained in such opinion. (g) The Initial Purchaser shall have received letters from Deloitte & Touche LLP and Donnelly Meiners Jordan Kline, independent public accountants, on the date hereof and from Deloitte & Touche LLP on the Closing Date, in form and substance satisfactory to the Initial Purchaser, with respect to the financial statements and certain financial information contained in the Offering Documents. (h) Holdings shall have entered into the Registration Rights Agreement on or prior to the Closing Date. (i) Holdings shall have performed or complied in all material respects with any of the agreements herein contained and required to be performed or complied with by it on or prior to the Closing Date. 11. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement shall become effective at the time that the Selling Securityholders, Holdings, the Company and the Initial Purchaser execute this Agreement. The Initial Purchaser may terminate this Agreement at any time prior to the Closing Date by written notice to Holdings if any of the following has occurred: (a) since the respective dates as of which information is given in the Offering Documents, any adverse change or development involving a prospective adverse change, whether or not arising in the ordinary course of business, which would, in the Initial Purchaser's judgment, make it impracticable to market the Units on the terms and in the manner contemplated in the Offering Documents; (b) any outbreak or escalation of hostilities or other national or international calamity or crisis or material change in economic conditions, if the effect of such outbreak, escalation, calamity, crisis or change on the financial markets of the United States or elsewhere would, in the Initial Purchaser's judgment, make it impracticable to market the Units on the terms and in the manner contemplated in the Offering Documents; (c) the suspension or material limitation of trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or limitation on prices for securities on any such exchange; (d) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in the Initial 24 Purchaser's opinion causes or could cause a Material Adverse Effect; (e) the declaration of a banking moratorium by either federal or New York State authorities; (f) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Initial Purchaser's opinion has a material adverse effect on the financial markets in the United States; or (g) any of Holdings' or the Company's securities shall have been downgraded or placed on any "watch list" for possible downgrading by any nationally recognized statistical rating organization, provided that in the case of such "watch list" placement, termination shall be permitted only if such placement would, in the judgment of the Initial Purchaser, make it impracticable or inadvisable to market the Units or to enforce contracts for the sale of the Units or materially impair the investment quality of the Units. 12. MISCELLANEOUS. (a) Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Selling Securityholders, the Company or Holdings, The Jordan Company, 9 West 57th Street, 40th Floor, New York, New York 10019, Attention: A. Richard Caputo, Jr. and (ii) if to the Initial Purchaser, Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. (b) The respective indemnities, contribution agreements, representations, warranties and other statements of Holdings, the Selling Securityholders and the Initial Purchaser set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Units, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any such person, (ii) acceptance of the Units and payment for them hereunder and (iii) termination of this Agreement. (c) Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Selling Securityholders, Holdings, the Company, the Initial Purchaser, any controlling persons referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Units from the Initial Purchaser merely because of such purchase. (d) This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of New York without reference to its choice of law provisions. (e) This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. SIGNATURE PAGE IS THE NEXT PAGE 25 Please confirm that the foregoing correctly sets forth the agreement among Holdings, the Company, the Selling Securityholders and the Initial Purchaser. Very truly yours, GFSI HOLDINGS, INC. By: /s/ Richard Caputo --------------------------------- Name: A. Richard Caputo, Jr. Title: Vice President GSFI, INC. By: /s/ Richard Caputo ----------------------------- Name: A. Richard Caputo, Jr. Titile: Vice President THE SELLING SECURITYHOLDERS LISTED ON SCHEDULE I HERETO By: /s/ Richard Caputo ----------------------------- Name: A Richard Caputo, Jr. Title: Attorney-in-Fact DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ Tyler Wolfram -------------------------------------------- Name: Tyler Wolfram Title: Vice President 26 EX-3.1 3 CERTIFICATE OF INCORPORATION OF GFSI HOLDINGS, INC. Exhibit 3.1 GFSI HOLDINGS, INC. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION ------------------------------------------------- 1. The Certificate of Incorporation of GFSI HOLDINGS, INC. (the "Corporation") was filed in the Office of the Secretary of State of the state of Delaware on December 23, 1996. 2. In the manner prescribed by Sections 241 and 245 of the General Corporation Law of the State of Delaware, resolutions were duly adopted by the sole director of the Corporation approving this Amended and Restated Certificate of Incorporation. The Corporation has not received any payment for any of its stock. 3. The text of the Certificate of Incorporation, as amended and restated herein, shall read as follows: FIRST: The name of the Corporation is GFSI HOLDINGS, INC. SECOND: The address of the Corporation's initial registered office in the state of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of the Corporation's initial registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 29,105 shares of which (i) 1,105 shares shall be Series A Common Stock, par value $0.01 per share ("Series A Common Stock"); (ii) 1,000 shares shall be Series B Common Stock, par value $0.01 per share (the "Series B Common Stock," which along with the Series A Common Stock shall be referred to collectively as the "Common Stock"); (iii) 13,500 shares shall be Series A 12% Cumulative Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"); (iv) 1 11,000 shares shall be Series B 12% Cumulative Preferred Stock, par value $0.01 per share ("Series B Preferred Stock"); and (v) 2,500 shares shall be Series C 12% Cumulative Preferred Stock, par value $0.01 per share ("Series C Preferred Stock," which along with the Series A Preferred Stock and the Series B Preferred Stock shall be referred to collectively as the "Preferred Stock"). The following provisions respecting the powers, preferences, rights and the qualifications, limitations or restrictions in respect of the Corporation's Common Stock and Preferred Stock are hereby adopted: 1. Common Stock. The Common Stock shall be subject to the following provisions: a. Dividends. The holders of Common Stock shall be entitled to receive, subject to any preferential dividend rights applicable to the Preferred Stock, such dividends as may be declared by the Board of Directors of the Corporation from time to time. No dividends shall be paid on shares of Common Stock unless and until all dividends accrued but not paid on the Preferred Stock as of such date have been paid in cash. b. Voting Rights. The holders of the Common Stock shall be entitled to one vote per share in voting on or consenting to the election of directors and for all other corporate purposes. 2. Preferred Stock. Each share of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be identical in all respects. The Preferred Stock shall be subject to the following provisions: a. Annual Dividends. (1) Subject to the provisions of Paragraph d. below, the holders of Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Director of the Corporation, annual cash dividends at the rate of $120.00 per share, per annum, payable on March 1 of each year (the "Preferred Stock Dividends"). The first such dividend payment shall be made on March 1, 1998. Such dividends shall be cumulative and shall accrue, whether or not earned or declared, from and after 2 the date of issue of the Preferred Stock. (2) The Preferred Stock Dividends shall be accrued, but not paid, if the payment thereof would result directly or indirectly in a default under any obligation of the Corporation or any of its subsidiaries for borrowed money or if, in the good faith opinion of the Board of Directors of the Corporation, the Corporation does not have available funds. b. Liquidation. ----------- (1) Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of all shares of Preferred Stock shall be entitled, before any distribution or payment is made upon any shares of Common Stock, to be paid an amount equal to the sum of $1,000.00 per share, plus all accrued but unpaid dividends thereon (the total amount of such sum being referred to herein as the "Preferred Stock Liquidation Payment") and the holders of Preferred Stock shall not be entitled to any further distribution or payment in respect of the Preferred Stock. If upon such liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the assets of the Corporation to be distributed among the holders of the capital stock of the Corporation shall be insufficient to permit payment to the holders of Preferred Stock of the entire amount of the Preferred Stock Liquidation Payment, then the entire assets of the Corporation to be distributed to the holders of the capital stock of the Corporation shall be distributed ratably among the holders of Preferred Stock in proportion to the Preferred Stock Liquidation Payment due under this subparagraph (1) to each such holder. Upon any such liquidation, dissolution or winding-up of the Corporation, but only after each holder of Preferred Stock shall have been paid the full Preferred Stock Liquidation Payment to which such holder is entitled, the remaining assets of the Corporation shall be distributed to the holders of Common Stock. (2) Written notice of such liquidation, dissolution or winding-up, stating the payment date, the amount of the Preferred Stock Liquidation Payment and the place where the amounts distributed shall be payable, 3 shall be given by mail, postage prepaid, not less than 10 days prior to the payment date stated therein, to the holders of record of the Preferred Stock, such notice to be addressed to each stockholder at his, her or its post office address as shown by the records of the Corporation. Neither the consolidation nor merger of the Corporation with or into any other corporation or corporations, nor the sale or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding-up of the Corporation within the meaning of any of the provisions of this Paragraph b. c. Redemptions. ----------- (1) Optional Redemptions. The Preferred Stock shall be redeemable from time to time by paying for each share in cash on the redemption date(s) the sum of $1,000.00 plus all accrued but unpaid dividends thereon, such sum being called the "Redemption Price." (2) Mandatory Redemptions. All shares of Preferred Stock not theretofore redeemed shall be redeemed by the Corporation by payment of the Redemption Price applicable to such shares in cash on March 1, 2009. (3) Priority. In case of a redemption of only part of the outstanding shares of any series of Preferred Stock, the shares to be redeemed will be redeemed on a pro rata basis among the holders of all the Preferred Stock. (4) Notice. In the event of a redemption under subparagraph (1) above, the Corporation shall cause to be mailed to each of the holders of the Preferred Stock to be redeemed, at the last address of the holder appearing on the records of the Corporation, at least 15 days, but no more than 60 days, prior to the date of such redemption, a notice stating the date on which such redemption shall take place. (5) Restrictions. Redemption payments (whether optional or mandatory) shall be accrued, but not paid, if the payment thereof would result directly or indirectly in a default under any obligation of the 4 Corporation or any of its subsidiaries for borrowed money or if, in the good faith opinion of the Board of Directors of the Corporation, the Corporation does not have available funds. d. Dividends After Redemption Date. Unless there is a default in the payment of the Redemption Price for any shares of Preferred Stock to be redeemed, (1) the shares of Preferred Stock designated for redemption shall not be entitled to any dividends accruing after the redemption date specified, (2) on such redemption date all rights of the respective holders of such shares, as stockholders of the Corporation by reason of the ownership of such shares, shall cease, except the right to receive the Redemption Price for such shares without interest upon presentation, and (3) such shares shall not be deemed to be outstanding after such redemption date. e. Voting Rights. None of the shares of Preferred Stock shall have voting rights except as expressly required by law and except on any amendment to the Corporation's Certificate of Incorporation to alter or change the powers, designations, preferences or special rights of any shares of Preferred Stock and on any amendments to the Bylaws of the Corporation which would effect such change. FIFTH: The name and mailing address of the incorporator are Michael J. Beal, 1200 Main Street, Suite 3500, Kansas City, Missouri 64105. SIXTH: The name of the person who is to serve as the sole director until the first annual meeting of stockholders, or until his successor is elected and shall qualify, is A. Richard Caputo, Jr., whose mailing address is 9 West 57th Street, 40th Floor, New York, New York 10019. SEVENTH: The duration of the Corporation is perpetual. EIGHTH: 1. Elimination of Certain Liability of Directors. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General 5 Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of the State of Delaware is amended subsequent to the date hereof to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director of the Corporation shall be limited or eliminated to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. 2. Indemnification and Insurance. a. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "Proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving, at the request of the Corporation, as a director, officer, employee or agent of another corporation, a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such Proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his 6 or her heirs, executors and administrators; provided, however, that, except as provided in Paragraph b. of this Section 2, the Corporation shall indemnify any such person seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 2 shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including without limitation, service to an employee benefit plan) in advance of the final disposition of a Proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section 2 or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. b. Right of Claimant to Bring Suit. If a claim under Paragraph a. of this Section 2 is not paid in full by the Corporation within 30 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware to indemnify the claimant for the 7 amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. c. Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 2 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. d. Insurance. The Corporation may, at its option and expense, maintain insurance to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. NINTH: The Board of Directors of the Corporation is authorized and empowered to make, alter, amend or repeal any or all of the Bylaws of the Corporation, subject to the power of the stockholders of the Corporation to make, alter, amend or repeal any or all of the Bylaws of the Corporation. TENTH: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by law; and all rights conferred upon stockholders, directors or any other persons whomsoever by and 8 pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to this reservation. IN WITNESS WHEREOF, GFSI Holdings, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by Michael J. Beal, its Vice President, and Jacob C. Young III, its Assistant Secretary, this 22nd day of February, 1997. GFSI HOLDINGS, INC. a Delaware corporation By: /s/ Michael J. Beal ------------------------------- Michael J. Beal, Vice President ATTEST: By: /s/ Jacob C. Young --------------------------------------- Jacob C. Young III, Assistant Secretary 9 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION ---------------------------- GFSI HOLDINGS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of said corporation by the unanimous written consent of its members adopted resolutions proposing and declaring advisable the following amendment to the Certificate of Incorporation of this corporation: RESOLVED that the Restated Certificate of Incorporation of GFSI Holdings, Inc. be amended by changing the first paragraph of Article FOURTH thereof so that, as amended, said paragraph of said Article shall be and read as follows: "FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 54,105 shares of which (i) 1,105 shares shall be Series A Common Stock, par value $0.01 per share ("Series A Common Stock"); (ii) 1,000 shares shall be Series B Common Stock, par value $0.01 per share ("Series B Common Stock," which along with the Series A Common Stock shall be referred to collectively as the "Common Stock"); (iii) 13,500 shares shall be Series A 12% Cumulative Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"); (iv) 11,000 shares shall be Series B 12% Cumulative Preferred Stock, par value $0.01 per share ("Series B Preferred Stock"); (v) 2,500 shares shall be Series C 12% Cumulative Preferred Stock, pare value $0.01 per share ("Series C Preferred Stock"); and (vi) 25,000 shares shall be Series D Preferred Stock, par value $0.01 per share ("Series D Preferred Stock," which along with the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock shall be referred to collectively as the "Preferred Stock")." FURTHER RESOLVED, that the Restated Certificate of Incorporation of GFSI Holdings, Inc. be amended by changing the Article FOURTH thereof by adding a new section at the end of such Article so that, as amended, said new paragraph of said Article shall be and read as follows: "3. Series D Preferred Stock. The Board of Directors is authorized, to the extent permitted by this Certificate of Incorporation and applicable law, to provide for the issuance of the Series D Preferred Stock, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the designation, powers, preferences and rights of the shares and the qualifications, limitations or restrictions thereof. Except for any difference so provided by the Board of Directors, the shares of all Series D Preferred Stock will rank on a parity with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding-up of the affairs of the Corporation. The authority of the Board of Directors with respect to the Series D Preferred Stock shall include, but not be limited to, determination of the following: (i) The rate of dividends, and whether (and if so, on what terms and conditions) dividends shall be cumulative (and if so, whether unpaid dividends shall compound or accrue interest) or shall be payable in preference or in any other relation to the dividends payable on any other class or classes of capital stock or any other series of Preferred Stock; (ii) Whether the Series D Preferred Stock shall have voting rights in addition to the voting rights provided by law and, if so, the terms and extent of such voting rights; (iv) Whether the shares must or may be redeemed and, if so, the terms and conditions of such redemption (including, without limitation, the dates upon or after which the shares of the series must or may be redeemed and the price or prices at which they must or may be redeemed, which price or prices may be different in different circumstances or at different redemption dates); (v) Whether the shares shall be issued with the privilege of conversion or exchange and, if so, the terms and conditions of such conversion or exchange (including without limitation the price or prices or the rate or rates of conversion or exchange or any terms for adjustment thereof); (vi) The amounts, if any, payable upon the shares in the event of voluntary liquidation, dissolution or winding up of the affairs of the Corporation in preference of shares of any other class or series and whether the shares shall be entitled to participate generally in distributions on the Common Stock under such circumstances; (vii) The amounts, if any, payable upon the shares in the event of involuntary liquidation, dissolution or winding up of the affairs of the Corporation in preference of shares of any other class or series and whether the shares shall be entitled to participate generally in distributions in the Common Stock under such circumstances; (viii) Whether the shares shall be entitled to the benefits of a sinking fund for the redemption or purchase of the shares (the term "sinking fund" being understood to include any similar fund, however designated); and (ix) Any other relative rights, preferences, limitations and powers of the Series D Preferred Stock." SECOND: That in lieu of a meeting and vote of stockholders, the stockholders have given unanimous written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said GFSI Holdings, Inc. has caused this certificate to be signed by its Assistant Secretary this 17th day of September, 1997. GFSI HOLDINGS, INC. By /s/ Richard Caputo --------------------------------- Name: A. Richard Caputo, Jr. Title: Assistant Secretary GFSI HOLDINGS, INC. CERTIFICATE OF DESIGNATIONS OF THE POWERS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF 11.375% SERIES D PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF Pursuant to Section 151 of the General Corporation Law of the State of Delaware GFSI Holdings Inc. (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware, does hereby certify that, pursuant to authority conferred upon the board of directors of the Company (the "Board of Directors") by its Certificate of Incorporation (hereafter referred to as the "Certificate of Incorporation"), and pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, said Board of Directors, pursuant to a meeting held on September 12, 1997, duly approved and adopted the following resolution (the "Resolution"): RESOLVED, that, pursuant to the authority vested in the Board of Directors by its Certificate of Incorporation, the Board of Directors does hereby create, authorize and provide for the issue of 11.375% Series D Preferred Stock, par value $0.01 per share, with a liquidation preference of $1,000.00 per share, consisting of 25,000 shares, having the designations, preferences, relative, participating, optional and other special rights and the qualifications, limitations and restrictions thereof that are set forth in the Certificate of Incorporation and in this Resolution as follows: (a) Designation. There is hereby created out of the authorized and unissued shares of Series D Preferred Stock of the Company a series of preferred stock, designated as the "11.375% Series D Preferred Stock" (the "Series D Preferred Stock"). The number of shares of Series D Preferred Stock shall be 25,000 shares, consisting an initial issuance of 25,000 shares of Series D Preferred Stock. The initial liquidation preference of the Series D Preferred Stock shall be $ 1,000.00 per share. (b) Rank. The Series D Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding-up or dissolution of the Company, rank (i) senior to all classes of common stock and to each other series of preferred stock existing on the Series D Preferred Stock Issue Date of the Company and each other class of capital stock or series of preferred stock issued by the Company after the Series D Preferred Stock Issue Date the terms of which do not expressly provide that such class or series will rank senior to or on a parity with the Series D Preferred Stock as to dividend distributions and distribution upon the liquidation, winding-up or dissolution of the Company (collectively referred to, with the common stock of the Company, as "Junior Securities"); (ii) subject to certain conditions, on a parity with any class of capital stock or series of preferred stock issued by the Company, which is established after the Series D Preferred Stock Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Series D Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up or dissolution of the Company (collectively referred to as "Parity Securities"); and (iii) subject to certain conditions, junior to each class of capital stock or series of preferred stock issued by the Company, which is established after the Series D Preferred Stock Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Series D Preferred Stock as to dividend distributions and distributions upon liquidation, winding-up or dissolution of the Company (collectively referred to as "Senior Securities"). In addition, creditors and stockholders of the Company's Subsidiaries will have priority over the Series D Preferred Stock with respect to claims on the assets of such Subsidiaries. The Preferred Stock will be subject to the issuance of series of Junior Securities, Parity Securities and Senior Securities, provided that the Company may not issue any new class of Parity Securities or Senior Securities without the approval of the holders of at least 50% of the shares of Series D Preferred Stock then outstanding, voting or consenting, as the case may be, together as one class, except that without the approval of the holders of Series D Preferred Stock, the Company may issue and have outstanding shares of Parity Securities issued from time to time in exchange for, or the proceeds of which are used to redeem or repurchase, any or all of the shares of Series D Preferred Stock or other Parity Securities. (c) Dividends. (i) Beginning on the Series D Preferred Stock Issue Date, the Holders of the outstanding shares of Series D Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends on each share of Series D Preferred Stock, at a rate per annum equal to 11.375% of the liquidation preference per share of the Series D Preferred Stock. All dividends shall be cumulative, whether or not earned or declared, compounded on a semi-annual basis on March 15 and September 15 of each year (the "Dividend Payment Dates") from the Series D Preferred Stock Issue Date. Dividends will accrue additional value to the liquidation preference but will not be payable before September 15, 2004, at which time they will be payable in cash, semi-annually on March 15 and September 15 of each year, commencing March 15, 2005. Each distribution in the form of a dividend shall be payable to Holders of record as they appear on the stock books of the Company on such record dates, not less than 10 nor more than 60 days preceding the related Dividend Payment Date, as shall be fixed by the Board of Directors. Dividends shall cease to accumulate in respect of shares of the Series D Preferred Stock on the Exchange Date or on the date of their earlier redemption unless the Company shall have failed to issue the appropriate aggregate principal amount of Exchange Notes in respect of the Series D Preferred Stock on the Exchange Date or shall have failed to pay the relevant redemption price on the date fixed for redemption. (ii) All dividends paid with respect to shares of the Series D Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata to the Holders entitled thereto. -2- (iii) Nothing herein contained shall in any way or under any circumstances be construed or deemed to require the Board of Directors to declare, or the Company to pay or set apart for payment, any dividends on shares of the Series D Preferred Stock at any time. (iv) Dividends on account of arrears for any past dividend period and dividends in connection with any optional redemption pursuant to paragraph (e)(i) may be declared and paid at any time, without reference to any regular Dividend Payment Date, to Holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors. (v) No full dividends may be declared or paid or funds set apart for the payment of dividends on any Parity Securities for any period unless full cumulative dividends shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sum in cash set apart for such payment on the Series D Preferred Stock. If full dividends are not so paid, the Series D Preferred Stock will share dividends pro rata with the Parity Securities. No dividends may be paid or set apart for such payment on Junior Securities (except dividends on Junior Securities in additional shares of Junior Securities) and no Junior Securities or Parity Securities may be repurchased, redeemed or otherwise retired nor may funds be set apart for payment with respect thereto, if full cumulative dividends have not been paid on the Series D Preferred Stock. (vi) Dividends payable on shares of Series D Preferred Stock for any period less than a year shall be computed on the basis of a 360-day year of twelve 30-day months. If any Dividend Payment Date occurs on a day that is not a Business Day, any accrued dividends otherwise payable on such Dividend Payment Date shall be paid on the next succeeding Business Day. (d) Liquidation Preference. (i) Upon any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company, the Holders of shares of Series D Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, the liquidation preference per share of Series D Preferred Stock, plus all accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up (including an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding-up), before any distribution is made on any Junior Securities, including, without limitation, the common stock of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the Series D Preferred Stock and all other Parity Securities are not paid in full, the holders of the Series D Preferred Stock and the Parity Securities will share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference and accumulated and unpaid dividends to which each is entitled. -3- (ii) After payment of the full amount of the liquidation preferences and all accumulated and unpaid dividends to which they are entitled, the holders of shares of the Series D Preferred Stock shall not be entitled to any further participation in any distribution of assets of the Company. (iii) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations shall be deemed to be a liquidation, dissolution or winding-up of the affairs of the Company (unless such sale, conveyance, exchange or transfer is in connection with a dissolution or winding-up of the business of the Company). (e) Redemption. (i) Optional Redemption. (A) Except as provided in paragraph (e)(i)(B) the Series D Preferred Stock may not be redeemed at the option of the Company prior to September 15, 2002. During the twelve-month period beginning on September 15 of the years indicated below, the Series D Preferred Stock 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 Series D Preferred Stock to be redeemed, at the redemption prices (expressed as percentages of the liquidation preference thereof) set forth below, plus any accumulated and unpaid dividends to the redemption date:
Year Percentage ---- ----------- 2002............................... 105.688 2003............................... 103.792 2004............................... 101.896 2005 and thereafter................ 100.000%
(B) Notwithstanding the foregoing, on or after March 15, 1998 and prior to September 15, 2002, the Company may (but shall not have the obligation to) redeem, in whole or in part, the outstanding Series D Preferred Stock at a redemption price in cash equal to 105.688% of the liquidation preference (determined at the date of redemption) thereof, with the net proceeds of one or more Equity Offerings of the Company or GFSI, Inc.; provided, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. In addition, upon the occurrence of a Change of Control on or after March 15, 1998 and prior to September 15, 2002, the Company, at its option, may redeem, in whole or in part, the outstanding Series D Preferred Stock at a redemption price in cash equal to 105.688% of the liquidation preference (determined at the date of redemption) thereof. The Company shall give not less than 30 and not more than 60 days' notice of such redemption within 30 days following a Change of Control. -4- (C) Upon the occurrence of a Change of Control on or after March 15, 1998 and prior to September 15, 2002, the Company, at its option, may redeem, in whole or in part, the outstanding Series D Preferred Stock at a redemption price in cash equal to 105.688% of the liquidation preference (determined at the date of redemption) thereof. The Company shall give not less than 30 and not more than 60 days' notice of such redemption within 30 days following a Change of Control. (ii) Mandatory Offers to Purchase. (A) Change of Control. Upon the occurrence of a Change of Control (such date being the "Change of Control Trigger Date"), each Holder of Series D Preferred Stock shall have the right to require the Company to purchase all or any part (equal to $500 or an integral multiple thereof) of such Holder's Series D Preferred Stock pursuant to an Offer (as defined below) at a purchase price in cash equal to 100% of the liquidation preference (determined at the date of redemption) thereof, plus any accumulated and unpaid dividends to the date of purchase. (B) Asset Sales. (1) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale (including the sale of any of the Capital Stock of any Restricted Subsidiary) providing for Net Proceeds in excess of $4.0 million unless at least 75% of the Net Proceeds from such Asset Sale are applied 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 this 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 Securities of the Company or 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. (2) The Company shall not, and shall 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 -5- 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 Series D Preferred Stock) 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." (3) When the aggregate amount of Excess Proceeds exceeds $15.0 million (such date being an "Asset Sale Trigger Date"), the Company shall make an Offer to all holders of Series D Preferred Stock to purchase the maximum liquidation preference of the Series D Preferred Stock then outstanding that may be purchased out of Excess Proceeds, at an offer price in cash in an amount equal to 100% of liquidation preference (determined at the date of redemption) thereof to the Purchase Date plus any accumulated and unpaid dividends to the Purchase Date in accordance with the procedures set forth in this Certificate of Designation. (4) If the liquidation preference of Series D Preferred Stock surrendered by holders thereof exceeds the amount of Excess Proceeds, the Company shall select the Series D Preferred Stock to be purchased on a pro rata basis, by lot or by a method that complies with the requirements of any stock exchange on which the Series D Preferred Stock are listed. (5) Upon completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. (6) 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 paragraph (e)(ii)(B), but may be retained for so long, but only for so long, as the applicable local law prohibits repatriation to the United States. The Company shall promptly take all reasonable actions required by the applicable local law to permit such repatriation, and once such repatriation of any affected Net Proceeds is not prohibited under applicable local law, such repatriation will be immediately effected and such repatriated Net Proceeds will be applied in the manner set forth above as if such Asset Sale have occurred on the date of repatriation -6- (iii) Procedures for Redemption. (A) Within 30 days after any Change of Control Trigger Date or Asset Sale Trigger Date, Holdings shall mail a notice to each holder of Series D Preferred Stock at such holder's registered address stating (i) that an offer ("Offer") is being made pursuant to paragraph (e)(ii)(A) or (e)(ii)(B), as the case may be, the length of time the Offer shall remain open and the maximum aggregate liquidation preference of Series D Preferred Stock that will be accepted for purchase pursuant to such Offer; (ii) the purchase price for the Series D Preferred Stock (as set forth in paragraph (e)(ii)(A) or (e)(ii)(B), as the case may be), the amount of accumulated and unpaid dividends on such Series D Preferred Stock 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")); (iii) that any Series D Preferred Stock not accepted for payment will continue to accumulate dividends; (iv) that, unless the Company fails to deposit on the Purchase Date an amount sufficient to purchase all Series D Preferred Stock accepted by the Company for purchase, dividends shall cease to accrue on such Series D Preferred Stock after the Purchase Date; (v) that Holders electing to tender any Series D Preferred Stock or portion thereof will be required to surrender their Series D Preferred Stock Certificate, with a form entitled "Option of Holder to Elect Purchase" completed, to the paying agent at the address specified in the notice prior to the close of business on the Business Day preceding the Purchase Date, provided that holders electing to tender only a portion of any Series D Preferred Stock must tender a liquidation preference of $500 or integral multiples thereof; (vi) that Holders will be entitled to withdraw their election to tender Series D Preferred Stock, if the paying agent receives, not later than the close of business on the third Business Day preceding the Purchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the liquidation preference of Series D Preferred Stock delivered for purchase, and a statement that such holder is withdrawing his election to have such Series D Preferred Stock purchased; and (vii) that Holders whose Series D Preferred Stock is accepted for payment in part will be issued new shares of Series D Preferred Stock equal in liquidation preference to the unpurchased portion of Series D Preferred Stock surrendered; provided that only Series D Preferred Stock with a liquidation preference of $500 or integral multiples thereof will be accepted for payment in part. (B) On the Purchase Date for any Offer, the Company shall, to the extent required by this Certificate of Designation and such Offer, (i) in the case of an Offer resulting from a Change of Control, accept for payment all Series D Preferred Stock or portions thereof tendered pursuant to such Offer and, in the case of an Offer resulting from an Asset Sale, accept for payment the maximum liquidation preference of Series D Preferred Stock or portions thereof tendered pursuant to such Offer that can be purchased out of Excess Proceeds from such Asset Sale, and (ii) deposit with the paying agent the aggregate purchase price of all Series D Preferred Stock or portions thereof accepted for payment and any accumulated and unpaid dividends on such Series D Preferred Stock as of the Purchase Date. (C) With respect to any Offer, if less than all of the Series D Preferred Stock tendered pursuant to an Offer are to be purchased by the Company, the Company shall select on the Purchase Date the Series D Preferred Stocks or portions thereof to be accepted for -7- payment pro rata, by lot or by a method that complies with the requirements of any stock exchange on which the Series D Preferred Stock are listed. (D) Promptly after consummation of an Offer, (i) the paying agent shall mail (or cause to be transferred by book entry) to each Holder of Series D Preferred Stock or portions thereof accepted for payment an amount equal to the purchase price for, plus any accumulated and unpaid dividends with respect to such Series D Preferred Stock, (ii) with respect to any tendered Series D Preferred Stock not accepted for payment in whole or in part, the Company shall return such Series D Preferred Stock to the Holder thereof, and (iii) with respect to any Series D Preferred Stock accepted for payment in part, the Company shall authenticate and mail to each such Holder a new Series D Preferred Stock equal in liquidation preference to the unpurchased portion of the tendered Series D Preferred Stock. (E) The Company shall publicly announce the results of the Offer on or as soon as practicable after the Purchase Date. (F) The Company shall comply with any tender offer rules under the Exchange Act which may then be applicable to the Company in connection with an Offer required to be made by the Company to repurchase the Series D Preferred Stock as a result of a Change of Control or an Asset Sale. To the extent that the provisions of any securities laws or regulations conflict with provisions of this certificate, the Company shall comply with the applicable securities laws and regulations. (G) With respect to any Offer, if the Company deposits prior to l0 a.m. New York City time with the paying agent on the Purchase Date an amount in available funds sufficient to purchase all Series D Preferred Stock accepted by the Company for payment, dividends shall cease to accumulate on such Series D Preferred Stock after the Purchase Date; provided, however, that if the Company fails to deposit such amount on the Purchase Date, dividends shall continue to accumulate on such Series D Preferred Stock until such deposit is made. (f) Voting Rights. (i) The Holders of shares of the Series D Preferred Stock, except as otherwise required under Delaware law or as set forth in paragraphs (ii) and (iii) below, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of the Company. (ii) (A) Except as set forth in paragraph (b) above, so long as any shares of the Series D Preferred Stock are outstanding, the Company shall not authorize any class of Senior Securities or Parity Securities without the affirmative vote or consent of Holders of at least a majority of the outstanding shares of Series D Preferred Stock, voting or consenting, as the case may be, as one class. -8- (B) So long as any shares of the Series D Preferred Stock are outstanding, the Company shall not amend this Certificate of Designation so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Series D Preferred Stock or to authorize the issuance of any additional shares of Series D Preferred Stock without the affirmative vote or consent of Holders of at least a majority of the outstanding shares of Series D Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (C) Except as set forth in paragraphs (f)(ii)(A) and (f)(ii)(B) above, (1) the creation, authorization or issuance of any shares of any Junior Securities, Parity Securities or Senior Securities, or (2) the increase or decrease in the amount of authorized capital stock of any class, including any preferred Stock, shall not require the consent of holders of Series D Preferred Stock and shall not, unless not complying with paragraphs (f)(ii)(A) and (f)(ii)(B) above, be deemed to affect adversely the rights, preferences, privileges or voting rights of holders of shares of Series D Preferred Stock. (iii) (A) If (1) dividends on the Series D Preferred Stock are in arrears and unpaid for two consecutive semi-annual periods; (2) the Company fails to discharge any redemption obligation of the Series D Preferred Stock when required; (3) the Company breaches or violates one of the provisions set forth in paragraph (l) hereof and the breach or violation continues for a period of 30 days or more; or (4) a default occurs on the obligation to pay principal of, interest on or any other payment obligation when due at final maturity on one or more classes of Indebtedness of the Company or any Subsidiary of the Company, whether such Indebtedness exists on the Series D Preferred Stock Issue Date or is incurred thereafter, having individually or in the aggregate an outstanding principal amount of $10,000,000 or more, or any other Payment Default occurs on one or more such classes of Indebtedness having individually or in the aggregate an outstanding principal amount of $10,000,000 or more, and such class or classes of Indebtedness are declared due and payable prior to their respective maturities, then, in any such case, the number of directors constituting the Board of Directors shall be adjusted to permit the Holders of the majority of the then outstanding Series D Preferred Stock, voting separately as one class, to elect two directors. (B) The approval of holders of a majority of the outstanding shares of Series D Preferred Stock, voting as a separate class, will be required for any merger, consolidation or sale of assets of the Company, except as permitted pursuant to paragraph (l)(i) below. Each such event described in clause (A) above is referred to herein as a "Voting Rights Triggering Event." Voting rights arising as a result of a Voting Rights Triggering Event will continue until such time as all dividends in arrears on the Series D Preferred Stock are paid in full and any failure, breach or default referred to in clause (A) is remedied. (g) Exchange. The Company may, at its option, exchange the Series D Preferred Stock for the Exchange Notes, pursuant to the terms set forth in the Units. On and after the date of any -9- such exchange, dividends will cease to accrue on the outstanding shares of Series D Preferred and all rights of the holders of Series D Preferred Stock (except the right to receive the Exchange Notes) will terminate. The person entitled to receive the Exchange Notes issuable upon such exchange will be treated for all purposes as the registered holder of such Exchange Notes. (h) Conversion or Exchange. The Holders of shares of Series D Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. (i) Preemptive Rights. No shares of Series D Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Company, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities or such warrants, rights or options may be designated, issued or granted. (j) Reissuance of Series D Preferred Stock. Shares of Series D Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that any issuance of such shares as Series D Preferred Stock must be in compliance with the terms hereof. (k) Business Day. If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. (1) Certain Additional Provisions. (i) Merger or Consolidation. Without the consent of Holders of a majority of the outstanding shares of Series D Preferred Stock, voting as a separate class, 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 Person 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 Series D Preferred Stock shall be converted into or exchanged for and shall become shares of such successor, transferee or resulting corporation, having in respect of such successor, transferee or resulting corporation substantially the same powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereon, that the Series D Preferred Stock had immediately prior to such Disposition; (c) immediately after such Disposition, no Voting Rights Triggering Event shall have occurred and be continuing; (d) the corporation formed by or surviving any such Disposition, or the corporation to which such Disposition shall have been made, shall have Consolidated Net Worth (immediately after the Disposition but prior to giving any pro forma -10- 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; and (e) prior to the consummation of any proposed Disposition, the Company shall have delivered to the transfer agent and registrar an officers' certificate and an opinion of counsel to the effect that such Disposition complies with the terms of this Certificate of Designation and that all conditions precedent to such Disposition have been satisfied. (ii) Junior Payments. The Company shall not, directly or indirectly, (i) declare or pay any dividend or make any distribution on account of any Junior Securities (other than dividends or distributions payable in Junior Securities), (ii) purchase, redeem or otherwise acquire or retire for value any Junior Securities or (iii) make any Restricted Investment (all such dividends, distributions, purchases, redemptions, acquisitions, retirements and Restricted Investments being collectively referred to as "Junior Payments"), if, at the time of such Junior Payment: (A) a Voting Rights Triggering Event shall have occurred and be continuing or would occur as a consequence thereof; (B) immediately after such Junior Payment and after giving effect thereto on a Pro Forma Basis, the Company shall not be able to issue $l.00 of additional Indebtedness pursuant to paragraph (l)(v)(A); or (C) such Junior Payment, together with the aggregate of all other Junior Payments made after the Series D Preferred Stock Issue Date, 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 Series D Preferred Stock Issue Date and ended as of the Company's most recently ended fiscal quarter at the time of such Junior 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 GFSI, Inc. (to the extent contributed to the Company) subsequent to the Series D Preferred Stock Issue Date (other than (x) Equity Interests issued or sold to a Restricted Subsidiary and (y) Disqualified Stock); plus (3) $7.5 million; plus (4) the amount by which the principal amount of and any accrued interest on either Senior Securities of the Company or any Restricted Subsidiary is reduced on Holdings' consolidated balance sheet upon the conversion or exchange (other than by a Restricted Subsidiary) subsequent to the Series D Preferred Stock Issue Date 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 -11- 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 GFSI, Inc. 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 Junior Payment that would result if such Subsidiary were redesignated as a Non-Restricted Subsidiary at such time, as determined in accordance with paragraph (l)(v)(A); 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 (B) of the second paragraph of paragraph (l)(iv). Notwithstanding the foregoing, this Certificate of Designation shall not prohibit as Junior Payments: (A) 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 of the provisions hereof (including, but not limited to, this paragraph (l)(ii)); (B) making Restricted Investments at any time, and from time to time, in an aggregate outstanding amount of $15,000,000 after the Series D Preferred Stock Issue Date (it being understood that if any Restricted Investment made after the Series D Preferred Stock Issue Date pursuant to this clause (B) 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 (B), so that up to $15,000,000 of Restricted Investments may be outstanding under this clause (B) at any given time); provided that, without otherwise limiting this clause (B), any Restricted Investment in a Subsidiary made pursuant to this clause (B) is made for fair market value (as determined by the Board of Directors in good faith); (C) the repurchase, redemption or acquisition of the Company's Stock from the executives, management and employees or consultants of the Company of its Subsidiaries pursuant to the terms of any subscription, stockholder or other agreement or plan, up to an aggregate amount not to exceed $10,000,000; (D) 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 -12- case pursuant to intercompany Indebtedness, intercompany management agreements, intercompany tax sharing agreements, and other intercompany agreements and obligations; (E) the purchase, redemption, retirement or other acquisition of the Series D Preferred Stock pursuant to paragraph (e) above; (F) the payment of (a) consulting, financial and investment banking fees under the TJC Agreement, provided, that no Voting Rights Triggering Event 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 Series D Preferred Stock, and (b) indemnities, expenses and other amounts under the TJC Agreement; (G) 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 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; (H) the defeasance, redemption or repurchase of subordinated Indebtedness 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; (I) Restricted Investments received in consideration for the sale, transfer or disposition of the Company or any Restricted Subsidiary; provided that the Company complies with paragraph (e)(ii)(B); (J) 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; (K) payments and transactions in connection with the Offering, including, but not limited to the expenses of the Offering; (L) payments of fees, expenses and indemnities to the directors of the Company and its Subsidiaries; (M) payments in respect of the Wolff Noncompetition Agreement; and -13- (N) shareholder loans in an aggregate principal amount not to exceed $1.0 million. (iii) Transactions with Affiliates. (A) Except as otherwise set forth herein, neither the Company nor any of its Restricted Subsidiaries shall 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 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 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. (B) The Company shall not, and shall not permit any Restricted Subsidiary to, engage in any Affiliate Transactions involving aggregate payments or other transfers by the Company and its Restricted Subsidiaries in excess of $7,500,000 (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 (i) the Board of Directors of the Company (including a majority of the disinterested directors, if any) determines, in good faith, that such Affiliate Transaction complies with the provisions hereof; and (ii)(A) with respect to any Affiliate Transaction involving the incurrence of Indebtedness, the company receives 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, the Company receives 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, the Company receives 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. (C) Notwithstanding subparagraphs (iii)(A) and (iii)(B) above, this paragraph (l)(iii) shall not apply to: (i) transactions between the Company and any Restricted Subsidiary or between Restricted Subsidiaries; (ii) payments under the TJC Agreement; (iii) any other payments or transactions permitted pursuant to paragraph (l)(ii) above; (iv) (A) payments and transactions under Incentive -14- 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; (v) payments and transactions in connection with the Offering; and (vi) the sale, transfer and/or termination of the officers' life insurance policies in effect on the Series D Preferred Stock Issue Date. (iv) Reports. (A) So long as Series D Preferred Stock is outstanding, whether or not the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company 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. (B) The Company shall provide to the Holders, within 15 days after it files them with the Commission, copies of the annual reports, quarterly reports and other documents (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) that the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act and the Commission will not accept such filing as is prescribed in Section 4.02(a), the Company shall provide to the Holders, within 15 days after it would have been required or permitted, as the case may be, to file with the Commission, financial statements, including any notes thereto (and with respect to annual reports, an auditor's report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," both comparable to that which the Company would have been required to include in such annual reports, quarterly reports and other documents relating to the Company and its Restricted Subsidiaries if the Company were subject to the requirements of Section 13 or 15(d) of the Exchange Act. (C) If the Company is not required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, the Company shall cause its financial statements referred to in paragraph (l)(iv)(A), including any notes thereto (and with respect to annual reports, an auditors' report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," to be so mailed to the Holders within 120 days after the end of each of the Company's fiscal years and within 60 days after the end of each of the first three fiscal quarters of each year. The Company shall cause to be disclosed in a statement accompanying any annual report or comparable information as of the date of the most recent financial statements in each such report or -15- comparable information the amount available for payments pursuant to paragraph (l)(ii). (D) If the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, for so long as Series D Preferred Stock remains outstanding, the Company shall furnish to the Holders, securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. (v) Limitation on Incurrence of Indebtedness. (A) The Company shall not, and shall not permit any Restricted Subsidiary to, issue any Indebtedness (other than the Indebtedness represented by the Exchange 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 1.5 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. (B) Subparagraph (A) above shall not apply to the issuance of: (i) Indebtedness of the Company and/or its Restricted Subsidiaries under the Company's credit facilities in an aggregate principal amount outstanding on the date of such issuance not to exceed the greater of (A) $135.0 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 $160.0 million at any one time outstanding (less the amount of any permanent reductions as set forth in paragraph (e)(ii)(B)); (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 Series D Preferred Stock Issue Date not to exceed $10.0 million in aggregate principal amount at any one time outstanding, or (B) their properties, assets and rights acquired after the Series D Preferred Stock Issue Date, 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 $35.0 million (all or any portion of which may be issued as additional Indebtedness under the Company's credit facilities) provided that the aggregate principal amount of Indebtedness outstanding under this clause (iii) -16- together with the aggregate principal amount of Indebtedness outstanding under clause (i) above shall not exceed $160.0 million at any one time outstanding (less the amount of any permanent reductions as set forth in paragraph (e)(ii)(B)); and (iv) Other Permitted Indebtedness. (vi) Limitation on Liens. 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 to the Series D Preferred Stock 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. (vii) Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. (A) The Company shall not, and shall 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: (i) 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, (ii) make loans or advances to the Company, or (iii) transfer any of its properties or assets to the Company, except for such encumbrances or restrictions existing under or by reason of: (A) applicable law, (B) Indebtedness permitted (1) under paragraph (1)(v)(A) and (2) under clauses (i), (ii) and (iii) of paragraph (1)(v)(B) and clauses (iv), (vii) and (x) of the definition of "Other Permitted Indebtedness," (C) customary provisions restricting subletting or assignment of any lease or license of the Company or any Restricted Subsidiary, (D) customary provisions of any franchise, distribution or similar agreement, (E) 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, (F) Indebtedness or other agreements existing on the Series D Preferred Stock Issue Date, (G) any Refinancing Indebtedness permitted under paragraph (l)(v), 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 than those contained in the agreements governing the Indebtedness being refinanced, (H) 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, (I) the terms of purchase money or capital lease obligations, but only to the extent such purchase money obligations -17- restrict or prohibit the transfer of the property so acquired, or (J) 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. (B) Nothing contained in this paragraph 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. (viii) Corporate Existence. Subject to paragraphs (e)(ii)(B) and (l)(i), the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of each of its Restricted Subsidiaries and the rights (charter and statutory), licenses and franchises of the Company and each of its Restricted Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any Restricted Subsidiary, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Restricted Subsidiaries taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. (ix) Compliance With Laws, Taxes. The Company shall, and shall cause each of its Restricted Subsidiaries to, comply with all statutes, laws, ordinances, or government rules and regulations to which it is subject, the non-compliance with which would materially adversely affect the business, prospects, earnings, properties, assets or condition, financial or otherwise, of the Company and its Restricted Subsidiaries taken as a whole. The Company shall, and shall cause each of its Restricted Subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies, except those contested in good faith by appropriate proceedings. (m) Definitions. As used in this Certificate of Designation, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "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. "Business Day" means any day other than a Legal Holiday. -18- "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 contemplated by the Offering), 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), 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 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 preferred stock outstanding on the Series D Preferred Stock Issue Date), 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 -19- 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 Series D Preferred Stock Issue Date 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. "Commission" means the Securities and Exchange Commission. "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 Transactions or any other refinancing of Indebtedness shall be excluded. "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: (a) 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 (b) Consolidated Net Income of any Person will not include, without duplication, any deduction for: (i) 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, (ii) the amortization of all intangible assets (including amortization attributable to inventory write-ups, goodwill, debt and financing costs, and Incentive Arrangements), (iii) any non-capitalized transaction costs incurred in connection with actual or proposed financings, acquisitions or divestitures (including, but not limited to, financing and -20- refinancing fees), (iv) any extraordinary or nonrecurring charges relating to any premium or penalty paid, write-off of deferred financing costs or other financial recapitalization charges in connection with redeeming or retiring any Indebtedness prior to its stated maturity and (v) 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 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 lO9; 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 Series D Preferred Stock Issue Date 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. "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 mandatory redemption date of the Series D Preferred Stock. "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. -21- "Equity Offering" means a public or private offering by the Company and/or its Subsidiaries 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. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Date" means a date on which the Units are exchanged by the Company for Exchange Notes. "Exchange Notes" means the Exchange Notes described in the Offering. "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. "Holder" means a holder of shares of Series D Preferred Stock. "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 and similar arrangements made in connection with acquisitions of Persons or businesses by the Company or the Restricted Subsidiaries or the retention of executives, officers or employees by the Company or the Restricted Subsidiaries. "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. "Indenture" means (i) the indenture governing the Company's 11.375% Subordinated Discount Notes due 2009 and (ii) the indenture governing the Exchange Notes. "Investment" means any capital contribution to, or other debt or equity investment in, any Person. -22- "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 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. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "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 Investors Service, Inc. 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. "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 -23- to be paid as a result of such Asset Sale (other than the Series D Preferred Stock) and legal, accounting, management and advisory and 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. "Non-Restricted Subsidiary" means any Subsidiary of the Company, other than a Restricted Subsidiary. "Obligations" means, with respect to any Indebtedness, all principal, interest, premium, 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. "Offering Circular" means the Offering Circular, dated September 11, 1997, relating to the Offering by the Company. "Offering" means the Offering of 50,000 exchangeable units consisting of 11.375% Subordinated Discount Notes due 2009 and Series D Preferred Stock. "Other Permitted Indebtedness" means: (i) Indebtedness of the Company and its Restricted Subsidiaries existing as of the Series D Preferred Stock Issue Date 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 Securities, and (C) in the case of Refinancing -24- Indebtedness of Junior Securities, such Refinancing Indebtedness shall be subordinated to the Notes at least to the same extent as the Junior Securities 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 paragraph of paragraph (1)(ii); (vi) Indebtedness of any Non-Restricted Subsidiary created after the Series D Preferred Stock Issue Date; 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 Restricted Subsidiaries of Indebtedness of the Company or a Restricted Subsidiary that was permitted to be incurred by paragraph (l)(v); 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. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "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 Holdings on the date of issuance of the Exchange 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 Worth for purposes of paragraph (m)(i) hereof, 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, -25- 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. "Redemption Date" with respect to any shares of Series D Preferred Stock, means the date on which such shares of Series D Preferred Stock are redeemed by the Company. "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 the Indentures or any Indebtedness issued to so extend, refinance, renew, replace, substitute or refund such Indebtedness; (ii) any refinancings of Indebtedness issued under the Company's credit facilities; 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 this Certificate of Designation; (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. "Restricted Subsidiary" means: (i) any Subsidiary of the Company existing on the Series D Preferred Stock Issue Date, and (ii) any other Subsidiary of the Company formed, acquired or existing after the Series D Preferred Stock Issue Date that is designated as a "Restricted Subsidiary" by the Company pursuant to a resolution approved by 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 terms of the Indenture unless such Subsidiary shall have subsequently been redesignated a Restricted Subsidiary in accordance With clause (ii) of this definition. -26- "Series D Preferred Stock Issue Date" means the date on which the Series D Preferred Stock is originally issued by the Company under this Certificate of Designation. "SFAS 106" means Statement of Financial Accounting Standards No. 106. "SFAS 109" means Statement of Financial Accounting Standards No. 109. "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. "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). "TJC Agreement" means the Management Consulting Agreement among the Company, GFSI, Inc. and TJC Management Corporation, as in effect on the Series D Preferred Stock Issue Date. "Units" means the exchangeable units of the Company consisting of the 11.375% Subordinated Discount Notes due 2009 and Series D Preferred Stock. "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 between the Company and Robert M. Wolff, relating to certain covenants not to compete with the business of the Company, as in effect on the Series D Preferred Stock Issue Date. -27- IN WITNESS WHEREOF, GFSI Holdings, Inc. has caused this Certificate of Designation to be signed by Douglas Zych, in his capacity as Vice President and attested to by A. Richard Caputo, Jr. in his capacity as Vice President and Assistant Secretary, on this 17th day of September 1997. GFSI HOLDINGS, INC. By: /s/ Douglas Zych --------------------- Name: Douglas Zych Title: Vice President Attest: By: /s/ Richard Caputo ------------------------------- Name: A. Richard Caputo, Jr. Title: Assistant Secretary EX-3.2 4 BYLAWS OF GFSI HOLDINGS, INC. Exhibit 3.2 BYLAWS OF GFSI HOLDINGS, INC. Offices ------- 1. Registered Office and Registered Agent. The location of the registered office and the name of the registered agent of the corporation in the State of Delaware shall be such as shall be determined from time to time by the board of directors and on file in the appropriate public offices of the State of Delaware pursuant to applicable provisions of law. 2. Corporate Offices. The corporation may have such other corporate offices and places of business anywhere within or without the State of Delaware as the board of directors may from time to time designate or the business of the corporation may require. Seal ---- 3. Corporate Seal. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware". The corporate seal may be used by causing it or a facsimile thereof to be impressed, affixed, reproduced or otherwise. Meeting of Stockholders ----------------------- 4. Place of Meetings. All meetings of the stockholders shall be held at the offices of the corporation or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. 5. Annual Meeting. An annual meeting of the stockholders of the corporation shall be held on the first Tuesday in December of each year, commencing in 1997, if not a legal holiday, and if a legal holiday, then on the next secular day follow- ing, at 10:00 a.m., or at such other date and time as shall be determined from time to time by the board of directors and stated in the notice of the meeting. At the annual meeting the stock holders shall elect directors to serve until the next annual meeting of the stockholders and until their successors are elected and qualified, or until their earlier resignation or removal, and shall transact such other business as may properly be brought before the meeting. The stockholders may transact such other business as may be desired, whether or not the same was specified in the notice of the meeting, unless the consideration of such other business without its having been specified in the notice of the meeting as one of the purposes thereof is prohibited by law. 6. Special Meetings. Special meetings of the stockholders may be held for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, and may be called by any officer, by the board of directors, or by the holders of, or by any officer or stockholder upon the written request of the holders of, not less than 25 percent of the outstanding stock entitled to vote at such meeting, and shall be called by any officer directed to do so by the board of directors or requested to do so in writing by a majority of the board of directors. Any such written request shall state the purpose or purposes of the proposed meeting. The "call" and the "notice" of any such meeting shall be deemed to be synonymous. 7. Voting. At all meetings of stockholders, every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three years prior to said meeting, unless said instrument shall provide for a longer period. Unless otherwise provided by the certificate of incorporation, each stockholder shall have one vote for each share of stock entitled to vote at such meeting registered in his name on the books of the corporation. At all meetings of stockholders, the voting may be by voice vote, except that, unless otherwise provided by the certificate of incorporation, any qualified voter may demand a vote by ballot on any matter, in which event such vote shall be taken by ballot. 8. Quorum. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of any business, except as otherwise provided by law, by the certificate of incorporation or by these bylaws. Every decision of a majority in 2 the amount of stock of such quorum shall be valid as a corporate act, except in those specific instances in which a larger vote is required by law or by the certificate of incorporation or by these bylaws. At any meeting at which a quorum shall not be present, the holders of a majority of the stock present in person or by proxy at such meeting shall have power successively to adjourn the meeting from time to time to a specified time and place, without notice to anyone other than announcement at the meeting, until a quorum shall be present in person or by proxy. At such adjourned meeting at which a quorum shall be present in person or by proxy, any business may be transacted which might have been transacted at the original meeting which was adjourned. If the adjournment is for more than 30 days, or if after adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 9. Stock Ledger. The original or duplicate stock ledger shall be the only evidence as to who are the stockholders entitled to examine the list required under Section 10 of these bylaws or the books of the corporation, or to vote in person or by proxy at any meeting of the stockholders. 10. Stockholders List. The secretary or assistant secretary, who shall have charge of the stock ledger, shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 11. Notice. Written or printed notice of each meeting of the stockholders, whether annual or special, stating the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes thereof, shall be given, either personally or by mail, to each stockholder of record of the corporation entitled to vote at such meeting not less than 10 days 3 nor more than 60 days prior to the meeting. The board of directors may fix in advance a date, which shall not be more than 60 nor less than 10 days preceding the date of any meeting of the stockholders, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof; provided, however, that the board of directors may fix a new record date for any adjourned meeting. 12. Action by Stockholders Without Meeting. Any action required by law to be taken at any annual or special meeting of stockholders of the corporation, or any other action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote, if a consent in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of any taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Board of Directors ------------------ 13. Powers; Number; Term; Qualification. The management of all the affairs, property, and business of the corporation shall be vested in a board of directors. Unless required by the certificate of incorporation, directors need not be stockholders. In addition to the powers and authorities these bylaws and the certificate of incorporation have expressly conferred upon it, the board of directors may exercise all such powers of the corporation, and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. The number of directors shall be as provided from time to time by resolution duly adopted by the holders of a majority of the outstanding shares entitled to vote thereon or by a majority of the whole board of directors. Each director shall hold office until his successor shall have been elected and qualified or until his earlier resignation and removal. Each director, upon his election, shall be deemed to have qualified by filing with the corporation his written acceptance of such office, which shall be placed in the minute book, or by his attendance at, or consent to action in lieu of, any regular or special meeting of directors. Any director may resign at any time by filing a written resignation with the 4 secretary of the corporation and, unless a later date is fixed by its terms, said resignation shall be effective from the filing thereof. 14. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, unless it is otherwise provided in the certificate of incorporation or bylaws, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. 15. Meetings of the Newly Elected Board. The first meeting of the members of each newly elected board of directors shall be held (i) at such time and place either within or without the State of Delaware as shall be suggested or provided by resolution of the stockholders at the meeting at which such newly elected board was elected, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present; or (ii) if not so suggested or provided for by resolution of the stockholders or if a quorum shall not be present, at such time and place as shall be consented to in writing by a majority of the newly elected board of directors, provided that written or printed notice of such meeting shall be given to each of the other directors in the same manner as provided in Section 17 of these bylaws with respect to the giving of notice for special meetings of the board, except that it shall not be necessary to state the purpose of the meeting in such notice; or (iii) regardless of whether the time and place of such meeting shall be suggested or provided for by resolution of the stockholders, at such time and place as shall be consented to in writing by all of the newly elected directors. 16. Regular Meeting. Regular meetings of the board of directors may be held without notice at such times and places either within or without the State of Delaware as shall from time to time be fixed by resolution adopted by the full board of directors. Any business may be transacted at a regular meeting. 17. Special Meeting. Special meetings of the board of directors may be called at any time by the president, any vice president, or the secretary, or by any two or more of the 5 directors. The place may be within or without the State of Delaware as designated in the notice. 18. Notice of Special Meeting. Written or printed notice of each special meeting of the board of directors, stating the place, day, and hour of the meeting and the purpose or purposes thereof, shall be mailed to each director addressed to him at his residence or usual place of business at least two days before the day on which the meeting is to be held, or shall be sent to him by telegram, or delivered personally, at least one day before the day on which the meeting is to be held. The notice may be given by any officer having authority to call the meeting. "Notice" and "call" with respect to such meetings shall be deemed to be synonymous. Any meeting of the board of directors shall be a legal meeting without any notice thereof having been given if all directors shall be present thereat. 19. Quorum. Unless otherwise required by law, the certificate of incorporation or these bylaws, a majority of the total number of directors shall be necessary at all meetings to constitute a quorum for the transaction of business, and except as may be otherwise provided by law, the certificate of incorporation or these bylaws, the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors. If at least one-third of the whole board of directors is present at any meeting at which a quorum is not present, a majority of the directors present at such meeting shall have power successively to adjourn the meeting from time to time to a subsequent date, without notice to any director other than announcement at the meeting. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting which was adjourned. 20. Attendance by Telephone. Unless otherwise restricted by the certificate of incorporation, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. 21. Committees. The board of directors may, by 6 resolution or resolutions passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more directors of the corporation. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in said resolution or resolutions or in these bylaws, shall have and may exercise all of the powers of the board of directors in the management of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; provided, however, that in the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. All committees so appointed shall, unless otherwise provided by the board of directors, keep regular minutes of the transactions of their meetings and shall cause them to be recorded in books kept for that purpose in the office of the corporation and shall report the same to the board of directors at its next meeting. The secretary or an assistant secretary of the corporation may act as secretary of the committee if the committee so requests. 22. Compensation. The board of directors may, by resolution, fix a sum to be paid directors for serving as directors of this corporation and may, by resolution, fix a sum which shall be allowed and paid for attendance at each meeting of the board of directors and in each case may provide for reimbursement of expenses incurred by directors in attending each meeting; provided that nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving his regular compensation therefor, Members of special or standing committees may be allowed like compensation for attending committee meetings. 23. Resignation. Any director may resign at any time by giving a written notice to the chairman of the board of directors, the president, or the secretary of the corporation. Such resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 7 24. Indemnification of Directors and Officers. Each person who is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation (including the heirs, successors, executors or administrators, or estate of such persons) shall be indemnified by the corporation as of right to the full extent permitted or authorized by the laws of the State of Delaware, as now in effect and as hereafter amended, against any liability, judgment, fine, amount paid in settlement, cost, and expense (including attorneys' fees) asserted or threatened against and incurred by such person in his capacity as or arising out of his status as a director or officer of the corporation or, if serving at the request of the corporation, as a director or officer of another corporation. The indemnification provided by this bylaw provision shall not be exclusive of any other rights to which those indemnified may be entitled under any other bylaws or under any agreement, vote of stockholders or disinterested directors or otherwise, and shall not limit in any way any right which the corporation may have to make different or further indemnification with respect to the same or different persons or classes of persons. 25. Action by Directors without Meeting. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting if all members of the board of directors or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Officers -------- 26. (a) Officers - Who Shall Constitute. The officers of the corporation shall consist of a chairman of the board of directors, a president, one or more vice presidents, a secretary, and a treasurer, each of whom shall be elected by the board of directors at their first meeting after the annual meeting of the stockholders. The board of directors may also designate additional assistant secretaries and assistant treasurers. In the discretion of the board of directors, the office of chairman of the board of directors may remain unfilled. The chairman of the board of directors (if any) shall at all times be, and other officers may be, members of the board of directors. Any number of offices may be held by the same person. 8 An officer shall be deemed qualified when he enters upon the duties of the office to which he has been elected or appointed and furnishes any bond required by the board; but the board may also require of such person his written acceptance and promise faithfully to discharge the duties of such office. (b) Term. Each officer of the corporation shall hold his office at the pleasure of the board of directors or for such other period as the board may specify at the time of his election or appointment, or until his death, resignation, or removal by the board, whichever first occurs. In any event, each officer of the corporation who is not re-elected or re-appointed at the annual meeting of the board of directors next succeeding his election or appointment and at which any officer of the corporation is elected or appointed shall be deemed to have been removed by the board, unless the board provides otherwise at the time of his election or appointment. (c) Other Officers and Agents. The board of directors from time to time may also appoint such other officers and agents for the corporation as it shall deem necessary or advisable, each of whom shall serve at the pleasure of the board or for such period as the board may specify, and shall exercise such powers, have such titles, and perform such duties as shall be determined from time to time by the board or by an officer empowered by the board to make such determinations. 27. President. The president shall be the chief executive officer of the corporation with such general executive powers and duties of supervision and management as are usually vested in the office of the chief executive officer of a corporation and he shall carry into effect all directions and resolutions of the board of directors. The president shall preside at all meetings of the stockholders and directors. The president may execute all bonds, notes, debentures, mortgages, and other instruments for and in the name of the corporation, and may cause the corporate seal to be affixed thereto. Unless the board of directors otherwise provides, the president, or any person designated in writing by him, shall have full power and authority on behalf of this corporation (i) to attend and to vote or take action at any meeting of the holders of securities of corporations in which this corporation may hold securities, and at such meetings shall possess and may exercise any 9 and all rights and powers incident to being a holder of such securities and which as the holder thereof this corporation may have possessed and exercised if present, and (ii) to execute and deliver waivers of notice and proxies for and in the name of the corporation with respect to any such securities held by this corporation. He shall, unless the board of directors otherwise provides, be ex officio a member of all standing committees. He shall have such other or further duties and authority as may be prescribed elsewhere in these bylaws or from time to time by the board of directors. 28. Vice President. In the absence of the president or in the event of his disability, inability, or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated by the board, or in the absence of any designation, then in the order of their election) shall perform the duties and exercise the powers of the president, and shall perform such other duties as the board of directors may from time to time prescribe. 29. Secretary and Assistant Secretaries. The secretary may attend all sessions of the board of directors and all meetings of the stockholders, and shall record or cause to be recorded all votes taken and the minutes of all proceedings in a minute book of the corporation to be kept for that purpose. He shall perform like duties for committees when requested to do so by the board of directors or any such committee. It shall be the principal responsibility of the secretary to give, or cause to be given, notice of all meetings of the stockholders and of the board of directors, but this shall not lessen the authority of others to give such notice as is authorized elsewhere in these bylaws. The secretary shall see that all books, records, lists, and information, or duplicates, required to be maintained in the State of Delaware or elsewhere, are so maintained. The secretary shall keep in safe custody the seal of the corporation and shall have the authority to affix the seal to any instrument requiring it, and when so affixed, he shall attest the seal by his signature. The board of directors may give general authority to any other officer to affix the seal of the corporation 10 and to attest the affixing by his signature. The secretary shall perform such other duties and have such other authority as may be prescribed elsewhere in these bylaws or from time to time by the board of directors or the chief executive officer of the corporation, under whose direct supervision he shall be. In the absence of the secretary or in the event of his disability, inability, or refusal to act, the assistant secretary (or in the event there be more than one assistant secretary, the assistant secretaries in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) may perform the duties and exercise the powers of the secretary, and shall perform such other duties as the board of directors may from time to time prescribe. 30. Treasurer and Assistant Treasurers. The treasurer shall have responsibility for the safekeeping of the funds and securities of the corporation, shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall keep, or cause to be kept, all other books of account and accounting records of the corporation. He shall deposit or cause to be deposited all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors or by any officer of the corporation to whom such authority has been granted by the board of directors. He shall disburse, or permit to be disbursed, the funds of the corporation as may be ordered, or authorized generally, by the board of directors, and shall render to the chief executive officer of the corporation and the directors whenever they may require it, an account of all his transactions as treasurer and of those under his jurisdiction, and of the financial condition of the corporation. He shall perform such other duties and shall have such other responsibility and authority as may be prescribed elsewhere in these bylaws or from time to time by the board of directors. He shall have the general duties, powers, and responsibilities of a treasurer of a corporation. If required by the board of directors, he shall give the corporation a bond in a sum and with one or more sureties 11 satisfactory to the board, for the faithful performance of the duties of his office, and for the restoration to the corporation, in the case of his death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in his possession or under his control which belong to the corporation. In the absence of the treasurer or in the event of his disability, inability, or refusal to act, the assistant treasurer (or in the event there be more than one assistant treasurer, the assistant treasurers in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) may perform the duties and exercise the powers of the treasurer, and shall perform such other duties and have such other authority as the board of directors may from time to time prescribe. 31. Duties of Officers May be Delegated. If any officer of the corporation be absent or unable to act, or for any other reason that the board of directors may deem sufficient, the board may delegate for the time being some or all of the functions, duties, powers, and responsibilities of any officer to any other officer, or to any other agent or employee of the corporation or other responsible person, provided a majority of the whole board of directors concurs therein. 32. Removal. Any officer or agent elected or appointed by the board of directors, and any employee, may be removed or discharged, with or without cause, at any time by the affirmative vote of a majority of the board of directors, but such removal or discharge shall be without prejudice to the contract rights, if any, of the person so removed or discharged. 33. Salaries. Salaries and other compensation of all elected officers of the corporation shall be fixed, increased or decreased by the board of directors, but this power, except as to the salary or compensation of the president, may, unless prohibited by law, be delegated by the board to the president, or may be delegated to a committee. Salaries and compensation of all other appointed officers, agents, and employees of the corporation may be fixed, increased or decreased by the board of directors, but until action is taken with respect thereto by the board of directors, the same may be fixed, increased or decreased by the president or such other officer or officers as may be designated by the board of directors to do so. 12 34. Delegation of Authority. The board of directors from time to time may delegate to the president or other officer or executive employee of the corporation, authority to hire, discharge, fix, and modify the duties, salary, or other compensation of employees of the corporation under their jurisdiction, and the board may delegate to such officer or executive employee similar authority with respect to obtaining and retaining for the corporation the services of attorneys, accountants, and other experts. Stock ----- 35. Certificates. Certificates of stock shall be issued in numerical order, and each stockholder shall be entitled to a certificate signed by the president or a vice president, and by the treasurer or an assistant treasurer or the secretary or an assistant secretary, certifying to the number of shares owned by the stockholder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may nevertheless be issued by the corporation with the same effect as if such officer, transfer agent, or registrar who signed such certificate, or whose facsimile signature shall have been placed thereon, had not ceased to be such officer, transfer agent, or registrar of the corporation. 36. Transfer. Transfers of stock shall be made only upon the transfer books of the corporation, kept at the office of the corporation or respective transfer agents designated to transfer the several classes of stock, and before a new certificate is issued the old certificate shall be surrendered for cancellation. Until and unless the board of directors appoints some other person, firm, or corporation as its transfer agent or transfer clerk (and upon the revocation of any such appointment, thereafter until a new appointment is similarly made) the secretary of the corporation shall be the transfer agent or transfer clerk of the corporation without the necessity of any formal action of the board, and the secretary, or any person designated by him, shall perform all of the duties thereof. 37. Registered Stockholders. Registered stockholders only shall be entitled to be treated by the corporation as the holders and owners in fact of the shares standing in their 13 respective names and the corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Delaware. 38. Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation, alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to give the corporation and its transfer agents and registrars, if any, a bond in such sum as it may direct to indemnify it against any claim that may be made against it with respect to the certificate or certificates alleged to have been lost, stolen, or destroyed. 39. Regulations. The board of directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion, and registration of certificates for shares of the capital stock of the corporation, not inconsistent with the laws of the State of Delaware, the certificate of incorporation of the corporation and these bylaws. 40. Fixing Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting except that the board of directors may fix a new record date for the adjourned meeting. 14 Dividends and Finance --------------------- 41. Dividends. Dividends upon the outstanding shares of the corporation, subject to the provisions of the certificate of incorporation and of any applicable law and of these bylaws, may be declared by the board of directors at any meeting. Subject to such provisions, dividends may be paid in cash, in property, or in shares of the capital stock of the corporation. 42. Moneys. The moneys of the corporation shall be deposited in the name of the corporation in such bank or banks or trust company or trust companies as the board of directors shall designate, and shall be drawn out only by check signed by persons designated by resolution adopted by the board of directors, except that the board of directors may delegate said powers in the manner hereinafter provided in this Section 42 of these bylaws. The board of directors may by resolution authorize an officer or officers of the corporation to designate any bank or banks or trust company or trust companies in which moneys of the corporation may be deposited, and to designate the person or persons who may sign checks drawn on any particular bank account or bank accounts of the corporation, whether created by direct designation of the board of directors or by an authorized officer or officers as aforesaid. 43. Fiscal Year. The board of directors shall have power to fix and from time to time change the fiscal year of the corporation. In the absence of action by the board of directors, however, the fiscal year of the corporation shall end each year on the date which the corporation treated as the close of its first fiscal year, until such time, if any, as the fiscal year shall be changed by the board of directors. Books and Records ----------------- 44. Books, Accounts, and Records. The books, accounts, and records of the corporation, except as may be otherwise required by the laws of the State of Delaware, may be kept outside the State of Delaware, at such place or places as the board of directors from time to time determine. The board of directors shall determine whether, to what extent and the conditions upon which the accounts and books of the corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by law or by resolution of the stockholders. 15 Notice ------ 45. Provisions. Whenever the provisions of the statutes of the State of Delaware, the certificate of incorporation or these bylaws require notice to be given to any director, officer, or stockholder, they shall not be construed to required actual personal notice. Notice by mail may be given in writing by depositing the same in a post office or letter box, in a post paid, sealed wrapper, addressed to such director, officer, or stockholder at his or her address as the same appears in the books of the corporation, and the time when the same shall be mailed shall be deemed to be the time of the giving of such notice. If notice be given by telegraph, such notice shall be deemed to be given when the same is delivered to the telegraph company. 46. Waiver. Whenever any notice is required to be given under the provisions of the statutes of the State of Delaware or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting need be specified in any written waiver of notice unless so required by the certificate of incorporation or the bylaws. Amendments ---------- 47. Amendments. These bylaws may be altered, amended or repealed by the affirmative vote of a majority of the shares of stock issued and outstanding and entitled to vote thereon, or, if the certificate of incorporation so provides, by the board of directors at any meeting thereof. 16 EX-4.1 5 INDENTURE 9/17/97 Exhibit 4.1 Execution Copy ================================================================================ GFSI Holdings, Inc. ________________________________________ Series A and Series B 11-3/8% Senior Discount Notes due 2009 ________________________________________ ___________________ INDENTURE DATED AS OF SEPTEMBER 17, 1997 ___________________ State Street Bank and Trust Company Trustee ================================================================================ TABLE OF CONTENTS ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions........................................ 1 Section 1.02. Other Definitions.................................. 12 Section 1.03. Incorporation by Reference of Trust Indenture Act.. 13 Section 1.04. Rules of Construction.............................. 13 ARTICLE 2 THE NOTES Section 2.01. Form and Dating.................................... 13 Section 2.02. Execution and Authentication....................... 14 Section 2.03. Registrar and Paying Agent......................... 14 Section 2.04. Paying Agent to Hold Money in Trust................ 15 Section 2.05. Holder Lists....................................... 15 Section 2.06. Transfer and Exchange.............................. 15 Section 2.07. Replacement Notes.................................. 21 Section 2.08. Outstanding Notes.................................. 21 Section 2.09. Treasury Notes..................................... 21 Section 2.10. Temporary Notes.................................... 22 Section 2.11. Cancellation....................................... 22 Section 2.12. Defaulted Interest................................. 22 Section 2.13. Record Date........................................ 22 Section 2.14. CUSIP Number....................................... 22 ARTICLE 3 OPTIONAL REDEMPTION AND MANDATORY OFFERS TO PURCHASE Section 3.01. Notices to Trustee................................. 23 Section 3.02. Selection of Notes to be Redeemed or Purchased..... 23 Section 3.03. Notice of Redemption............................... 24 Section 3.04. Effect of Notice of Redemption..................... 25 Section 3.05. Deposit of Redemption Price........................ 25 Section 3.06. Notes Redeemed in Part............................. 25 Section 3.07. Optional Redemption Provisions..................... 25 Section 3.08. Mandatory Purchase Provisions...................... 26 ARTICLE 4 COVENANTS Section 4.01. Payment of Notes................................... 27 Section 4.02. SEC Reports........................................ 28 Section 4.03. Compliance Certificate............................. 29 Section 4.04. Stay, Extension and Usury Laws..................... 29 Section 4.05. Limitation on Restricted Payments.................. 29 Section 4.06. Corporate Existence................................ 32 Section 4.07. Limitation on Incurrence of Indebtedness........... 32 Section 4.08. Limitation on Transactions With Affiliates......... 33 Section 4.09. Limitation on Liens................................ 33 Section 4.10. Compliance With Laws, Taxes........................ 34
i
Section 4.11. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries............... 34 Section 4.12. Maintenance of Office or Agencies............................ 34 Section 4.13. Change of Control............................................ 35 Section 4.14. Limitation on Asset Sales.................................... 35 Section 4.15. Designation of Restricted and Non-Restricted Subsidiaries.... 36 ARTICLE 5 SUCCESSORS Section 5.01. Merger or Consolidation...................................... 37 Section 5.02. Successor Corporation Substituted............................ 38 ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default............................................ 38 Section 6.02. Acceleration................................................. 40 Section 6.03. Other Remedies............................................... 40 Section 6.04. Waiver of Past Defaults...................................... 41 Section 6.05. Control by Majority.......................................... 41 Section 6.06. Limitation on Suits.......................................... 41 Section 6.07. Rights of Holders to Receive Payment......................... 41 Section 6.08. Collection Suit by Trustee................................... 41 Section 6.09. Trustee May File Proofs of Claim............................. 42 Section 6.10. Priorities................................................... 42 Section 6.11. Undertaking for Costs........................................ 42 ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee............................................ 43 Section 7.02. Rights of Trustee............................................ 44 Section 7.03. Individual Rights of Trustee................................. 44 Section 7.04. Trustee's Disclaimer......................................... 44 Section 7.05. Notice to Holders of Defaults and Events of Default.......... 44 Section 7.06. Reports by Trustee to Holders................................ 45 Section 7.07. Compensation and Indemnity................................... 45 Section 7.08. Replacement of Trustee....................................... 46 Section 7.09. Successor Trustee by Merger, Etc............................. 46 Section 7.10. Eligibility; Disqualification................................ 47 Section 7.11. Preferential Collection of Claims Against Holdings........... 47 ARTICLE 8 DISCHARGE OF INDENTURE Section 8.01. Discharge of Liability on Notes; Defeasance.................. 47 Section 8.02. Conditions to Defeasance..................................... 48 Section 8.03. Application of Trust Money................................... 49 Section 8.04. Repayment to Holdings........................................ 49 Section 8.05. Indemnity for Government Obligations......................... 49 Section 8.06. Reinstatement................................................ 49
ii ARTICLE 9 AMENDMENTS Section 9.01. Amendments and Supplements Permitted Without Consent of Holders... 50 Section 9.02. Amendments and Supplements Requiring Consent of Holders........... 50 Section 9.03. Compliance with TIA............................................... 51 Section 9.04. Revocation and Effect of Consents................................. 51 Section 9.05. Notation on or Exchange of Notes.................................. 51 Section 9.06. Trustee Protected................................................. 52 ARTICLE 10 MISCELLANEOUS Section 10.01. Trust Indenture Act Controls...................................... 52 Section 10.02. Notices........................................................... 52 Section 10.03. Communication by Holders with Other Holders....................... 53 Section 10.04. Certificate and Opinion as to Conditions Precedent................ 53 Section 10.05. Statements Required in Certificate or Opinion..................... 53 Section 10.06. Rules by Trustee and Agents....................................... 54 Section 10.07. Legal Holidays.................................................... 54 Section 10.08. No Recourse Against Others........................................ 54 Section 10.09. Counterparts...................................................... 54 Section 10.10. Variable Provisions............................................... 54 Section 10.11. Governing Law..................................................... 55 Section 10.12. No Adverse Interpretation of Other Agreements..................... 55 Section 10.13. Successors........................................................ 55 Section 10.14. Severability...................................................... 55 Section 10.15. Table of Contents, Headings, Etc.................................. 55 EXHIBITS Exhibit A Form of Note...................................................... A-1 Exhibit B Certificate of Transferor......................................... B-1 Exhibit C Certificate of Regulation S Transferor............................ C-1
iii This Indenture, dated as of September 17, 1997, is between GFSI Holdings, Inc., a Delaware corporation ("Holdings"), and State Street Bank and Trust Company, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the holders of Holding's 11 3/8% Series A Senior Discount Notes due 2009 (the "Series A Notes") and Holdings' 11 3/8% Series B Senior Discount notes due 2009 (the "Series B Notes" and, together with the Series A Notes, the "Notes"). ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01 Definitions "Accreted Value" means, as of any date of determination prior to September 15, 2004, the sum of (a) the initial offering price of each Note and (b) that portion of the excess of the principal amount of each Note over such initial offering price as shall have been accreted thereon through such date, such amount to be so accreted on a daily basis at the rate of 11 3/8% per annum of the initial offering price of the Notes, compounded semi-annually on each September 15, and each March 15, from the date of issuance of the Notes through the date of determination computed on the basis of a 360-day year of twelve 30-day months. The Accreted Value of any Notes on or after September 15, 2004 shall be 100% of the principal amount thereof. "Affiliate" means any of the following: (i) any Person directly or indirectly controlling or controlled by or under direct or indirect common control with Holdings, (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, provided, however that MCIT PLC shall not be deemed an Affiliate of Holdings. "Affiliated Embroiderers" means the affiliated entities that provide embroidery services for the Company as of the date of this Indenture. "Agent" means any Registrar, Paying Agent or co-registrar. "Asset Sale" means the sale, lease, conveyance or other disposition by Holdings 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 Holdings, (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 Holdings or a Restricted Subsidiary to Holdings or a Restricted Subsidiary, (viii) the designation of a Restricted Subsidiary as a Non-Restricted Subsidiary pursuant to Section 4.15, (ix) the sale, lease, conveyance or other disposition of all or substantially all of the assets of Holdings as permitted under Section 5.01, (x) the sale or disposition of obsolete equipment or other obsolete assets, (xi) Restricted Payments permitted by Section 4.05, (xii) the exchange of assets for other non-cash assets that (a) are useful in the business of Holdings 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), or (xiii) the sale, transfer and/or termination of the officers' life insurance policies in effect on the date of this Indenture. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means Holdings' board of directors or any authorized committee of such board of directors. "Business Day" means any day other than a Legal Holiday. "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), 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 minority interests in other Persons, except the amount of such portion received in cash by Holdings 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 this Indenture), 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. 2 "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 Holdings 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 Holdings, (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 Holdings (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 Holdings (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, (v) the first day on which a majority of the members of the Board of Directors of Holdings are not Continuing Directors or (vi) the first day on which Holdings ceases to be the owner of record of 100% of the Voting Stock of the Company. 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 Holdings 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. "Company" means GFSI, Inc. a Delaware corporation and a wholly owned Subsidiary of Holdings. "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 Transactions or any other refinancing of Indebtedness shall be excluded. "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: (a) 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 (b) Consolidated Net Income of any Person will not include, without duplication, any deduction for: (i) 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, (ii) the amortization of all intangible assets (including amortization attributable to inventory write-ups, goodwill, debt and financing costs, and Incentive Arrangements), (iii) 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), (iv) any extraordinary or nonrecurring charges relating to any premium or penalty paid, write-off of deferred financing costs or other financial recapitalization charges 3 in connection with redeeming or retiring any Indebtedness prior to its stated maturity and (v) 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 of 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 Holdings who (i) was a member of such Board of Directors on the date of this 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. "Corporate Trust Office" of the Trustee means, the corporate trust administration office of the Trustee at which the trust created by this Indenture is administered. "Credit Facilities" means, with respect to Holdings and its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Definitive Notes" means Notes that are in the form of Exhibit A attached hereto (but without including the text referred to in footnotes 1 and 2 thereto). "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, until a successor shall have been appointed and become such pursuant to Section 2.06 of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "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 4 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 $500,000,000 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 Holdings or the Company, as applicable, 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. "Exchange Offer" means the offer by Holdings to Holders to exchange Series B Notes for Series A Notes. "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. "Global Note" means a Note that contains the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 2 to the form of the Note attached hereto as Exhibit A. "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. "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. "Holder" means a Person in whose name a Note is registered. "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 Holdings or the Restricted Subsidiaries or the retention of consultants, executives, officers or employees by Holdings or its Restricted Subsidiaries. "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 5 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. "Indenture" means this Indenture, as amended or supplemented from time to time. "Initial Purchaser" means Donaldson, Lufkin & Jenrette Securities Corporation. "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 Holdings, whether voluntary or involuntary, or (ii) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of Holdings. "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. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York, the city in which the Corporate Trust Office of the Trustee is located or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "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). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "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 Holdings) 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. 6 "Moody's" means Moody's Investors Services, 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 Holdings 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 investment banking fees and sales commissions), (ii) taxes paid or payable as a result thereof, (iii) any portion of cash proceeds that Holdings 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 Holdings 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 Holdings 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 Holdings 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. "Non-Restricted Subsidiary" means any Subsidiary of Holdings 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. "Offering" means the offer and sale of the Units as contemplated by the Offering Memorandum. "Offering Memorandum" means the Offering Memorandum, dated September 12, 1997, relating to Holdings' offering and placement of the Units. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of Holdings by two Officers of Holdings, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of Holdings, that meets the requirements of Section 10.05 hereof. 7 "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 10.05 hereof. The counsel may be an employee of or counsel to Holdings, any Subsidiary of Holdings or the Trustee. "Other Permitted Indebtedness" means: (i) Indebtedness of Holdings 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 Holdings 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 Holdings and its Restricted Subsidiaries; (v) Indebtedness of Holdings 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 Holdings or a Restricted Subsidiary) or (x) of Section 4.05(b); 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 Holdings and its Restricted Subsidiaries and Holdings and its Restricted Subsidiaries have no Obligations with respect to such Indebtedness; (vii) Indebtedness of Holdings and its Restricted Subsidiaries under Hedging Obligations; (viii) Indebtedness of Holdings 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 Holdings and its Restricted Subsidiaries in connection with performance, surety, statutory, appeal or similar bonds in the ordinary course of business; (x) Indebtedness of Holdings 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 Holdings or any of the Restricted Subsidiaries of Indebtedness of Holdings or a Restricted Subsidiary of Holdings that was permitted to be incurred by Section 4.07; 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 Liens" means: (i) Liens securing Senior Indebtedness of Holdings that was permitted by the terms of this 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 8 ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (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 Holdings 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 Section 4.07; (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 Holdings 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 Holdings 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 Holdings 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 $3.0 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 Holdings or another Restricted Subsidiary. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Post-Petition Interest" means 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. "Preferred Stock" means the 11 3/8% Series D Preferred Stock of Holdings due 2009. "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 Holdings on 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 9 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 Sections 4.05, 4.16 and 5.01, the incurrence of Indebtedness pursuant to Section 4.07(a) and Consolidated Net Worth for purposes of Section 5.01), 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 Holdings 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 Credit Facilities, and (iii) any additional Indebtedness issued to pay premiums and fees in connection with clauses (i) and (ii). "Registration Rights Agreement" means the Registration Rights Agreement, dated as of September 17, 1997, by and between Holdings and the Initial Purchaser. "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; (ii) any Incentive Arrangements; (iii) Investments in Holdings; 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 10 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. "Restricted Subsidiary" means: (i) any Subsidiary of Holdings existing on the date of original issuance of the Notes, and (ii) any other Subsidiary of Holdings formed, acquired or existing after the date of original issuance of the Notes that is designated as a "Restricted Subsidiary" by Holdings 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 Holdings that has been redesignated by Holdings pursuant to a resolution approved by a majority of the Board of Directors as a Non-Restricted Subsidiary in accordance with Section 4.15 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 Holdings or any Restricted Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act. "S&P" means Standard & Poor's Rating Services, a division of McGraw-Hill Companies, Inc. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "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 Holdings 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 the Notes. "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). 11 "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) 77aaa- 77bbbb), as amended, as in effect on the date of original issuance of the Notes. "TJC Agreement" means the Management Consulting Agreement, dated February 27, 1997, among the Company, Holdings and TJC Management Corporation, as in effect on the date of this Indenture. "Transfer Restricted Notes" means securities that bear or are required to bear the legend set forth in Section 2.06. "Trust Officer" means any officer in the corporate trust administration department of the Trustee or any other officer of the Trustee to which a matter relating to this Indenture or any Note has been referred by an officer in such corporate trust administration department. "Trustee" means State Street Bank and Trust Company until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter means the successor. "U.S. Government Obligations" means direct obligations of the United States of America for the payment of which the full faith and credit of the United States of America is pledged, provided that no U.S. Government Obligation shall be callable at the issuer's option. "Units" means the units of Holdings consisting of the Notes and the Preferred Stock. "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 date of this Indenture, 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 this Indenture. Section 1.02. Other Definitions. Defined in Term Section "Acceleration Notice"........................... 6.02 "Affiliate Transaction"......................... 4.09 "Asset Transfer Trigger Date"................... 4.15 "Asset Sale Disposition Date"................... 4.15 "Change of Control Trigger Date"................ 4.14 "covenant defeasance option".................... 8.01 "Disposition"................................... 5.01 12 "DTC"........................................... 2.03 "Event of Default".............................. 6.01 "Excess Proceeds"............................... 4.15 "legal defeasance option"....................... 8.01 "Notice of Default"............................. 6.01 "Offer"......................................... 3.08 "Paying Agent".................................. 2.03 "Purchase Date"................................. 3.08 "Registrar"..................................... 2.03 "Restricted Payments"........................... 4.05 "Successor Corporation"......................... 5.01 "Trustee Expenses".............................. 6.08 Section 1.03. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in, and made a part of, this Indenture. Any terms incorporated by reference in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them therein. Section 1.04 Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it herein; (2) an accounting term not otherwise defined herein has the meaning assigned to it under GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. ARTICLE 2 THE NOTES Section 2.01. Form and Dating. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A, which is part of this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes shall be in denominations of $500.00 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, Holdings and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. 13 Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06. 14 Section 2.02. Execution and Authentication. One Officer shall sign the Notes for Holdings by manual or facsimile signature. Holdings' seal shall be reproduced on the Notes and may be in facsimile form. If an Officer whose signature is on a Note no longer holds that office at the time a Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of an authorized signatory of the Trustee, and the Trustee's signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in Exhibit A. The Trustee shall, upon a written order of Holdings signed by two Officers directing the Trustee to authenticate the Notes and certifying that all conditions precedent to the issuance of the Notes contained herein have been complied with, authenticate Notes for original issuance up to an aggregate principal amount stated in paragraph 4 of the Notes (the aggregate principal amount of outstanding Notes may not exceed that amount at any time, except as provided in Section 2.07). The Trustee may appoint an authenticating agent acceptable to Holdings to authenticate Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holdings or an Affiliate of Holdings. Section 2.03. Registrar and Paying Agent. Holdings shall maintain an office or agency (the "Registrar") where Notes may be presented for registration of transfer or for exchange and an office or agency (the "Paying Agent") where Notes may be presented for payment. The Registrar shall keep a register of the Notes and of their transfer and exchange. Holdings may appoint one or more co-registrars and one or more additional paying agents. The term "Registrar" includes any co-registrar, and the term "Paying Agent" includes any additional paying agent. Holdings may change any Paying Agent or Registrar without prior notice to any Holder. Holdings shall notify in writing the Trustee and the Trustee shall notify the Holders in writing of the name and address of any Agent not a party to this Indenture. If Holdings fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. Holdings shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, and such agreement shall incorporate the TIA's provisions and implement the provisions of this Indenture that relate to such Agent. Holdings initially appoints The Depository Trust Company ("DTC") to act as Depository with respect to the Global Notes. Holdings initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Notes and as Note Custodian with respect to the Global Notes. Holdings or any of its Subsidiaries may act as Paying Agent, Registrar or co-registrar. If Holdings fails to appoint or maintain a Registrar and Paying Agent, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.07. 15 Section 2.04. Paying Agent to Hold Money in Trust. Holdings shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the Holders' benefit or the Trustee all money the Paying Agent holds for redemption or purchase of the Notes or for the payment of principal of, or premium, if any, or interest on, or Liquidated Damages, if any, with respect to the Notes, and will promptly notify the Trustee of any Default by Holdings in providing the Paying Agent with sufficient funds to (i) purchase Notes tendered pursuant to an Offer arising under Section 4.13, (ii) redeem Notes called for redemption, or (iii) make any payment of principal, premium, interest or Liquidated Damages due on the Notes. While any such Default continues, the Trustee may require the Paying Agent to pay all money it holds to the Trustee and to account for any funds disbursed. Holdings at any time may require the Paying Agent to pay all money it holds to the Trustee and to account for any funds disbursed. Upon payment over to the Trustee, the Paying Agent (if other than Holdings or any of its Subsidiaries) shall have no further liability for the money it delivered to the Trustee. If Holdings or any of its Subsidiaries acts as Paying Agent, it shall segregate and hold in a separate trust fund for the Holders' benefit or the Trustee all money it holds as Paying Agent. Section 2.05. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is not the Registrar, Holdings shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require that sets forth the names and addresses of, and the aggregate principal amount of Notes held by, each Holder, and Holdings shall otherwise comply with Section 312(a) of the TIA. Section 2.06. Transfer and Exchange. (a) Transfer and Exchange of Definitive Notes. When Definitive Notes are presented by a Holder to the Registrar with a request: (x) to register the transfer of the Definitive Notes; or (y) to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Definitive Notes presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney, duly authorized in writing; and (ii) in the case of a Definitive Note that is a Transfer Restricted Note, such request shall be accompanied by the following additional information and documents, as applicable: 16 (A) if such Transfer Restricted Note is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification to that effect from such Holder (in substantially the form of Exhibit B hereto); or (B) if such Transfer Restricted Note is being transferred (1) to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or (2) pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act (and based on an opinion of counsel if Holdings so requests) or (3) pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B hereto); (C) if such Transfer Restricted Note is being transferred pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and based on an opinion of counsel if Holdings so requests), certifications to that effect from such Holder (in substantially the form of Exhibits B and C hereto); or (D) if such Transfer Restricted Note is being transferred in reliance on another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if Holdings so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B hereto). (b) Transfer of a Definitive Note for a Beneficial Interest in a Global Note. A Definitive Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Note, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (i) if such Definitive Note is a Transfer Restricted Note, a certification from the Holder thereof (in substantially the form of Exhibit B hereto) to the effect that such Definitive Note is being transferred by such Holder to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act; and (ii) whether or not such Definitive Note is a Transfer Restricted Note, written instructions from the Holder thereof directing the Trustee to make, or to direct the Note Custodian to make, an endorsement on the Global Note to reflect an increase in the aggregate principal amount of the Notes represented by the Global Note, the Trustee shall cancel such Definitive Note in accordance with Section 2.11 and cause, or direct the Note Custodian to cause, in accordance with the standing instructions and procedures existing between the Depository and the Note Custodian, the aggregate principal amount of Notes represented by the Global Note to be increased accordingly. If no Global Notes are then outstanding, Holdings shall issue and, upon receipt of an authentication order in accordance with Section 2.02, the Trustee shall authenticate a new Global Note in the appropriate principal amount. 17 (c) Transfer and Exchange of Global Notes. The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depository, in accordance with this Indenture and the procedures of the Depository therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. (d) Transfer of a Beneficial Interest in a Global Note for a Definitive Note. (i) Any Person having a beneficial interest in a Global Note may upon request exchange such beneficial interest for a Definitive Note. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depository, from the Depository or its nominee on behalf of any Person having a beneficial interest in a Global Note, and, in the case of a Transfer Restricted Note, the following additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depository as being the beneficial owner, a certification to that effect from such Person (in substantially the form of Exhibit B hereto); or (B) if such beneficial interest is being transferred (1) to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or (2) pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act (and based on an opinion of counsel if Holdings so requests) or (3) pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B hereto); or (C) if such beneficial interest is being transferred pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and based on an opinion of counsel if Holdings so requests), certifications to that effect from such Holder (in substantially the form of Exhibits B and C hereto); or (D) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if Holdings so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B hereto). the Trustee or the Note Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depository and the Note Custodian, cause the aggregate principal amount of Global Notes to be reduced accordingly and, following such reduction, Holdings shall execute and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate and deliver to the transferee a Definitive Note in the appropriate principal amount. 18 (ii) Definitive Notes issued in exchange for a beneficial interest in a Global Note pursuant to this Section 2.06(d) shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver in accordance with the standard procedures of the Depository such Definitive Notes to the Persons in whose names such Notes are so registered. (e) Restrictions on Transfer and Exchange of Global Notes. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (f) of this Section 2.06), a Global Note may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (f) Authentication of Definitive Notes in Absence of Depository. If at any time: (i) the Depository for the Notes notifies Holdings that the Depository is unwilling or unable to continue as Depository for the Global Notes and a successor Depository for the Global Notes is not appointed by Holdings within 90 days after delivery of such notice; or (ii) Holdings, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Notes under this Indenture, then Holdings shall execute, and the Trustee shall, upon receipt of an authentication order in accordance with Section 2.02, authenticate and deliver, Definitive Notes in an aggregate principal amount equal to the principal amount of the Global Notes in exchange for such Global Notes and registered in such names as the Depository shall instruct the Trustee or Holdings in writing. (g) Legends. (i) Except for any Transfer Restricted Note sold or transferred (including any Transfer Restricted Note represented by a Global Note) as described in (ii) below, each Note certificate evidencing Global Notes and Definitive Notes (and all Notes issued in exchange therefor or substitution thereof) shall bear legends in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF HOLDINGS THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR 19 OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF HOLDINGS SO REQUESTS), (2) TO HOLDINGS OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Note (including any Transfer Restricted Note represented by a Global Note) pursuant to an effective registration statement under the Securities Act, pursuant to Rule 144 under the Securities Act or pursuant to an opinion of counsel reasonably satisfactory to Holdings and the Registrar that no legend is required: (A) in the case of any Transfer Restricted Note that is a Definitive Note, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Note for a Definitive Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Note; and (B) in the case of any Transfer Restricted Note represented by a Global Note, such Transfer Restricted Note shall not be required to bear the legend set forth in (i) above if all other interests in such Global Note have been or are concurrently being sold or transferred pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, but such Transfer Restricted Note shall continue to be subject to the provisions of Section 2.06(c); provided, however, that with respect to any request for an exchange of a Transfer Restricted Note that is represented by a Global Note for a Definitive Note that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit B hereto). (iii) Notwithstanding the foregoing, upon consummation of the Exchange Offer, Holdings shall issue and, upon receipt of an authentication order in accordance with Section 2.02, the Trustee shall authenticate, Series B Notes in exchange for 20 Series A Notes accepted for exchange in the Exchange Offer, which Series B Notes shall not bear the legend set forth in (i) above, and the Registrar shall rescind any restriction on the transfer of such Notes, in each case unless the Holder of such Series A Notes is either (A) a broker-dealer, (B) a Person participating in the distribution of the Series A Notes or (C) a Person who is an affiliate (as defined in Rule 144A) of Holdings. Holdings shall identify to the Trustee such Holders of the Notes in a written certification signed by an Officer of Holdings and, absent certification from Holdings to such effect, the Trustee shall assume that there are no such Holders. (iv) Original Issue Discount Legend. Each Note shall bear a legend in substantially the following form: "FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $_____, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $______, THE ISSUE DATE IS ____________ AND THE YIELD TO MATURITY IS 11 3/8% PER ANNUM." (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in Global Notes have been exchanged for Definitive Notes, redeemed, repurchased or canceled, all Global Notes shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for Definitive Notes, redeemed, repurchased or canceled, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note, by the Trustee or the Notes Custodian, at the direction of the Trustee, to reflect such reduction. (i) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, Holdings shall execute and the Trustee shall authenticate Definitive Notes and Global Notes at the Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but Holdings may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 3.07, 4.14, 4.15 and 9.05). (iii) Neither Holdings nor the Registrar shall be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Definitive Notes and Global Notes issued upon any registration of transfer or exchange of Definitive Notes or Global Notes in accordance with this Indenture (including any increase in the aggregate principal amount of the Notes represented by the Global Note pursuant to subsection (b) above) shall be the valid obligations of Holdings, evidencing the same debt, and entitled to the same 21 benefits under this Indenture, as the Definitive Notes or Global Notes surrendered upon such registration of transfer or exchange. (v) Holdings shall not be required to issue Notes and the Registrar shall not be required to register the transfer of or to exchange Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 and ending at the close of business on the day of selection, or to register the transfer of or to exchange a Note between a record date and the next succeeding interest payment date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and Holdings may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of, premium, if any, accrued and unpaid interest, and Liquidated Damages, if any, on such Notes, and neither the Trustee, any Agent nor Holdings shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Definitive Notes and Global Notes in accordance with the provisions of Section 2.02. Section 2.07. Replacement Notes. If any mutilated Note is surrendered to the Trustee, or Holdings and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, Holdings shall issue and the Trustee, upon Holdings' written order signed by two Officers, shall authenticate a replacement Note if the Trustee's requirements are met. If the Trustee or Holdings requires it, the Holder must supply an indemnity bond that is sufficient in the judgment of the Trustee and Holdings to protect Holdings, the Trustee, any Agent or any authenticating agent from any loss that any of them may suffer if a Note is replaced. Holdings and the Trustee may charge for their expenses in replacing a Note. Every replacement Note is an additional Obligation of Holdings. Section 2.08. Outstanding Notes. The Notes outstanding at any time are all the Notes the Trustee has authenticated except for those it has canceled, those delivered to it for cancellation, those representing reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. If a Note is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that a bona fide purchaser holds the replaced Note. If the entire principal of, and premium, if any, and accrued interest on, and Liquidated Damages, if any, with respect to any Note is considered paid under Section 4.01, it ceases to be outstanding and interest and Liquidated Damages on it cease to accrue. Subject to Section 2.09, a Note does not cease to be outstanding because Holdings or an Affiliate holds the Note. 22 Section 2.09. Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by Holdings or an Affiliate shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that a Trust Officer of the Trustee knows are so owned shall be so disregarded. Notwithstanding the foregoing, Notes that Holdings or an Affiliate offers to purchase or acquires pursuant to an Offer, exchange offer, tender offer or otherwise shall not be deemed to be owned by Holdings or an Affiliate until legal title to such Notes passes to Holdings or such Affiliate, as the case may be. Section 2.10. Temporary Notes. Until Definitive Notes are ready for delivery, Holdings may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that Holdings considers appropriate for temporary Notes. Without unreasonable delay, Holdings shall prepare and the Trustee, upon receipt of Holdings' written order signed by two Officers which shall specify the amount of temporary Notes to be authenticated and the date on which the temporary Notes are to be authenticated, shall authenticate Definitive Notes and deliver them in exchange for temporary Notes. Until such exchange, Holders of temporary Notes shall be entitled to the same rights, benefits and privileges as Definitive Notes. Section 2.11. Cancellation. Holdings at any time may deliver Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange, replacement, payment (including all Notes called for redemption and all Notes accepted for payment pursuant to an Offer) or cancellation, and the Trustee shall cancel all such Notes and shall destroy all canceled Notes (subject to the Exchange Act's record retention requirements) and deliver a certificate of their destruction to Holdings unless by written order, signed by two Officers of Holdings, Holdings shall direct that canceled Notes be returned to it. Holdings may not issue new Notes to replace any Notes that have been canceled by the Trustee or that have been delivered to the Trustee for cancellation. If Holdings or an Affiliate acquires any Notes (other than by redemption or pursuant to an Offer), such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until such Notes are delivered to the Trustee for cancellation. Section 2.12. Defaulted Interest. If Holdings defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to Holders on a subsequent special record date, in each case at the rate provided in the Notes and in Section 4.01. Holdings shall fix or cause to be fixed each such special record date and payment date. As early as practicable prior to the special record date, Holdings (or the Trustee, in the name of and at the expense of Holdings) shall mail a notice that states the special record date, the related payment date and the amount of interest to be paid. Section 2.13. Record Date. 23 The record date for purposes of determining the identity of Holders of Notes entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in section 316(c) of the TIA. Section 2.14. CUSIP Number. A "CUSIP" number shall be printed on the Notes, and the Trustee shall use the CUSIP number in notices of redemption, purchase or exchange as a convenience to Holders, provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. Holdings shall promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3 OPTIONAL REDEMPTION AND MANDATORY OFFERS TO PURCHASE Section 3.01. Notices to Trustee. If Holdings elects to redeem Notes pursuant to Section 3.07, it shall furnish to the Trustee, at least 40 days prior to the redemption date and at least 10 days prior to the date that notice of the redemption is to be mailed by Holdings to Holders, an Officers' Certificate stating that Holdings has elected to redeem Notes pursuant to Section 3.07(a) or 3.07(b), as the case may be, the date notice of redemption is to be mailed to Holders, the redemption date, the aggregate principal amount (or, if prior to September 15, 2004, the Accreted Value) of Notes to be redeemed, the redemption price for such Notes and the amount of accrued and unpaid interest on and Liquidated Damages, if any, with respect to such Notes as of the redemption date. If the Trustee is not the Registrar, Holdings shall, concurrently with delivery of its notice to the Trustee of a redemption, cause the Registrar to deliver to the Trustee a certificate (upon which the Trustee may rely) setting forth the name of, and the aggregate principal amount (or, if prior to September 15, 2004, the Accreted Value) of Notes held by, each Holder. If Holdings is required to offer to purchase Notes pursuant to Section 4.13 or 4.14, it shall furnish to the Trustee, at least two Business Days before notice of the Offer is to be mailed to Holders, an Officers' Certificate setting forth that the Offer is being made pursuant to Section 4.13 or 4.14, as the case may be, the Purchase Date, the maximum principal amount (or, if prior to September 15, 2004, the Accreted Value) of Notes Holdings is offering to purchase pursuant to the Offer, the purchase price for such Notes, and the amount of accrued and unpaid interest on and Liquidated Damages, if any, with respect to such Notes as of the Purchase Date. Holdings will also provide the Trustee with any additional information that the Trustee reasonably requests in connection with any redemption or Offer. Section 3.02. Selection of Notes to be Redeemed or Purchased. If less than all outstanding Notes are to be redeemed or if less than all Notes tendered pursuant to an Offer are to be accepted for payment, the Trustee shall select the outstanding Notes to be redeemed or accepted for payment pro rata, by lot or by a method that complies with the requirements of any stock exchange on which the Notes are listed and that the Trustee considers fair and appropriate. If Holdings elects to mail notice of a redemption to Holders, the Trustee shall at least five Business Days prior to the date notice of redemption is to be mailed, (i) select the Notes to be redeemed from Notes outstanding not 24 previously called for redemption and (ii) notify Holdings of the names of each Holder of Notes selected for redemption, the principal amount (or, if prior to September 15, 2004, the Accreted Value) of Notes held by each such Holder and the principal amount (or, if prior to September 15, 2004, the Accreted Value) of such Holder's Notes that are to be redeemed. If less than all Notes tendered pursuant to an Offer on the Purchase Date are to be accepted for payment, the Trustee shall select on or promptly after the Purchase Date the Notes to be accepted for payment. The Trustee shall select for redemption or purchase Notes or portions of Notes in principal amounts of $500 or integral multiples of $500; except that if all of the Notes of a Holder are selected for redemption or purchase, the aggregate principal amount (or, if prior to September 15, 2004, the Accreted Value) of the Notes held by such Holder, even if not a multiple of $500, shall be redeemed or purchased. Except as provided in the preceding sentence, provisions of this Indenture that apply to Notes called for redemption or tendered pursuant to an Offer also apply to portions of Notes called for redemption or tendered pursuant to an Offer. The Trustee shall notify Holdings promptly of the Notes or portions of Notes to be called for redemption or selected for purchase. Section 3.03. Notice of Redemption. At least 30 days but not more than 60 days before a redemption date, Holdings shall mail a notice of redemption to each Holder of Notes or portions thereof that are to be redeemed. The notice shall identify the Notes or portions thereof to be redeemed and shall state: (1) the redemption date; (2) the redemption price for the Notes and separately stating the amount of unpaid and accrued interest on, and Liquidated Damages, if any, with respect to, such Notes as of the date of redemption; (3) if any Note is being redeemed in part, the portion of the principal amount (or, if prior to September 15, 2004, the Accreted Value) of such Notes to be redeemed and that, after the redemption date, upon surrender of such Note, a new Note or Notes in principal amount at maturity equal to the unredeemed portion will be issued; (4) the name and address of the Paying Agent; (5) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price for, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; (6) that, unless Holdings defaults in making such redemption payment, interest on Notes called for redemption ceases to accrue on and after the redemption date; (7) the paragraph of the Notes pursuant to which the Notes called for redemption are being redeemed; and (8) the CUSIP number; provided that no representation is made as to the correctness or accuracy of the CUSIP number listed in such notice and printed on the Notes. 25 At Holdings' request, the Trustee shall (at Holdings' expense) give the notice of redemption in Holdings' name at least 30 but not more than 60 days before a redemption; provided, however, that Holdings shall deliver to the Trustee, at least 45 days prior to the redemption date and at least 10 days prior to the date that notice of the redemption is to be mailed to Holders, an Officers' Certificate that (i) requests the Trustee to give notice of the redemption to Holders, (ii) sets forth the information to be provided to Holders in the notice of redemption, as set forth in the preceding paragraph, (iii) states that Holdings has elected to redeem Notes pursuant to Section 3.07(a) or 3.07(b), as the case may be, and (iv) sets forth the aggregate principal amount (or, if prior to September 15, 2004, the Accreted Value) of Notes to be redeemed and the amount of accrued and unpaid interest and Liquidated Damages, if any, thereon as of the redemption date. If the Trustee is not the Registrar, Holdings shall, concurrently with any such request, cause the Registrar to deliver to the Trustee a certificate (upon which the Trustee may rely) setting forth the name of, the address of, and the aggregate principal amount (or, if prior to September 15, 2004, the Accreted Value) of Notes held by, each Holder. Section 3.04. Effect of Notice of Redemption. Once notice of redemption is mailed, Notes called for redemption become due and payable on the redemption date at the price set forth in the Notes. Upon surrender to the Trustee or Paying Agent, such Notes called for redemption shall be paid at the redemption price (which shall include accrued interest thereon to the redemption date) but installments of interest, the maturity of which is on or prior to the redemption date, shall be payable to Holders of record at the close of business on the relevant record dates. Section 3.05. Deposit of Redemption Price. Prior to 10 a.m. on any redemption date, Holdings shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of, and accrued interest on, and Liquidated Damages, if any, with respect to all Notes to be redeemed on that date. The Trustee or the Paying Agent shall return to Holdings any money that Holdings deposited with the Trustee or the Paying Agent in excess of the amounts necessary to pay the redemption price of, and accrued interest on, and Liquidated Damages, if any, with respect to all Notes to be redeemed. If Holdings complies with the preceding paragraph, interest on the Notes to be redeemed will cease to accrue on such Notes on the applicable redemption date, whether or not such Notes are presented for payment. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of Holdings to comply with the preceding paragraph, interest will be paid on the unpaid principal, premium, if any, interest and Liquidated Damages, if any, from the redemption date until such principal, premium, interest and Liquidated Damages, if any, is paid, at the rate of interest provided in the Notes and Section 4.01. Section 3.06. Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, Holdings shall issue and the Trustee shall authenticate for the Holder at Holdings' expense a new Note equal in principal amount to the unredeemed portion of the Note surrendered. 26 Section 3.07. Optional Redemption Provisions. (a) Except as provided in Section 3.07(b), the Notes may not be redeemed at the option of Holdings prior to September 15, 2002. During the twelve-month period beginning on September 15 of the years indicated below, the Notes will be redeemable at the option of Holdings, 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 Accreted Value for all redemption dates prior to September 15, 2004 and of the principal amount for all redemption dates including September 15, 2004 and thereafter) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the redemption date: 27
Year Percentage ---- ---------- 2002.......................................................105.688 2003.......................................................103.792 2004.......................................................101.896 2005 and thereafter........................................100.000%
(b) Notwithstanding the foregoing, on or after March 15, 1998 and prior to September 15, 2002, Holdings may (but shall not have the obligation to) redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof, with the net proceeds of one or more Equity Offerings of Holdings or the Company; provided, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. In addition, upon the occurrence of a Change of Control on or after March 15, 1998 and prior to September 15, 2002, Holdings, at its option, may redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof. Holdings shall give not less than 30 and not more than 60 days' notice of such redemption within 30 days following a Change of Control. Section 3.08. Mandatory Purchase Provisions. (a) Within 30 days after any Change of Control Trigger Date or Asset Sale Trigger Date, Holdings shall mail a notice to each Holder at such Holder's registered address stating (i) that an offer ("Offer") is being made pursuant to Section 4.13 or Section 4.14, as the case may be, the length of time the Offer shall remain open and the maximum aggregate principal amount of Notes that will be accepted for payment pursuant to such Offer; (ii) the purchase price for the Notes (as set forth in Section 4.13 or Section 4.14, as the case may be), the amount of accrued and unpaid interest on, and Liquidated Damages, if any, with respect to, such Notes 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")); (iii) that any Note not accepted for payment will continue to accrue interest and Liquidated Damages, if any; (iv) that, unless Holdings fails to deposit with the Paying Agent on the Purchase Date an amount sufficient to purchase all Notes accepted by Holdings for payment, interest shall cease to accrue on such Notes after the Purchase Date; (v) that Holders electing to tender any Note or portion thereof will be required to surrender their Note, with a form entitled "Option of Holder to Elect Purchase" completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day preceding the Purchase Date, provided that Holders electing to tender only a portion of any Note must tender a principal amount of $500 or integral multiples thereof; (vi) that Holders will be entitled to withdraw their election to tender Notes, if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Purchase Date, a telegram, telex, facsimile transmission (receipt of which a Trust Officer has acknowledged) or letter setting forth the name of the Holder, the principal amount (or, if prior to September 15, 2004, the Accreted Value) of Notes delivered for purchase, and a statement that such Holder is withdrawing his election to have such Note purchased; and (vii) that Holders whose Notes are accepted for payment in part will be issued new Notes equal in principal amount at maturity to the unpurchased portion of Notes surrendered; provided that only Notes in a principal amount of $500 or integral multiples thereof will be accepted for payment in part. (b) On the Purchase Date for any Offer, Holdings shall, to the extent required by this Indenture and such Offer, (i) 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, accept for payment the maximum principal amount (or, if prior to 28 September 15, 2004, the Accreted Value) of Notes or portions thereof tendered pursuant to such Offer that can be purchased out of Excess Proceeds from such Asset Sale Trigger Date, (ii) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment and any accrued and unpaid interest and Liquidated Damages, if any, on such Notes as of the Purchase Date, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Offer. (c) With respect to any Offer, if less than all of the Notes tendered pursuant to an Offer are to be purchased by Holdings, the Trustee shall select on the Purchase Date the Notes or portions thereof to be accepted for payment pursuant to Section 3.02. (d) Promptly after consummation of an Offer, (i) the Paying Agent shall mail (or cause to be transferred by book entry) to each Holder of Notes or portions thereof accepted for payment an amount equal to the purchase price for, plus any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes, (ii) with respect to any tendered Note not accepted for payment in whole or in part, the Trustee shall return such Note to the Holder thereof, and (iii) with respect to any Note accepted for payment in part, the Trustee shall authenticate and mail to each such Holder a new Note equal in principal amount at maturity to the unpurchased portion of the tendered Note. (e) Holdings shall publicly announce the results of the Offer on or as soon as practicable after the Purchase Date. (f) Holdings shall comply with any tender offer rules under the Exchange Act which may then be applicable to Holdings, including Rule 14e-1, in connection with an Offer required to be made by Holdings to repurchase the Notes as a result of a Change of Control Trigger Date or an Asset Sale Trigger Date. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture, Holdings shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. (g) With respect to any Offer, if Holdings deposits prior to 10 a.m. New York City time with the Paying Agent on the Purchase Date an amount in available funds sufficient to purchase all Notes accepted by Holdings for payment, interest shall cease to accrue on such Notes after the Purchase Date; provided, however, that if Holdings fails to deposit such amount on the Purchase Date, interest shall continue to accrue on such Notes until such deposit is made. ARTICLE 4 COVENANTS Section 4.01. Payment of Notes. (a) Holdings shall pay the principal of, and premium, if any, and accrued and unpaid interest on the Notes on the dates and in the manner provided in the Notes. Holders of Notes must surrender their Notes to the Paying Agent to collect principal payments. Principal of, premium, if any, and accrued and unpaid interest, and Liquidated Damages, if any, shall be considered paid on the date due if the Paying Agent (other than Holdings or any of its Subsidiaries), the Global Note Holder or each Holder that has specified an account, holds, as of 10:00 a.m. New York City time, money Holdings deposited in immediately available funds designated for and sufficient to pay in cash all principal, premium, if any, and accrued and unpaid interest on, and Liquidated Damages, if any, then due; provided that, to the extent that the Holders have not specified accounts, such amounts shall be considered paid on the date due if Holdings mails a check for such amounts on such date. The Paying Agent shall return to Holdings, no later than five (5) days following the date of payment, any money (including accrued 29 interest) that exceeds the amount of principal, premium, if any, accrued and unpaid interest, and Liquidated Damages, if any, paid on the Notes. Holdings shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. If any Liquidated Damages become payable, Holdings shall not later than three (3) Business Days prior to the date that any payment of Liquidated Damages is due (i) deliver an Officers' Certificate to the Trustee setting forth the amount of Liquidated Damages payable to Holders and (ii) instruct the Paying Agent to pay such amount of Liquidated Damages to Holders entitled to receive such Liquidated Damages. (b) To the extent lawful, Holdings shall pay interest (including Post- Petition Interest) on (i) overdue principal and premium at the then applicable interest rate on the Notes, compounded semiannually and (ii) overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate as set forth in clause (i), compounded semiannually. Section 4.02. SEC Reports. (a) So long as the Notes are outstanding, whether or not Holdings is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, Holdings shall file with the SEC (unless the SEC will not accept such filing) the annual reports, quarterly reports and other documents relating to Holdings and its Restricted Subsidiaries that Holdings would have been required to file with the SEC pursuant to Section 13 or 15(d) if Holdings were subject to such reporting requirements. (b) Holdings shall provide to the Holders and file with the Trustee, within 15 days after it files them with the SEC, copies of the annual reports, quarterly reports and other documents (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that Holdings is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If Holdings is not subject to the requirements of Section 13 or 15(d) of the Exchange Act and the SEC will not accept such filing as is prescribed in Section 4.02(a), Holdings shall provide to the Holders and file with the Trustee, within 15 days after it would have been required or permitted, as the case may be, to file with the SEC, financial statements, including any notes thereto (and with respect to annual reports, an auditor's report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," both comparable to that which Holdings would have been required to include in such annual reports, quarterly reports and other documents relating to Holdings and its Restricted Subsidiaries if Holdings were subject to the requirements of Section 13 or 15(d) of the Exchange Act. Subsequent to the qualification of this Indenture under the TIA, Holdings also shall comply with the provisions of section 314(a) of the TIA. (c) If Holdings is required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, Holdings shall cause any annual report furnished to its stockholders generally and any quarterly or other financial reports it furnishes to its stockholders generally to be filed with the Trustee, and Holdings shall mail such reports to the Holders at their addresses appearing in the register of Notes maintained by the Registrar. If Holdings is not required to furnish annual or quarterly reports to its stockholders pursuant to the Exchange Act, Holdings shall cause its financial statements referred to in Section 4.02(a), including any notes thereto (and with respect to annual reports, an auditors' report by a firm of established national reputation), and a "Management's Discussion and Analysis of Financial Condition and Results of Operations," to be so mailed to the Holders within 120 days after the end of each of Holdings' fiscal years and within 60 days after the end of each of the first three fiscal quarters of each year. Holdings shall cause to be disclosed in a statement accompanying any annual report or comparable information as of the date of the most recent financial statements in each such report or comparable information the amount available for payments pursuant to Section 4.05. 30 (d) If Holdings is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, for so long as any Notes remain outstanding, Holdings shall furnish to the Holders, securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. Section 4.03. Compliance Certificate. Holdings shall deliver to the Trustee, within 120 days after the end of each fiscal year of Holdings, an Officers' Certificate stating that a review of the activities of Holdings and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether Holdings has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that, to the best of his or her knowledge, Holdings has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action Holdings has taken or proposes to take with respect thereto) and that, to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of, premium, if any, and accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes are prohibited or if such event has occurred, a description of the event and what action Holdings is taking or proposes to take with respect thereto. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the financial statements delivered pursuant to Section 4.02 shall be accompanied by a written statement of Holdings' independent public accountants (who shall be a firm of established national reputation reasonably satisfactory to the Trustee) that in making the examination necessary for certification of such financial statements nothing has come to their attention that would lead them to believe that Holdings has violated any provisions of Section 4.01, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14 or 4.15 or of Article 5 or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. Holdings shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action Holdings is taking or proposes to take with respect thereto. Section 4.04. Stay, Extension and Usury Laws. Holdings covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that might affect the covenants or the performance of this Indenture; and Holdings (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. Section 4.05. Limitation on Restricted Payments. (a) Holdings shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on account of Holdings' or any 31 Restricted Subsidiary's Equity Interests (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of Holdings 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 Holdings or any of its Restricted Subsidiaries, other than any such Equity Interests purchased from Holdings 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, Holdings shall not be able to issue $1.00 of additional Indebtedness pursuant to Section 4.07(a); or (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 Holdings (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 Holdings' 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 Holdings from the issue or sale of Equity Interests of Holdings or Holdings (to the extent contributed to Holdings) 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) $7.5 million; plus (4) the amount by which the principal amount of and any accrued interest on either Senior Indebtedness of Holdings or any Restricted Subsidiary is reduced on Holdings' 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 Holdings or any Restricted Subsidiary (not held by Holdings or any Restricted Subsidiary) for Equity Interests (other than Disqualified Stock) of Holdings (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 Holdings or any Restricted Subsidiary (to Persons other than Holdings 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 Section 4.15(a); 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 Section 4.05(b). 32 (b) Notwithstanding the foregoing, the following Restricted Payments may be made: (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 this Indenture (including, but not limited to, Section 4.05); (ii) making Restricted Investments at any time, and from time to time, in an aggregate outstanding amount of $15.0 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 Holdings or a Restricted Subsidiary, the portion of the net cash proceeds or fair market value of securities or properties paid or transferred to Holdings 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 $15.0 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 Holdings or Holdings from the executives, management, employees or consultants of Holdings or its Restricted Subsidiaries in an aggregate amount not to exceed $10.0 million; (iv) any loans, advances, distributions or payments from Holdings to its Restricted Subsidiaries, or any loans, advances, distributions or payments by a Restricted Subsidiary to Holdings or to another Restricted Subsidiary, in each case pursuant to intercompany Indebtedness, intercompany management agreements and other intercompany agreements and obligations; (v) the purchase, redemption, retirement or other acquisition of the Notes pursuant to Sections 3.08, 4.14 or 4.15; (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 Holdings' Obligations to pay such fees under the TJC Agreement shall be subordinated expressly to Holdings' 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 Holdings or any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of Holdings) of other Equity Interests of Holdings (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 Holdings or a Subsidiary of Holdings) 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 Sections 4.05(a)(iv)(C)(1) and (2); (viii) the defeasance, redemption or repurchase of Subordinated Indebtedness of Holdings 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 Holdings) of Equity Interests of Holdings (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 Holdings) 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 Sections 4.05(a)(iv)(C)(1) and (2); (ix) Restricted Investments made or received in connection with the sale, transfer or disposition of any business, properties or assets of Holdings or any Restricted Subsidiary, provided, that if such sale, transfer or disposition constitutes an Asset Sale, Holdings complies with Section 4.14; (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 in connection with the Offering, including, but not limited to, the expenses of the Offering; (xii) payments of fees, expenses and indemnities to the directors of Holdings and its Restricted Subsidiaries; (xiii) payments in respect of the 33 Wolff Noncompetition Agreement; and (xiv) shareholder loans in an aggregate principal amount not to exceed $1.0 million. Section 4.06. Corporate Existence. Subject to Section 4.14 and Article 5, Holdings shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of each of its Restricted Subsidiaries and the rights (charter and statutory), licenses and franchises of Holdings and each of its Restricted Subsidiaries; provided, however, that Holdings shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any Restricted Subsidiary, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of Holdings and its Restricted Subsidiaries taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. Section 4.07. Limitation on Incurrence of Indebtedness. (a) Holdings shall not, and shall not permit any Restricted Subsidiary to, issue any Indebtedness (other than the Indebtedness represented by the Notes) unless Holdings' Cash Flow Coverage Ratio for its four full fiscal quarters next preceding the date such additional Indebtedness is issued would have been at least 1.5 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. (b) Section 4.07(a) shall not apply to the issuance of: (i) Indebtedness of Holdings and/or its Restricted Subsidiaries under the Credit Facilities in an aggregate principal amount outstanding on such date of issuance (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of Holdings and/or any of its Restricted Subsidiaries thereunder) not to exceed the greater of (A) $135.0 million and (B) the sum of: (1) 85% of the book value of accounts receivable of Holdings and its Restricted Subsidiaries on a consolidated basis and (2) 65% of the book value of the inventories of Holdings 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 $160.0 million at any one time outstanding (less the amount of any permanent reductions as set forth in Section 4.14); (ii) Indebtedness of Holdings 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 $10.o 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 Holdings and its Restricted Subsidiaries in an aggregate principal amount up to $35.0 million (all or any portion of which may be issued as additional Indebtedness under the Credit Facilities) 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 $160.0 million at any one time outstanding (less the amount of any permanent reductions as set forth in Section 4.14); and (iv) Other Permitted Indebtedness. 34 Section 4.08. Limitation on Transactions With Affiliates. (a) Except as otherwise set forth herein, neither Holdings nor any of its Restricted Subsidiaries shall 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 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 Holdings 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. (b) Holdings shall not, and shall not permit any Restricted Subsidiary to, engage in any Affiliate Transaction involving aggregate payments or other transfers by Holdings and its Restricted Subsidiaries in excess of $10.0 million (including cash and non-cash payments and benefits valued at their fair market value by the Board of Directors of Holdings in good faith) unless Holdings delivers to the Trustee: (i) a resolution of the Board of Directors of Holdings 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 this 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 Holdings or such Restricted Subsidiary, as the case may be, from a financial point of view. (c) Notwithstanding Sections 4.08(a) and (b), Section 4.08 will not apply to: (i) transactions between Holdings and any Restricted Subsidiary or between Restricted Subsidiaries; (ii) payments under the TJC Agreement; (iii) any other payments or transactions permitted pursuant to Section 4.05; (iv) (A) payments and transactions under Incentive Arrangements and (B) reasonable compensation paid to officers, employees or consultants of Holdings or any Restricted Subsidiary as determined in good faith by Holdings' Board of Directors or executives; or (v) or the sale, transfer and/or termination of the officers' life insurance policies in effect on the date of issuance of the Notes. (d) Notwithstanding Sections 4.08(a) and (b), 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) of Section 4.08(b). Section 4.09. Limitation on Liens. Holdings 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 this 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. 35 Section 4.10. Compliance With Laws, Taxes. Holdings shall, and shall cause each of its Restricted Subsidiaries to, comply with all statutes, laws, ordinances, or government rules and regulations to which it is subject, the non-compliance with which would materially adversely affect the business, prospects, earnings, properties, assets or condition, financial or otherwise, of Holdings and its Restricted Subsidiaries taken as a whole. Holdings shall, and shall cause each of its Restricted Subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies, except those contested in good faith by appropriate proceedings. Section 4.11. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. (a) Holdings shall not, and shall 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: (i) 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 Holdings or any Restricted Subsidiary, or pay any Indebtedness owed to, Holdings or any Restricted Subsidiary, (ii) make loans or advances to Holdings, or (iii) transfer any of its properties or assets to Holdings, except for such encumbrances or restrictions existing under or by reason of: (A) applicable law, (B) Indebtedness permitted (1) under Section 4.07(a) and (2) under clauses (i), (ii) and (iii) of Section 4.07(b) and clauses (iv), (vii) and (x) of the definition of "Other Permitted Indebtedness," (C) customary provisions restricting subletting or assignment of any lease or license of Holdings or any Restricted Subsidiary, (D) customary provisions of any franchise, distribution or similar agreement, (E) any instrument governing Indebtedness or preferred stock or any other encumbrance or restriction of a Person acquired by Holdings 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, (F) Indebtedness or other agreements existing on the date of original issuance of the Notes, (G) any Refinancing Indebtedness permitted under Section 4.07, 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, (H) 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, (I) 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 (J) any instrument governing the sale of assets of Holdings or any Restricted Subsidiary, which encumbrance or restriction applies solely to the assets of Holdings or such Restricted subsidiary being sold in such transaction. (b) Nothing contained in Section 4.11 shall prevent Holdings 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 Holdings or any of its Restricted Subsidiaries that are subject to Permitted Liens. Section 4.12. Maintenance of Office or Agencies. Holdings shall maintain in the Borough of Manhattan, the City of New York an office or an agency (which may be an office of any Agent or any Affiliate thereof) where Notes may be surrendered 36 for registration of transfer or exchange and where notices and demands to or upon Holdings in respect of the Notes and this Indenture may be served. Holdings shall give prompt written notice to the Trustee of any change in the location of such office or agency. If at any time Holdings shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office. Holdings may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any matter relieve Holdings of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. Holdings shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Holdings hereby designates the Corporate Trust Office of State Street Bank and Trust Company, N.A., 61 Broadway, Concourse Level, Corporate Trust Window, New York, New York 10006 as one such office or agency of Holdings in accordance with Section 2.03. Section 4.13. Change of Control. (a) 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 Holdings to purchase all or any part (equal to $500 or an integral multiple thereof) of such Holder's Notes pursuant to an Offer at a purchase price in cash equal to 100% of the Accreted Value (determined at the date of redemption) thereof (if such Offer is prior to September 15, 2004) or the aggregate principal amount thereof (if such Offer is on or after September 15, 2004), plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. Although the failure of Holdings to purchase all Notes tendered in such an Offer shall be a Default, if Holdings is unable to purchase all Notes tendered in such an Offer, Holdings shall nevertheless purchase the maximum principal amount of Notes that it is able to purchase at that time. (b) In the event of a Change of Control, Holdings shall not offer to purchase or redeem any Subordinated Indebtedness required or entitled by its terms to be redeemed or purchased until the Change of Control Offer for the Notes has been consummated and all Notes tendered pursuant to such Offer have been accepted for payment. Section 4.14. Limitation on Asset Sales. (a) Holdings shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale (including the sale of any of the Capital Stock of any Restricted Subsidiary) providing for Net Proceeds in excess of $4.0 million unless at least 75% of the Net Proceeds from such Asset Sale are applied (in any manner otherwise permitted by this Indenture) to one or more of the following purposes in such combination as Holdings 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 Holdings and its Restricted Subsidiaries at the time of the Asset Sale or the making of a capital expenditure otherwise permitted by this Indenture; provided that such investment occurs within 365 days of the date of such Asset Sale (the "Asset Sale Disposition Date"), (b) to reimburse Holdings 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 Holdings 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, 37 (d) the permanent purchase, redemption or other prepayment or repayment of outstanding Senior Indebtedness of Holdings or Indebtedness of Holdings' 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. (b) Holdings shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale unless at least 75% of the consideration thereof received by Holdings 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 Holdings' or such Restricted Subsidiary's most recent balance sheet or in the notes thereto, excluding contingent liabilities and trade payables) of Holdings 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 Holdings or any such Restricted Subsidiary from such transferee that are promptly, but in no event more than 90 days after receipt, converted by Holdings 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." (c) When the aggregate amount of Excess Proceeds exceeds $15.0 million (such date being an "Asset Sale Trigger Date"), Holdings 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 Accreted Value (determined at the date of redemption) thereof to the Purchase Date (if such Purchase Date is prior to September 15, 2004) or 100% of the aggregate principal amount thereof (if such Purchase Date is on or after September 15, 2004) plus any accrued and unpaid interest and Liquidated Damages, if any, to the Purchase Date in accordance with the procedures set forth in this Indenture. (d) To the extent that any Excess Proceeds remain after completion of an Offer, Holdings may use such remaining amount for general corporate purposes. (e) If the Accreted Value or the aggregate principal amount, as the case may be, 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, by lot or by a method that complies with the requirements of any stock exchange on which the Notes are listed and that the Trustee considers fair and appropriate. (f) Upon completion of an Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. (g) 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 Section 4.14, but may be retained for so long, but only for so long, as the applicable local law prohibits repatriation to the United States. Holdings shall promptly take all reasonable actions required by the applicable local law to permit such repatriation, and once such repatriation of any affected Net Proceeds is not prohibited under applicable local law, such repatriation will be immediately effected and such repatriated Net Proceeds will be applied in the manner set forth above as if such Asset Sale have occurred on the date of repatriation. 38 Section 4.15. Designation of Restricted and Non-Restricted Subsidiaries. (a) From and after the date of original issuance of the Notes, Holdings 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) Holdings could incur $1.00 of additional Indebtedness pursuant to Section 4.07(a) 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 Section 4.08. Any Investment made by Holdings or any Restricted Subsidiary that 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 Holdings in good faith) of the Equity Interests of such Subsidiary held by Holdings and its Restricted Subsidiaries on such date, and (ii) the amount of the Investments determined in accordance with GAAP made by Holdings and any of its Restricted Subsidiaries in such Subsidiary. (b) A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary. Holdings shall not, and shall 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, (i) Holdings could incur at least $1.00 of additional Indebtedness pursuant to Section 4.07(a) and (ii) no Default or Event of Default shall have occurred and be continuing. (c) 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 Holdings stating that the Board of Directors has made such designation in accordance with this Indenture, and Holdings is required to deliver to the Trustee such resolution together with an Officers' Certificate certifying that the designation complies with this 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. ARTICLE 5 SUCCESSORS Section 5.01. Merger or Consolidation. (a) Holdings 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 (i) 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; (ii) the successor corporation of such Disposition or the corporation to which such Disposition shall have been made expressly assumes the Obligations of Holdings, pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee, under the Indenture and the Notes; (iii) immediately after such Disposition, no Default or Event of Default shall exist; and (iv) the corporation formed by or surviving any such Disposition, or the corporation to which such Disposition shall have been made, shall (A) have Consolidated Net Worth (immediately after the 39 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 Holdings immediately preceding the Disposition, (B) be permitted immediately after the Disposition by the terms of this Indenture to issue at least $1.00 of additional Indebtedness determined on a Pro Forma Basis, and (C) have a Cash Flow Coverage Ratio, for the four fiscal quarters immediately preceding the applicable Disposition, and determined on a Pro Forma Basis, equal to or greater than the actual Cash Flow Coverage Ratio of Holdings for such four quarter period. (b) Prior to the consummation of any proposed Disposition, Holdings 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 this Indenture. Section 5.02. Successor Corporation Substituted. Upon any Disposition, the Successor Corporation resulting from such Disposition shall succeed to, and be substituted for, and may exercise every right and power of, Holdings under this Indenture with the same effect as if such Successor has been named as Holdings herein; provided, however, that neither Holdings nor any Successor Corporation shall be released from its Obligation to pay the principal of, premium, if any, and accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes. ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default. (a) An Event of Default is: (i) a default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; (ii) a default in payment when due of principal or premium, if any, with respect to, the Notes; (iii) the failure of Holdings to comply with any of its other agreements or covenants in, or provisions of, this Indenture or the Notes outstanding and the Default continues for the period, if applicable, and after the notice specified in Section 6.01(b); (iv) a default by Holdings 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 Holdings or any Restricted Subsidiary (or the payment of which is guaranteed by Holdings or any Restricted Subsidiary), whether such Indebtedness or guarantee now exists or shall be created hereafter, if (A) either (1) such default results from the failure to pay principal of or interest on any such Indebtedness at or after the final maturity thereof (after giving effect to any extensions thereof) or (2) as a result of such default the maturity of such Indebtedness has been accelerated prior to its expressed maturity, and (B) the principal amount of such Indebtedness, 40 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 $12.5 million; (v) a failure by Holdings or any Restricted Subsidiary to pay final judgments (not covered by insurance) aggregating in excess of $7.5 million, which judgments a court of competent jurisdiction does not rescind, annul or stay within 45 days after their entry; and (vi) in existence when Holdings or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; and (vii) in existence when a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against Holdings or any Significant Subsidiary in an involuntary case, (B) appoints a Custodian of Holdings or any Significant Subsidiary or for all or substantially all of the property of Holdings or any Significant Subsidiary, or (C) orders the liquidation of Holdings or any Significant Subsidiary, and any such order or decree remains unstayed and in effect for 60 days. (b) A Default or Event of Default under Section 6.01(a)(iii) (other than an Event of Default arising under Section 5.01, which shall be an Event of Default with the notice but without the passage of time specified in this Section 6.01(b)) is not an Event of Default under this Indenture until the Trustee or the Holders of at least 25% in principal amount at maturity of the Notes then outstanding notify Holdings of the Default, and Holdings does not cure the Default within 30 days after receipt of the notice. The notice must specify the Default, demand that it be remedied, and state that the notice is a "Notice of Default." (c) In the case of any Event of Default pursuant to Sections 6.01(a)(i) and (ii) occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of Holdings with the intention of avoiding payment of the premium that Holdings would have to pay if Holdings then had elected to redeem the Notes pursuant to paragraph 5 of the Notes, an equivalent premium shall also 41 become and be immediately due and payable to the extent permitted by law, anything in this Indenture or in the Notes contained to the contrary notwithstanding. (d) The Trustee shall not be charged with knowledge of any Default or Event of Default unless written notice thereof shall have been given to a Trust Officer at the Corporate Trust Office of the Trustee by Holdings or any other Person. (e) The Trustee may withhold from Holders of the Notes notice of any continuing Default or Event of Default (except a Default or an Event of Default pursuant to Sections 6.01(a)(i) and (ii)) if the Trustee determines that withholding notice is in their interest. Section 6.02. Acceleration. (a) Upon the occurrence of an Event of Default (other than an Event of Default under clause Sections 6.01(a)(vi) and (vii)), the Trustee or the holders of at least 25% in principal amount at maturity of the then outstanding Notes may declare all Notes to be due and payable immediately by notice in writing to Holdings and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice") and, upon receipt by Holdings of such Acceleration Notice, the principal of (or, if prior to September 15, 2004, the Accreted Value of), premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to all Notes shall be due and payable immediately, but only if such Event of Default is then continuing; provided, however, that if an Event of Default arises under Section 6.01(a)(vi) or (vii), the principal of (or, if prior to September 15, 2004, the Accreted Value of), premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to all Notes, shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders of Notes. (b) The holders of a majority in principal amount at maturity of the Notes then outstanding, 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, if prior to September 15, 2004, the Accreted Value of) or interest on such Notes that shall have become due by such declaration) shall have been cured or waived. (c) If there has been a declaration of acceleration of the Notes because an Event of Default under Section 6.01(a)(iv) has occurred and is continuing, such declaration of acceleration shall be automatically annulled if the holders of the Indebtedness described in Section 6.01(a)(iv) have rescinded the declaration of acceleration in respect of such Indebtedness within 30 Business Days thereof and if (i) the annulment of such acceleration would not conflict with any judgment or decree of a court of competent jurisdiction, (ii) all existing Events of Default, except non-payment of principal (or, if prior to September 15, 2004, the Accreted Value), premium, interest or Liquidated Damages that shall have become due solely because of the acceleration, have been cured or waived, and (iii) Holdings has delivered an Officers' Certificate to the Trustee to the effect of clauses (i) and (ii) above. Section 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of, premium, if any, or any accrued and unpaid interest on, or Liquidated Damages, if any, with respect to the Notes or to enforce the performance of any provision of the Notes or this Indenture. 42 The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.04. Waiver of Past Defaults. The holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of all Holders of Notes waive any existing Default or Event of Default under this Indenture and its consequences, except a continuing Default in the payment of the principal of, premium, if any, and interest on, and Liquidated Damages, if any, with respect to such Notes, which may only be waived with the consent of each Holder of Notes affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; provided that no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.05. Control by Majority. Subject to Section 7.01(e), the Holders of a majority in principal amount at maturity of the then outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it by this Indenture. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability. Section 6.06. Limitation on Suits. A Holder may pursue a remedy with respect to this Indenture or the Notes only if (i) the Holder gives to the Trustee notice of a continuing Event of Default; (ii) the Holders of at least 25% in principal amount at maturity of the then outstanding Notes make a request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period the Holders of a majority in principal amount at maturity of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Holders of the Notes may not enforce this Indenture, except as provided herein. Section 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to a Note, on or after a respective due date expressed in the Note, or to bring suit for the enforcement of any such payment on or after such respective date, shall not be impaired or affected without the consent of the Holder. 43 Section 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(a)(i) or (ii) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against Holdings for (i) the principal, premium and Liquidated Damages, if any, and interest remaining unpaid on the Notes, (ii) interest on overdue principal and premium, if any, and, to the extent lawful, interest, and (iii) such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel ("Trustee Expenses"). Section 6.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable to have the claims of the Trustee (including any claim for Trustee Expenses) and the Holders allowed in any Insolvency or Liquidation Proceeding or other judicial proceeding relative to Holdings (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute to Holders any money or other property payable or deliverable on any such claims and each Holder authorizes any Custodian in any such Insolvency or Liquidation Proceeding or other judicial proceeding to make such payments to the Trustee, and if the Trustee shall consent to the making of such payments directly to the Holders any such Custodian is hereby authorized to make such payments directly to the Holders, and to pay to the Trustee any amount due to it hereunder for Trustee Expenses, and any other amounts due the Trustee under Section 7.07. To the extent that the payment of any such Trustee Expenses, and any other amounts due the Trustee under Section 7.07 out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders may be entitled to receive in such proceeding, whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any Insolvency or Liquidation Proceeding. Section 6.10. Priorities. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for Trustee Expenses due under Section 6.08 or for other amounts due under Section 7.07; Second: to Holders for amounts due and unpaid on the Notes for principal, premium and Liquidated Damages, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal, premium and Liquidated Damages, if any, and interest, respectively; and Third: to Holdings or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders. 44 Section 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by Holders of more than 10% in principal amount at maturity of the then outstanding Notes. ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee. (a) If an Event of Default occurs (and has not been cured) the Trustee shall (i) exercise the rights and powers vested in it by this Indenture, and (ii) use the same degree of care and skill in exercising such rights and powers as a prudent person would exercise or use under the circumstances in the conduct of its own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee's duties shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether they conform to this Indenture's requirements. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that: (i) this paragraph does not limit the effect of Section 7.01(b); (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction it receives pursuant to Section 6.05. (d) Whether or not expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b),(c) and (e) of this Section. 45 (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders unless such Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money it receives except as the Trustee may agree in writing with Holdings. Money the Trustee holds in trust need not be segregated from other funds except to the extent required by law. Section 7.02. Rights of Trustee. (a) The Trustee may rely on any document it believes to be genuine and to have been signed or presented by the proper Person. The Trustee shall not be obligated to investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may reasonably require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any Agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take, except to the extent that such action or omission to act constitutes negligence or wilful misconduct on the part of the Trustee. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from Holdings shall be sufficient if signed by an Officer. Section 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with Holdings or an Affiliate with the same rights it would have if it were not Trustee. However, if the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as Trustee or resign. Any Agent may do the same with like rights. The Trustee is also subject to Sections 7.10 and 7.11. Section 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for Holdings' use of the proceeds from the Notes or for any money paid to Holdings or upon Holdings' direction under any provisions hereof, it shall not be responsible for the use or application of any money any Paying Agent other than the Trustee receives, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document furnished or issued in connection with the sale of the Notes or pursuant to this Indenture, other than its certificate of authentication. Section 7.05. Notice to Holders of Defaults and Events of Default. 46 If a Default or Event of Default occurs and is continuing and if it is actually known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Note (including any failure to redeem Notes called for redemption or any failure to purchase Notes tendered pursuant to an Offer that are required to be purchased by the terms of this Indenture), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the Holders' interests. Section 7.06. Reports by Trustee to Holders. Within 60 days after each February 15 beginning with February 15, 1998, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with section 313(a) of the TIA (but if no event described in section 313(a) of the TIA has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with section 313(b)(2) of the TIA. The Trustee shall also transmit by mail all reports as required by section 313(c) of the TIA. Commencing at the time this Indenture is qualified under the TIA, a copy of each report at the time of its mailing to Holders shall be filed with the SEC and each national securities exchange on which the Notes are listed. Holdings shall notify the Trustee when the Notes are listed on any national securities exchange. Section 7.07. Compensation and Indemnity. Holdings shall pay to the Trustee (in its capacities as Trustee, Paying Agent and/or Registrar) from time to time reasonable compensation for its services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. Holdings shall reimburse the Trustee upon request for all reasonable disbursements, advances, fees and expenses it incurs or makes in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. Holdings shall indemnify and hold harmless the Trustee (in its capacities as Trustee, Paying Agent and/or Registrar) against any and all losses, liabilities or expenses the Trustee incurs arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth below. The Trustee shall notify Holdings promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify Holdings shall not relieve Holdings of its Obligations hereunder. Holdings shall defend the claim and the Trustee shall reasonably cooperate in the defense. The Trustee may have separate counsel and Holdings shall pay the reasonable fees and expenses of such counsel. Holdings need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. Holdings' Obligations under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. Holdings need not reimburse any expense or indemnify against any loss or liability the Trustee incurs through the Trustee's negligence or bad faith. To secure Holdings' payment of its Obligations in this Section and the payment of Trustee Expenses payable pursuant to Section 6.08 the Trustee shall have a Lien prior to the Notes on all money or property the Trustee holds or collects. Such Lien shall survive the satisfaction and discharge of this Indenture. 47 When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(a)(vii) or (viii) occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute administrative expenses under any Bankruptcy Law. Section 7.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign and be discharged from the trust hereby created by so notifying Holdings. The Holders of a majority in principal amount at maturity of the then outstanding Notes may remove the Trustee by so notifying the Trustee and Holdings. Holdings may remove the Trustee if: (i) the Trustee fails to comply with Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (iii) a Custodian or public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, Holdings shall promptly appoint a successor Trustee, provided that the Holders of a majority in principal amount at maturity of the then outstanding Notes may appoint a successor Trustee to replace any successor Trustee appointed by Holdings. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, Holdings or the Holders of at least 10% in principal amount at maturity of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to Holdings. Thereupon, the resignation or removal of the retiring Trustee shall become effective and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its appointment to Holders. The retiring Trustee shall promptly transfer all property it holds as Trustee to the successor Trustee, provided all sums owing to the retiring Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, Holdings' obligations under Section 7.07 shall continue for the retiring Trustee's benefit with respect to expenses and liabilities it incurred prior to being replaced. 48 Section 7.09. Successor Trustee by Merger, Etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business (including the trust created by this Indenture) to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 7.10. Eligibility; Disqualification. The Trustee shall at all times (i) be a corporation organized and doing business under the laws of the United States of America, of any state thereof, or the District of Columbia authorized under such laws to exercise corporate trustee power, (ii) be subject to supervision or examination by federal or state authority, (iii) have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition, and (iv) satisfy the requirements of sections 310(a)(1), (2) and (5) of the TIA. The Trustee is subject to section 310(b) of the TIA. Section 7.11. Preferential Collection of Claims Against Holdings. The Trustee is subject to section 311(a) of the TIA, excluding any creditor relationship listed in section 311(b) of the TIA. A Trustee who has resigned or been removed shall be subject to section 311(a) of the TIA to the extent indicated therein. ARTICLE 8 DISCHARGE OF INDENTURE Section 8.01. Discharge of Liability on Notes; Defeasance. (a) When (i) Holdings delivers to the Trustee all outstanding Notes (other than Notes replaced pursuant to Section 2.07) for cancellation, or (ii) all outstanding Notes have become due and payable and Holdings irrevocably deposits with the Trustee funds sufficient to pay at maturity all outstanding Notes, including interest, premium and Liquidated Damages thereon (other than Notes replaced pursuant to Section 2.07), and if in either case Holdings pays all other sums payable under this Indenture by Holdings, then this Indenture shall, subject to Sections 8.01(c) and 8.06, cease to be of further effect. (b) Subject to Sections 8.01(c), 8.02, and 8.06, Holdings at any time may terminate (i) all its obligations under the Notes and this Indenture ("legal defeasance option") or (ii) its obligations under Sections 4.02, 4.03, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, and 4.16 and the operation of Sections 5.01(a)(iii), 5.01(a)(iv), or 6.01(a)(iii) through (a)(v) ("covenant defeasance option"). Holdings may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If Holdings exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default. If Holdings exercises its covenant defeasance option, payment of the Notes shall not be accelerated because of an Event of Default specified in Sections 6.01(a)(iii) through (a)(v) or because of Holdings' failure to comply with Section 5.01(a)(iii) and 5.01(a)(iv). Upon satisfaction of the conditions set forth herein and upon Holdings' request (and at Holdings' expense), the Trustee shall acknowledge in writing the discharge of those obligations that Holdings has terminated. 49 (c) Notwithstanding clauses (a) and (b) above, Holdings' obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 4.04, 7.07, 7.08, 8.04, 8.05 and 8.06, and the Trustee's and the Paying Agent's obligations in Section 8.04 shall survive until the Notes have been paid in full. Thereafter, Holdings' obligations in Sections 7.07 and 8.05 and Holdings', the Trustee's and the Paying Agent's obligations in Section 8.04 shall survive. Section 8.02. Conditions to Defeasance. Holdings may exercise its legal defeasance option or its covenant defeasance option only if: (1) Holdings irrevocably deposits in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations sufficient for the payment in full of the principal of (or, if prior to September 15, 2004, the Accreted Value of), premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes then outstanding, as of the maturity date, the redemption date or the Purchase Date, as the case may be; (2) Holdings delivers to the Trustee a certificate from a nationally recognized firm of independent accountants or an investment bank expressing its opinion that the payments of principal and interest when due and without reinvestment of the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay when due principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to all the Notes to maturity or redemption, as the case may be; (3) since Holdings' irrevocable deposit provided for in Section 8.02(1), 91 days have passed; (4) no Default has occurred and is continuing on the date of such deposit and after giving effect to it; (5) the deposit does not constitute a default under any other agreement binding on Holdings; (6) Holdings delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940, as amended; (7) in the case of the legal defeasance option, Holdings shall have delivered to the Trustee an Opinion of Counsel stating that (i) Holdings has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) under applicable federal income tax law, in either case, to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders 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, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (8) in the case of the covenant defeasance option, Holdings shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to federal income tax on the same amount, in the same manner and at the same times as would have been the case if such covenant defeasance 50 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); and (9) Holdings delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Notes contemplated by this Article 8 have been satisfied. Before or after a deposit, Holdings may make arrangements satisfactory to the Trustee for the redemption or purchase of Notes at a future date in accordance with Article 3. Section 8.03. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes. Section 8.04. Repayment to Holdings. After the Notes have been paid in full, the Trustee and the Paying Agent shall promptly turn over to Holdings any excess money or securities they hold. The Trustee and the Paying Agent shall pay to Holdings upon written request by Holdings any money they hold for the payment of principal, premium, interest or Liquidated Damages that remains unclaimed for one year after the date upon which such payment shall have become due; provided, however, that Holdings shall have either caused notice of such payment to be mailed to each Holder entitled thereto no less than 30 days prior to such repayment or within such period shall have published such notice in a financial newspaper of widespread circulation published in The City of New York (including, without limitation, The Wall Street Journal). After payment to Holdings, Holders entitled to the money must look to Holdings for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. Section 8.05. Indemnity for Government Obligations. Holdings shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. Section 8.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, Holdings' obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if Holdings has made any payment of principal of, premium, if any, and any accrued and 51 unpaid interest on, and Liquidated Damages, if any, with respect to any Notes because of the reinstatement of its Obligations, Holdings shall be subrogated to the Holders' rights to receive such payment from the money or U.S. Government Obligations the Trustee or Paying Agent holds. ARTICLE 9 AMENDMENTS Section 9.01. Amendments and Supplements Permitted Without Consent of Holders. Notwithstanding Section 9.02, Holdings and the Trustee may amend or supplement this Indenture or the Notes without the consent of any Holder (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; (c) to provide for the assumption by a Successor Corporation of Holdings' Obligations to the Holders in the event of a Disposition pursuant to Article 5; (d) to comply with SEC's requirements to effect or maintain the qualification of this Indenture under the TIA; or (e) to make any change that does not adversely affect any Holder's legal rights under this Indenture. Upon Holdings' request, after receipt by the Trustee of a resolution of the Board of Directors authorizing the execution of any amended or supplemental indenture, the documents described in Section 9.06, the Trustee shall join with Holdings in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be contained in any such amended or supplemental indenture, but the Trustee shall not be obligated to enter into an amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. Section 9.02. Amendments and Supplements Requiring Consent of Holders. Subject to Section 6.07, Holdings and the Trustee may amend or supplement this Indenture or the Notes with the written consent of the Holders of at least a majority in principal amount at maturity of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes). Subject to Sections 6.04 and 6.07, the Holders of a majority in principal amount at maturity of the Notes then outstanding (including consents obtained in connection with a tender offer or exchange offer for the Notes) may also waive any existing Default or Event of Default (other than a payment Default) and its consequences or compliance in a particular instance by Holdings with any provision of this Indenture or the Notes. Upon Holdings' request and after receipt by the Trustee of a resolution of the Board of Directors authorizing the execution of any supplemental indenture, evidence of the Holders' consent, and the documents described in Section 9.06, the Trustee shall join with Holdings in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but not be obligated to, enter into such amended or supplemental indenture. It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment or waiver under this Section becomes effective, Holdings shall mail to each Holder affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure 52 of Holdings to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. Without the consent of each Holder affected, an amendment, supplement or waiver under this Section may not (1) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (2) reduce the rate of or change the time for payment of interest, including interest as set forth in Section 4.01, or Liquidated Damages on any Note or alter the redemption or purchase provisions with respect thereto or the price at which Holdings is required to offer to purchase any Note; (3) reduce the principal of or change the fixed maturity of any Note; (4) make any Note payable in money other than that stated in the Note; (5) make any change in Section 6.04 or 6.07 or in this sentence of this Section 9.02; or (6) waive a default in the payment of the principal of, or premium, if any, or any accrued and unpaid interest on, or Liquidated Damages, if any, with respect to, or redemption or purchase payment with respect to, any Note (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the then outstanding Notes and a waiver of the payment default that resulted from such acceleration). Section 9.03. Compliance with TIA. Every amendment or supplement to this Indenture or the Notes shall be set forth in an amended supplemental indenture that complies with the TIA as then in effect. Section 9.04. Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same Indebtedness as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his or her Note or portion of a Note if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officer's Certificate certifying that the Holders of the requisite principal amount of Notes have consented to the amendment or waiver. Holdings may, but shall not be obligated to, fix a record date for the purpose of determining the Holders of Notes entitled to consent to any amendment or waiver. If a record date is fixed, then, notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders of Notes at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders of Notes after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Notes required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment or waiver becomes effective it shall bind every Holder, unless it is of the type described in any of clauses (1) through (6) of Section 9.02. In such case, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder of a Note that evidences the same debt as the consenting Holder's Note. Section 9.05. Notation on or Exchange of Notes. The Trustee may (at Holdings' expense) place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. Holdings in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. 53 Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. Section 9.06. Trustee Protected. The Trustee shall sign any amendment or supplemental indenture authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing such amendment or supplemental indenture, the Trustee shall be entitled to receive and, subject to Section 7.01, shall be fully protected in relying upon, an Officers' Certificate and Opinion of Counsel as conclusive evidence that such amendment or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon Holdings in accordance with its terms. Holdings may not sign an amendment or supplemental indenture until the Board of Directors approves it. ARTICLE 10 MISCELLANEOUS Section 10.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of section 318(c) of the TIA, the imposed duties shall control. Section 10.02. Notices. Any notice or communication by Holdings or the Trustee to the other is duly given if in writing and delivered in person, mailed by registered or certified mail, postage prepaid, return receipt requested or delivered by telecopier or overnight air courier guaranteeing next day delivery to the other's address: If to Holdings: GFSI Holdings, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 with copies to: Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603-3441 Attention: Phil Niehoff, Esq. Telecopier No.: (312) 701-7711 The Jordan Company 9 West 57th Street, 40th Floor New York, New York 10019 Attention: A. Richard Caputo, Jr. Telecopier No.: (212) 755-5263 54 If to the Trustee: State Street Bank and Trust Company 225 Asylum Street Hartford, Connecticut 06105 Attention: Corporate Trust Administration Telecopier No.: (860) 244-1889 Holdings or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; the date receipt is acknowledged, if mailed by registered or certified mail; when answered back, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Notwithstanding the foregoing, deliveries to the Trustee shall be effective only upon receipt. Any notice or communication to a Holder shall be mailed by first-class mail to his or her address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If Holdings mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. Section 10.03. Communication by Holders with Other Holders. Holders may communicate pursuant to section 312(b) of the TIA with other Holders with respect to their rights under this Indenture or the Notes. Holdings, the Trustee, the Registrar and any other Person shall have the protection of section 312(c) of the TIA. Section 10.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by Holdings to the Trustee to take any action under this Indenture, Holdings shall furnish to the Trustee: (a) an Officers' Certificate (which shall include the statements set forth in Section 10.05) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel (which shall include the statements set forth in Section 10.05) stating that, in the opinion of such counsel, all such conditions precedent provided for in this Indenture relating to the proposed action have been complied with. Section 10.05. Statements Required in Certificate or Opinion. 55 Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to section 314(a)(4) of the TIA) shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in such Person's opinion, such condition or covenant has been complied with. Section 10.06. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 10.07. Legal Holidays. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 10.08. No Recourse Against Others. No officer, employee, director, stockholder or Subsidiary of Holdings shall have any liability for any Obligations of Holdings under the Notes or this 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 Holdings' Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the SEC is of the view that such a waiver is against public policy. Section 10.09. Counterparts. This Indenture may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 10.10. Variable Provisions. Holdings initially appoints the Trustee as Paying Agent, Registrar and authenticating agent. The first compliance certificate to be delivered by Holdings to the Trustee pursuant to Section 4.03 shall be for the fiscal year ending on June 30, 1998. 56 Section 10.11. Governing Law. The internal laws of the State of New York shall govern this Indenture and the Notes, without regard to the conflict of laws provisions thereof. Section 10.12. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of Holdings or any of its Subsidiaries, and no other indenture, loan or debt agreement may be used to interpret this Indenture. Section 10.13. Successors. All agreements of Holdings in this Indenture and the Notes shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. Section 10.14. Severability. If any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 10.15. Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. [NEXT PAGE IS SIGNATURE PAGE] 57 Dated as of September 17, 1997 GFSI HOLDINGS, INC. By: /s/ Richard Caputo ----------------------------------- Name: A. Richard Caputo, Jr. Title: Vice President Dated as of September 17, 1997 STATE STREET BANK AND TRUST COMPANY, as Trustee By: /s/ Jacqueline Connor ----------------------------------- Name: Jacqueline Connor Title: Assistant Vice President 58 EXHIBIT A (Face of Note) 11 3/8% Series [A/B] Senior Discount Note due 2009 No. $__________ CUSIP No. GFSI HOLDINGS, INC. promises to pay to or registered assigns, the principal sum of Dollars on _________, 2009. Interest Payment Dates: Record Dates: Dated: GFSI HOLDINGS, INC. By:______________________________ Name: Title: Trustee's Certificate of Authentication Dated: This is one of the Notes referred to in the within-mentioned Indenture: STATE STREET BANK AND TRUST COMPANY, as Trustee By: --------------------------------- (Authorized Signatory) A-1 [Unless and until it is exchanged in whole or in part for Notes in definitive form, this Subordinated Discount Note may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. The Depository Trust Company shall act as the Depository until a successor shall be appointed by Holdings and the Registrar. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY Person IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.]/1/ THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF HOLDINGS THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF HOLDINGS SO REQUESTS), (2) TO HOLDINGS OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. Additional provisions of this Senior Discount Note are set forth on the other side of this Senior Discount Note. - ------------------------ 1. This paragraph should be included only if the Senior Discount Note is issued in global form. A-2 (Back of Note) 11 3/8% SERIES [A/B] SENIOR DISCOUNT NOTES DUE 2009 1. Interest. No interest will accrue on the Notes until September 15, 2004, but the Accreted Value (as defined in the Indenture) will accrete (representing the amortization of original issue discount) between the date of original issuance and such date, on a semi-annual basis using a 360-day year of twelve 30-day months such that the Accreted Value shall be equal to the full principal amount of the Notes on September 15, 2004. GFSI Holdings, Inc. ("Holdings") promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below. Interest on the Notes will accrue at 11 3/8% per annum from September 15, 2004 until maturity. Interest if any, will be payable semiannually in cash in arrears on March 15 and September 15 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from September 15, 2004; provided that the first Interest Payment Date shall be March 15, 2005. Holdings shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest and Liquidated Damages, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. Holdings will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment Date even if such Notes are canceled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. Holdings will pay principal, premium, if any, interest and Liquidated Damages, if any, in money of the United States that at the time of payment is legal tender for payment of public and private debts. Holdings will pay principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds by 11 a.m. New York City time to the accounts specified by the Holders or, if no such account is specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, interest and Liquidated Damages, if any, on all Global Notes. 3. Paying Agent and Registrar. State Street Bank and Trust Company (the "Trustee") will initially act as the Paying Agent and Registrar. Holdings may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. Holdings or any of its Subsidiaries may act in any such capacity. 4. Indenture. Holdings issued the Notes under an Indenture, dated as of September 17, 1997 (the "Indenture"), among Holdings and the Trustee. 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 (15 U.S. Code (S)(S) 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured senior obligations of Holdings. A-3 5. Optional Redemption. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of Holdings prior to March 15, 1998. During the twelve-month period beginning September 15 of the years indicated below, the Notes will be redeemable at the option of Holdings, 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 Accreted Value for all redemption dates prior to September 15, 2004 and of the principal amount for all redemption dates including September 15, 2004 and thereafter) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption: Year Percentage ---- ---------- 2002................................................. 105.688% 2003................................................. 103.792% 2004................................................. 101.986% 2005 and thereafter.................................. 100.000% (b) Notwithstanding the foregoing, on or after March 15, 1998 and prior to September 15, 2002, Holdings may (but shall not have the obligation to) redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof, with the net proceeds of one or more Equity Offerings of Holdings or Holdings; provided, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. In addition, upon the occurrence of a Change of Control on or after March 15, 1998 and prior to September 15, 2002, Holdings, at its option, may redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof. Holdings shall give not less than 30 and not more than 60 days' notice of such redemption within 30 days following a Change of Control. 6. Mandatory Redemption. Subject to Holdings' obligation to make an offer to purchase Notes under certain circumstances pursuant to Sections 4.14 and 4.15 of the Indenture (as described in paragraph 7 below), Holdings is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 7. Mandatory Offers to Purchase Notes. (a) 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 Holdings to purchase all or any part (equal to $500 or an integral multiple thereof) of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 100% of the Accreted Value (determined at the date of redemption) thereof (if such Offer is prior to September 15, 2004) to the date of purchase, or 100% of the aggregate principal amount thereof (if such Offer is on or after September 15, 2004), plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. (b) If Holdings or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, Holdings will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer") to purchase Notes at a purchase price equal to 100% of the Accreted Value (determined at the date of redemption) thereof to the date of purchase (if such date of purchase is prior to September 15, 2004), or 100% of the principal amount of the Notes (if such date of purchase is on or after September 15, 2004), plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered pursuant to A-4 any Asset Sale Offer, the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. (c) Holders may tender all or, subject to paragraph 8 below, any portion of their Notes in a Change of Control Offer or Asset Sale Offer (collectively, an "Offer") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) Holdings shall 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 Holdings 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 this Indenture, Holdings shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. 8. Notice of Redemption or Purchase. Notice of an optional redemption or an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $500 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $500 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, 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. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount at maturity of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount at maturity of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of Holdings' obligations to Holders in the event of a merger or consolidation of Holdings in which Holdings is not the surviving corporation or a sale of substantially all of Holdings' assets to such other corporation; comply with the SEC's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes; or, make any change that does not materially adversely affect any Holder's rights under the Indenture. 12. Defaults and Remedies. Events of Default include: default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; default in payment of principal of, or premium, if any, on the Notes; failure by Holdings for 30 days after notice to it to comply with A-5 any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; and certain events of bankruptcy or insolvency involving Holdings or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount at maturity of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount at maturity of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. Holdings must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with Holdings. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for Holdings or any Affiliate, and may otherwise deal with Holdings or any Affiliate, as if it were not Trustee. 14. No Recourse Against Others. No officer, employee, director, stockholder or Subsidiary of Holdings shall have any liability for any Obligations of Holdings 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 Holdings' Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the SEC is of the view that such a waiver is against public policy. 15. Successor Substituted. Upon the consolidation or merger by Holdings with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all of its assets to another corporation, in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not Holdings) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of Holdings under the Indenture with the same effect as if such surviving or other corporation had been named as Holdings in the Indenture. 16. Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 17. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST ( =Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). A-6 19. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, Holdings has caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. 16. Additional Rights of Holders of Transfer Restricted Notes. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Transfer Restricted Notes shall have all the rights set forth in the Registration Rights Agreement, dated as of September 17, 1997 between Holdings, and Donaldson, Lufkin & Jenrette Securities Corporation (the "Registration Rights Agreement"). Holdings will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI Holdings, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 A-7 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: (Insert assignee's soc. sec. or tax I.D. no.) (Print or type assignee's name, address and zip code) and irrevocably appoint as agent to transfer this Note on the books of Holdings. The agent may substitute another to act for him. Date: Your Signature: ---------------------------------------- (Sign exactly as your name appears on the other side of this Note) Signature must be guaranteed by an eligible guarantor institution (bank, stock broker, savings and loan association or credit union) with membership in an approved signature guarantee program pursuant to Securities and Exchange Commission Rule 17Ad-15. Signature Guarantee: ---------------------------- A-8 OPTION OF HOLDER TO ELECT PURCHASE If you elect to have this Note purchased by Holdings pursuant to Section 4.13 of the Indenture, check the box: [_] If you elect to have this Note purchased by Holdings pursuant to Section 4.14 of the Indenture, check the box: [_] If you elect to have only part of this Note purchased by Holdings pursuant to Section 4.13 or 4.14 of the Indenture, state the amount (multiples of $500 only): $ Date: Your Signature:_________________________________ (Sign exactly as your name appears on the other side of this Note) Signature must be guaranteed by an eligible guarantor institution (bank, stock broker, savings and loan association or credit union) with membership in an approved signature guarantee program pursuant to Securities and Exchange Commission Rule 17Ad-15. Signature Guarantee: ---------------------------- A-9 SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES/2/ The following exchanges of a part of this Global Note for Definitive Notes have been made:
Principal Amount of this Signature of Amount of decrease in Amount of increase in Global Note authorized officer of Principal Amount of this Principal Amount of following such decrease Trustee or Note Date of Exchange Global Note this Global Note (or increase) Custodian - ------------------ ------------------------ --------------------- ------------------------- ---------------------
- ------------------------ 2. This should be included only if the Note is issued in global form. A-10 EXHIBIT B CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF NOTES _________________, _______ Re: 11-3/8% Series [A/B] Senior Discount Notes due 2009 of GFSI Holdings, Inc. This Certificate relates to $_____ principal amount of Notes held in * ________ book-entry or *_______ definitive form by ________________ (the "Transferor"). The Transferor*: [_] has requested the Trustee by written order to deliver in exchange for its beneficial interest in the Global Note held by the Depository a Note or Notes in definitive, registered form equal to its beneficial interest in such Global Note (or the portion thereof indicated above); or [_] has requested the Trustee by written order to exchange or register the transfer of a Note or Notes. [_] In connection with such request and in respect of each such Note, the Transferor does hereby certify that the Transferor is familiar with the Indenture relating to the above captioned Notes and that the transfer of this Note does not require registration under the Securities Act (as defined below) because:* [_] Such Note is being acquired for the Transferor's own account without transfer (in satisfaction of Section 2.06(a)(ii)(A) or Section 2.06(d)(i)(A) of the Indenture). [_] Such Note is being transferred (i) to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")), in reliance on Rule 144A or (ii) pursuant to an exemption from registration in accordance with Rule 904 under the Securities Act (and in the case of clause (ii), based on an opinion of counsel if Holdings so requests and together with a certification in substantially the form of Exhibit C to the Indenture). [_] Such Note is being transferred (i) in accordance with Rule 144 under the Securities Act (and based on an opinion of counsel if Holdings so requests) or (ii) pursuant to an effective registration statement under the Securities Act. - ------------------ *Check applicable box. B-1 [_] Such Note is being transferred in reliance on and in compliance with another exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if Holdings so requests). [INSERT NAME OF TRANSFEROR] By: --------------------------------- Name: Title: Address: - --------------- *Check applicable box. B-2 EXHIBIT C FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S _________________, ______ ______________________, as Registrar Attention: Corporate Trust Department Ladies and Gentlemen: In connection with our proposed sale of certain 11 3/8% Series [A/B] Senior Discount Notes due 2009 (the "Notes") of GFSI Holdings, Inc., a Delaware corporation (the "Company"), we represent that: (i) the offer of the Notes was not made to a person in the United States; (ii) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; (iii) no directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (iv) the transaction is not part of a plan or scheme to evade the registration requirements of the U.S. Securities Act of 1933. You and Holdings are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, ---------------------------------- [Name of Transferor] By: ------------------------------ Name: Title: Address: C-1 EX-4.2 6 GLOBAL SERIES A SENIOR DISCOUNT NOTE Exhibit 4.2 11 3/8% Series A Senior Discount Note due 2009 No. G-1 $108,467,780 CUSIP No. 36169L AA 2 GFSI HOLDINGS, INC. promises to pay to Cede & Co. or registered assigns, the principal sum of One Hundred Eight Million, Four Hundred Sixty Seven Thousand, Seven Hundred Eighty and xx/100 Dollars on September 15, 2009. Interest Payment Dates: March 15 and September 15 Record Dates: March 1 and September 1 Dated: October 23, 1997 GFSI HOLDINGS, INC. By: /s/ Richard Caputo ----------------------------- Name: A. Richard Caputo, Jr. Title: Vice President Trustee's Certificate of Authentication Dated: October 23, 1997 This is one of the Notes referred to in the within-mentioned Indenture: STATE STREET BANK AND TRUST COMPANY, as Trustee By: /s/ Jacqueline Connor ----------------------------------- (Authorized Signatory) Unless and until it is exchanged in whole or in part for Notes in definitive form, this Senior Discount Note may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. The Depository Trust Company shall act as the Depository until a successor shall be appointed by Holdings and the Registrar. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY Person IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF HOLDINGS THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF HOLDINGS SO REQUESTS), (2) TO HOLDINGS OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE. FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED -2- WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $487.20, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $512.80, THE ISSUE DATE IS SEPTEMBER 17, 1997 AND THE YIELD TO MATURITY IS 11 3/8% PER ANNUM. Additional provisions of this Senior Discount Note are set forth on the other side of this Senior Discount Note. -3- (Back of Note) 11 3/8% SERIES A SENIOR DISCOUNT NOTES DUE 2009 1. Interest. No interest will accrue on the Notes until September 15, 2004, but the Accreted Value (as defined in the Indenture) will accrete (representing the amortization of original issue discount) between the date of original issuance and such date, on a semi-annual basis using a 360-day year of twelve 30-day months such that the Accreted Value shall be equal to the full principal amount of the Notes on September 15, 2004. GFSI Holdings, Inc. ("Holdings") promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below. Interest on the Notes will accrue at 11 3/8% per annum from September 15, 2004 until maturity. Interest if any, will be payable semiannually in cash in arrears on March 15 and September 15 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from September 15, 2004; provided that the first Interest Payment Date shall be March 15, 2005. Holdings shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest and Liquidated Damages, if any, (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. Holdings will pay interest on the Notes (except defaulted interest) and Liquidated Damages to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment Date even if such Notes are canceled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. Holdings will pay principal, premium, if any, interest and Liquidated Damages, if any, in money of the United States that at the time of payment is legal tender for payment of public and private debts. Holdings will pay principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds by 11 a.m. New York City time to the accounts specified by the Holders or, if no such account is specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, interest and Liquidated Damages, if any, on all Global Notes. 3. Paying Agent and Registrar. State Street Bank and Trust Company (the "Trustee") will initially act as the Paying Agent and Registrar. Holdings may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. Holdings or any of its Subsidiaries may act in any such capacity. 4. Indenture. Holdings issued the Notes under an Indenture, dated as of September 17, 1997 (the "Indenture"), among Holdings and the Trustee. 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 (15 U.S. Code (S)(S) 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall -4- have the meanings assigned them in the Indenture). The Notes are unsecured senior obligations of Holdings. 5. Optional Redemption. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of Holdings prior to March 15, 1998. During the twelve-month period beginning September 15 of the years indicated below, the Notes will be redeemable at the option of Holdings, 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 Accreted Value for all redemption dates prior to September 15, 2004 and of the principal amount for all redemption dates including September 15, 2004 and thereafter) set forth below, plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of redemption: Year Percentage ---- ---------- 2002................................................. 105.688% 2003................................................. 103.792% 2004................................................. 101.986% 2005 and thereafter.................................. 100.000% (b) Notwithstanding the foregoing, on or after March 15, 1998 and prior to September 15, 2002, Holdings may (but shall not have the obligation to) redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof, with the net proceeds of one or more Equity Offerings of Holdings or Holdings; provided, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. In addition, upon the occurrence of a Change of Control on or after March 15, 1998 and prior to September 15, 2002, Holdings, at its option, may redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof. Holdings shall give not less than 30 and not more than 60 days' notice of such redemption within 30 days following a Change of Control. 6. Mandatory Redemption. Subject to Holdings' obligation to make an offer to purchase Notes under certain circumstances pursuant to Sections 4.13 and 4.14 of the Indenture (as described in paragraph 7 below), Holdings is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 7. Mandatory Offers to Purchase Notes. (a) 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 Holdings to purchase all or any part (equal to $500 or an integral multiple thereof) of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 100% of the Accreted Value (determined at the date of redemption) thereof (if such Offer is prior to September 15, 2004) to the date of purchase, or 100% of the aggregate principal amount thereof (if such Offer is on or after September 15, 2004), plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. (b) If Holdings or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, Holdings will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer") to purchase Notes at a purchase price equal to 100% of the Accreted Value (determined at the date of redemption) thereof to the date of purchase (if such date of purchase is prior to September 15, 2004), or 100% of the principal amount of the Notes (if -5- such date of purchase is on or after September 15, 2004), plus any accrued and unpaid interest and Liquidated Damages, if any, to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered pursuant to any Asset Sale Offer, the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. (c) Holders may tender all or, subject to paragraph 8 below, any portion of their Notes in a Change of Control Offer or Asset Sale Offer (collectively, an "Offer") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) Holdings shall 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 Holdings 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 this Indenture, Holdings shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. 8. Notice of Redemption or Purchase. Notice of an optional redemption or an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $500 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $500 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, 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. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount at maturity of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount at maturity of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of Holdings' obligations to Holders in the event of a merger or consolidation of Holdings in which Holdings is not the surviving corporation or a sale of substantially all of Holdings' assets to such other corporation; comply with the SEC's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes; or, make any change that does not materially adversely affect any Holder's rights under the Indenture. -6- 12. Defaults and Remedies. Events of Default include: default for 30 days in payment of interest on, or Liquidated Damages, if any, with respect to, the Notes; default in payment of principal of, or premium, if any, on the Notes; failure by Holdings for 30 days after notice to it to comply with any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; and certain events of bankruptcy or insolvency involving Holdings or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount at maturity of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if any, and any accrued and unpaid interest on, and Liquidated Damages, if any, with respect to the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount at maturity of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. Holdings must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with Holdings. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for Holdings or any Affiliate, and may otherwise deal with Holdings or any Affiliate, as if it were not Trustee. 14. No Recourse Against Others. No officer, employee, director, stockholder or Subsidiary of Holdings shall have any liability for any Obligations of Holdings 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 Holdings' Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the SEC is of the view that such a waiver is against public policy. 15. Successor Substituted. Upon the consolidation or merger by Holdings with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all of its assets to another corporation, in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not Holdings) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of Holdings under the Indenture with the same effect as if such surviving or other corporation had been named as Holdings in the Indenture. 16. Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 17. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. -7- 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 19. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, Holdings has caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. 16. Additional Rights of Holders of Transfer Restricted Notes. In addition to the rights provided to Holders of Notes under the Indenture, Holders of Transfer Restricted Notes shall have all the rights set forth in the Registration Rights Agreement, dated as of September 17, 1997 between Holdings, and Donaldson, Lufkin & Jenrette Securities Corporation (the "Registration Rights Agreement"). Holdings will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI Holdings, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 -8- ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: (Insert assignee's soc. sec. or tax I.D. no.) (Print or type assignee's name, address and zip code) and irrevocably appoint as agent to transfer this Note on the books of Holdings. The agent may substitute another to act for him. Date: Your Signature:_______________________________________ (Sign exactly as your name appears on the other side of this Note) Signature must be guaranteed by an eligible guarantor institution (bank, stock broker, savings and loan association or credit union) with membership in an approved signature guarantee program pursuant to Securities and Exchange Commission Rule 17Ad-15. Signature Guarantee:_____________________________ -9- OPTION OF HOLDER TO ELECT PURCHASE If you elect to have this Note purchased by Holdings pursuant to Section 4.13 of the Indenture, check the box: [_] If you elect to have this Note purchased by Holdings pursuant to Section 4.14 of the Indenture, check the box: [_] If you elect to have only part of this Note purchased by Holdings pursuant to Section 4.13 or 4.14 of the Indenture, state the amount (multiples of $500 only): $ Date: Your Signature:_______________________________________ (Sign exactly as your name appears on the other side of this Note) Signature must be guaranteed by an eligible guarantor institution (bank, stock broker, savings and loan association or credit union) with membership in an approved signature guarantee program pursuant to Securities and Exchange Commission Rule 17Ad-15. Signature Guarantee:_____________________________ -10- SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES The following exchanges of a part of this Global Note for Definitive Notes have been made:
Principal Amount of this Signature of Amount of decrease in Amount of increase in Global Note authorized officer of Principal Amount of this Principal Amount of following such decrease Trustee or Note Date of Exchange Global Note this Global Note (or increase) Custodian ---------------- ------------------------ --------------------- ------------------------ ---------------------
EX-4.3 7 FORM OF GLOBAL SERIES B SENIOR DISCOUNT NOTE Exhibit 4.3 11 3/8% Series B Senior Discount Note due 2009 No. G-1 $108,467,780 CUSIP No. 36169L AA 2 GFSI HOLDINGS, INC. promises to pay to Cede & Co. or registered assigns, the principal sum of One Hundred Eight Million, Four Hundred Sixty Seven Thousand, Seven Hundred Eighty and xx/100 Dollars on September 15, 2009. Interest Payment Dates: March 15 and September 15 Record Dates: March 1 and September 1 Dated: _____________, 1997 GFSI HOLDINGS, INC. By: ____________________________ Name: A. Richard Caputo, Jr. Title: Vice President Trustee's Certificate of Authentication Dated: ____________, 1997 This is one of the Notes referred to in the within-mentioned Indenture: STATE STREET BANK AND TRUST COMPANY, as Trustee By: ___________________________________ (Authorized Signatory) Unless and until it is exchanged in whole or in part for Notes in definitive form, this Senior Discount Note may not be transferred except as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. The Depository Trust Company shall act as the Depository until a successor shall be appointed by Holdings and the Registrar. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY Person IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 PRINCIPAL AMOUNT OF THIS SECURITY, THE ISSUE PRICE IS $487.20, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $512.80, THE ISSUE DATE IS SEPTEMBER 17, 1997 AND THE YIELD TO MATURITY IS 11 3/8% PER ANNUM. Additional provisions of this Senior Discount Note are set forth on the other side of this Senior Discount Note. -2- (Back of Note) 11 3/8% SERIES A SENIOR DISCOUNT NOTES DUE 2009 1. Interest. No interest will accrue on the Notes until September 15, 2004, but the Accreted Value (as defined in the Indenture) will accrete (representing the amortization of original issue discount) between the date of original issuance and such date, on a semi-annual basis using a 360-day year of twelve 30-day months such that the Accreted Value shall be equal to the full principal amount of the Notes on September 15, 2004. GFSI Holdings, Inc. ("Holdings") promises to pay interest on the principal amount of the Notes at the rate and in the manner specified below. Interest on the Notes will accrue at 11 3/8% per annum from September 15, 2004 until maturity. Interest if any, will be payable semiannually in cash in arrears on March 15 and September 15 of each year, or if any such day is not a Business Day on the next succeeding Business Day (each, an "Interest Payment Date"). Interest on the Notes will accrue from the most recent date on which interest has been paid or, if no interest has been paid, from September 15, 2004; provided that the first Interest Payment Date shall be March 15, 2005. Holdings shall pay interest on overdue principal and premium, if any, from time to time on demand at the interest rate then in effect and shall pay interest on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment. Holdings will pay interest on the Notes (except defaulted interest) to the Persons who are registered holders of Notes at the close of business on the record date for the next Interest Payment Date even if such Notes are canceled after such record date and on or before such Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal payments on such Notes. Holdings will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. Holdings will pay principal, premium, if any, and interest by wire transfer of immediately available funds by 11 a.m. New York City time to the accounts specified by the Holders or, if no such account is specified, by mailing a check to each such Holder's registered address; provided that payment by wire transfer of immediately available funds will be required with respect to principal, premium, if any, and interest on all Global Notes. 3. Paying Agent and Registrar. State Street Bank and Trust Company (the "Trustee") will initially act as the Paying Agent and Registrar. Holdings may appoint additional paying agents or co-registrars, and change the Paying Agent, any additional paying agent, the Registrar or any co-registrar without prior notice to any Holder. Holdings or any of its Subsidiaries may act in any such capacity. 4. Indenture. Holdings issued the Notes under an Indenture, dated as of September 17, 1997 (the "Indenture"), among Holdings and the Trustee. 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 (15 U.S. Code (S)(S) 77aaa-77bbbb) as in effect on the date of the original issuance of the Notes (the "Trust Indenture Act"). The Notes are subject to, and qualified by, all such terms, certain of which are summarized herein, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of such terms (all capitalized terms not defined herein shall have the meanings assigned them in the Indenture). The Notes are unsecured senior obligations of Holdings. -3- 5. Optional Redemption. (a) Except as described in paragraph 5(b) below, the Notes may not be redeemed at the option of Holdings prior to March 15, 1998. During the twelve-month period beginning September 15 of the years indicated below, the Notes will be redeemable at the option of Holdings, 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 Accreted Value for all redemption dates prior to September 15, 2004 and of the principal amount for all redemption dates including September 15, 2004 and thereafter) set forth below, plus any accrued and unpaid interest to the date of redemption:
Year Percentage ---- ---------- 2002.............................................. 105.688% 2003.............................................. 103.792% 2004.............................................. 101.986% 2005 and thereafter............................... 100.000%
(b) Notwithstanding the foregoing, on or after March 15, 1998 and prior to September 15, 2002, Holdings may (but shall not have the obligation to) redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof, with the net proceeds of one or more Equity Offerings of Holdings or Holdings; provided, that any such redemption shall occur within 60 days of the date of the closing of any such Equity Offering. In addition, upon the occurrence of a Change of Control on or after March 15, 1998 and prior to September 15, 2002, Holdings, at its option, may redeem, in whole or in part, the outstanding Notes at a redemption price in cash equal to 105.688% of the Accreted Value (determined at the date of redemption) thereof. Holdings shall give not less than 30 and not more than 60 days' notice of such redemption within 30 days following a Change of Control. 6. Mandatory Redemption. Subject to Holdings' obligation to make an offer to purchase Notes under certain circumstances pursuant to Sections 4.13 and 4.14 of the Indenture (as described in paragraph 7 below), Holdings is not required to make any mandatory redemption, purchase or sinking fund payments with respect to the Notes. 7. Mandatory Offers to Purchase Notes. (a) 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 Holdings to purchase all or any part (equal to $500 or an integral multiple thereof) of such Holder's Notes pursuant to an offer (a "Change of Control Offer") at a purchase price in cash equal to 100% of the Accreted Value (determined at the date of redemption) thereof (if such Offer is prior to September 15, 2004) to the date of purchase, or 100% of the aggregate principal amount thereof (if such Offer is on or after September 15, 2004), plus any accrued and unpaid interest to the date of purchase. (b) If Holdings or any Restricted Subsidiary consummates one or more Asset Sales and does not use all of the Net Proceeds from such Asset Sales as provided in the Indenture, Holdings will be required, under certain circumstances, to utilize the Excess Proceeds from such Asset Sales to offer (an "Asset Sale Offer") to purchase Notes at a purchase price equal to 100% of the Accreted Value (determined at the date of redemption) thereof to the date of purchase (if such date of purchase is prior to September 15, 2004), or 100% of the principal amount of the Notes (if such date of purchase is on or after September 15, 2004), plus any accrued and unpaid interest to the date of purchase. If the Excess Proceeds are insufficient to purchase all Notes tendered -4- pursuant to any Asset Sale Offer, the Trustee shall select the Notes to be purchased in accordance with the terms of the Indenture. (c) Holders may tender all or, subject to paragraph 8 below, any portion of their Notes in a Change of Control Offer or Asset Sale Offer (collectively, an "Offer") by completing the form below entitled "OPTION OF HOLDER TO ELECT PURCHASE." (d) Holdings shall 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 Holdings 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 this Indenture, Holdings shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Indenture by virtue thereof. 8. Notice of Redemption or Purchase. Notice of an optional redemption or an Offer will be mailed to each Holder at its registered address at least 30 days but not more than 60 days before the date of redemption or purchase. Notes may be redeemed or purchased in part, but only in whole multiples of $500 unless all Notes held by a Holder are to be redeemed or purchased. On or after any date on which Notes are redeemed or purchased, interest ceases to accrue on the Notes or portions thereof called for redemption or accepted for purchase on such date. 9. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $500 and integral multiples thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. Holders seeking to transfer or exchange their Notes may be required, 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. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption or tendered pursuant to an Offer. Also, it need not exchange or register the transfer of any Notes for a period of 15 Business Days before a selection of Notes to be redeemed or between a record date and the next succeeding Interest Payment Date. 10. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount at maturity of the then outstanding Notes, and any existing Default (except a payment Default) may be waived with the consent of the Holders of a majority in principal amount at maturity of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended to: cure any ambiguity, defect or inconsistency; provide for uncertificated Notes in addition to or in place of certificated Notes; provide for the assumption by another corporation of Holdings' obligations to Holders in the event of a merger or consolidation of Holdings in which Holdings is not the surviving corporation or a sale of substantially all of Holdings' assets to such other corporation; comply with the SEC's requirements to effect or maintain the qualification of the Indenture under the Trust Indenture Act; provide for additional Guarantees with respect to the Notes; or, make any change that does not materially adversely affect any Holder's rights under the Indenture. 12. Defaults and Remedies. Events of Default include: default for 30 days in payment of interest on the Notes; default in payment of principal of, or premium, if any, on the -5- Notes; failure by Holdings for 30 days after notice to it to comply with any of its other agreements or covenants in, or provisions of, the Indenture or the Notes; certain defaults under and acceleration prior to maturity of, or failure to pay at maturity, certain other Indebtedness; certain final judgments that remain undischarged; and certain events of bankruptcy or insolvency involving Holdings or any Restricted Subsidiary that is a Significant Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount at maturity of the Notes may declare all the Notes to be immediately due and payable in an amount equal to the principal of, premium, if any, and any accrued and unpaid interest on such Notes; provided, however, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, the principal of, premium, if any, and any accrued and unpaid interest on the Notes becomes due and payable immediately without further action or notice. Subject to certain exceptions, Holders of a majority in principal amount at maturity of the then outstanding Notes may direct the Trustee in its exercise of any trust or power, provided that the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of Holders unless such Holders have offered to the Trustee security and indemnity satisfactory to it. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may withhold from Holders notice of any continuing default (except a payment Default) if it determines that withholding notice is in their interests. Holdings must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with Holdings. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for Holdings or any Affiliate, and may otherwise deal with Holdings or any Affiliate, as if it were not Trustee. 14. No Recourse Against Others. No officer, employee, director, stockholder or Subsidiary of Holdings shall have any liability for any Obligations of Holdings 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 Holdings' Obligations under the Notes. Each Holder by accepting a Note waives and releases all such liability, and such waiver and release is part of the consideration for the issuance of the Notes. The foregoing waiver may not be effective to waive liabilities under the Federal securities law and the SEC is of the view that such a waiver is against public policy. 15. Successor Substituted. Upon the consolidation or merger by Holdings with or into another corporation, or upon the sale, lease, conveyance or other disposition of all or substantially all of its assets to another corporation, in accordance with the Indenture, the corporation surviving any such merger or consolidation (if not Holdings) or the corporation to which such assets were sold or transferred to shall succeed to, and be substituted for, and may exercise every right and power of Holdings under the Indenture with the same effect as if such surviving or other corporation had been named as Holdings in the Indenture. 16. Governing Law. This Note shall be governed by and construed in accordance with the internal laws of the State of New York without regard to the conflict of laws provisions thereof. 17. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), -6- JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 19. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Note Identification Procedures, Holdings has caused CUSIP numbers to be printed on the Notes and have directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers printed on the Notes. Holdings will furnish to any Holder upon written request and without charge a copy of the Indenture, which has in it the text of this Note in larger type. Request may be made to: GFSI Holdings, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Attention: director of finance Telecopier: (913) 752-3336 -7- ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to: (Insert assignee's soc. sec. or tax I.D. no.) (Print or type assignee's name, address and zip code) and irrevocably appoint as agent to transfer this Note on the books of Holdings. The agent may substitute another to act for him. Date: Your Signature:__________________________ (Sign exactly as your name appears on the other side of this Note) Signature must be guaranteed by an eligible guarantor institution (bank, stock broker, savings and loan association or credit union) with membership in an approved signature guarantee program pursuant to Securities and Exchange Commission Rule 17Ad-15. Signature Guarantee:_____________________________ -8- OPTION OF HOLDER TO ELECT PURCHASE If you elect to have this Note purchased by Holdings pursuant to Section 4.13 of the Indenture, check the box: [ ] If you elect to have this Note purchased by Holdings pursuant to Section 4.14 of the Indenture, check the box: [ ] If you elect to have only part of this Note purchased by Holdings pursuant to Section 4.13 or 4.14 of the Indenture, state the amount (multiples of $500 only): $ Date: Your Signature:___________________________________ (Sign exactly as your name appears on the other side of this Note) Signature must be guaranteed by an eligible guarantor institution (bank, stock broker, savings and loan association or credit union) with membership in an approved signature guarantee program pursuant to Securities and Exchange Commission Rule 17Ad-15. Signature Guarantee:_________________________ -9- SCHEDULE OF EXCHANGES OF DEFINITIVE NOTES The following exchanges of a part of this Global Note for Definitive Notes have been made:
Principal Amount of this Signature of Amount of decrease in Amount of increase in Global Note authorized officer of Principal Amount of this Principal Amount of following such decrease Trustee or Note Date of Exchange Global Note this Global Note (or increase) Custodian ---------------- ------------------------ --------------------- ----------------------- ---------------------
EX-4.4 8 REGISTRATION RIGHTS AGREEMENT 9/17/97 Exhibit 4.4 GFSI HOLDINGS, INC. ________________________________________ 11-3/8% Senior Discount Notes due 2009 ________________________________________ ___________________ REGISTRATION RIGHTS AGREEMENT dated as of september 17, 1997 ___________________ Donaldson, Lufkin & Jenrette Securities Corporation This Registration Rights Agreement (this "Agreement") is made and entered into as of September 17, 1997 by and between GFSI Holdings, Inc., a Delaware corporation ("Holdings"), and Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial Purchaser"), which has agreed to purchase Holdings' Units (the "Units") consisting of Holdings' 11-3/8% Subordinated Discount Notes due 2009 and Holdings' 11-3/8% Preferred Stock due 2009 and exchangeable, at Holdings' option, for Holdings' 11-3/8% Senior Discount Notes due 2009 (the "Series A Notes") pursuant to the Purchase Agreement (as defined). This Agreement is made pursuant to the Purchase Agreement, dated September 12, 1997 (the "Purchase Agreement"), by and among Holdings, GFSI, Inc., a Delaware corporation, the Selling Securityholders (as such term is defined in the Purchase Agreement) and the Initial Purchaser. In order to induce the Initial Purchaser to purchase the Units, Holdings has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchaser set forth in the Purchase Agreement. The parties hereby agree as follows: 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: Act: The Securities Act of 1933, as amended. Business Day: Any day except a Saturday, Sunday or other day in the City of New York, or in the city of the corporate trust office of the Trustee, on which banks are authorized to close. Broker-Dealer: Any broker or dealer registered under the Exchange Act. Broker-Dealer Transfer Restricted Notes: Series B Notes that are acquired by a Broker-Dealer in the Exchange Offer in exchange for Series A Notes that such Broker-Dealer acquired for its own account as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from Holdings or any of its affiliates). Closing Date: The date hereof. Commission: The Securities and Exchange Commission. Consummate: An Exchange Offer shall be deemed "Consummated" for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, (b) the maintenance of such Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof and (c) the delivery by Holdings to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by Holders thereof pursuant to the Exchange Offer. Damages Payment Date: Each Interest Payment Date. Effectiveness Target Date: As defined in Section 5. Exchange Act: The Securities Exchange Act of 1934, as amended. Exchange Offer: The registration by Holdings under the Act of the Series B Notes pursuant to the Exchange Offer Registration Statement pursuant to which Holdings shall offer the Holders of all outstanding Transfer Restricted Notes the opportunity to exchange all such outstanding Transfer Restricted Notes for Series B Notes in an aggregate principal amount equal to the aggregate principal amount of the Transfer Restricted Notes tendered in such exchange offer by such Holders. Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer, including the related Prospectus. Exempt Resales: The transactions in which the Initial Purchaser proposes to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act, and to certain "accredited investors," as such term is defined in Rule 501(a)(1), (2), (3), (5) and (7) of Regulation D under the Act. Holders: As defined in Section 2 hereof. Indemnified Holder: As defined in Section 8(a) hereof. Indenture: The Indenture, dated the Closing Date, between Holdings and State Street Bank and Trust Company, as trustee (the "Trustee"), pursuant to which the Notes are to be issued, as such Indenture is amended or supplemented from time to time in accordance with the terms thereof. Interest Payment Date: As defined in the Indenture and the Notes. NASD: National Association of Securities Dealers, Inc. Notes: The Series A Notes and the Series B Notes. Person: An individual, partnership, corporation, trust, unincorporated organization, or a government or agency or political subdivision thereof. Prospectus: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. Record Holder: With respect to any Damages Payment Date, each Person who is a Holder of Notes on the record date with respect to the Interest Payment Date on which such Damages Payment Date shall occur. Registration Default: As defined in Section 5 hereof. Registration Statement: Any registration statement of Holdings relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Notes pursuant to the Shelf Registration Statement, in each case, (i) which is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein. Restricted Broker-Dealer: Any Broker-Dealer which holds Broker-Dealer Transfer Restricted Notes. Series B Notes: Holdings' 11-3/8% Series B Senior Discount Notes due 2009 to be issued pursuant to the Indenture (i) in the Exchange Offer or (ii) upon the request of any Holder of Series A Notes covered by a Shelf Registration Statement, in exchange for such Series A Notes. Shelf Registration Statement: As defined in Section 4 hereof. TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the date of the Indenture. Transfer Restricted Notes: Each Note, until the earliest to occur of (a) the date on which such Note is exchanged in the Exchange Offer and entitled to be resold to the public by the Holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Note has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the Prospectus contained therein) or (d) the date on which such Note is distributed to the public pursuant to Rule 144 under the Act. Underwritten Registration or Underwritten Offering: A registration in which securities of Holdings are sold to an underwriter for reoffering to the public. 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Notes (each, a "Holder") whenever such Person owns Transfer Restricted Notes. 3. REGISTERED EXCHANGE OFFER a. Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), Holdings shall (i) cause to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 60 days after the Closing Date, the Exchange Offer Registration Statement, (ii) use their best efforts to cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 120 days after the Closing Date, (iii) in connection with the foregoing, (A) file all pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause such Exchange Offer Registration Statement to become effective, (B) file, if applicable, a post- effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Notes and to permit sales of Broker-Dealer Transfer Restricted Notes by Restricted Broker-Dealers as contemplated by Section 3(c) below. b. Holdings shall use its best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open, for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. Holdings shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Notes shall be included in the Exchange Offer Registration Statement. Holdings shall use its best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter. (c) Holdings shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Restricted Broker-Dealer who holds Series A Notes that are Transfer Restricted Notes and that were acquired for the account of such Broker- Dealer as a result of market-making activities or other trading activities, may exchange such Series A Notes (other than Transfer Restricted Notes acquired directly from Holdings) pursuant to the Exchange Offer; however, such Broker- Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of each Series B Note received by such Broker- Dealer in the Exchange Offer, which prospectus delivery requirement may be satisfied by the delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer Registration Statement. Such "Plan of Distribution" section shall also contain all other information with respect to such sales of Broker- Dealer Transfer Restricted Notes by Restricted Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Notes held by any such Broker-Dealer except to the extent required by the Commission as a result of a change in policy after the date of this Agreement. Holdings shall use its reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by the provisions of Section 6(c) below to the extent necessary to ensure that it is available for sales of Broker-Dealer Transfer Restricted Notes by Restricted Broker-Dealers, and to ensure that such Registration Statement conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of 120 days from the date on which the Exchange Offer is Consummated. Holdings shall promptly provide sufficient copies of the latest version of such Prospectus to such Restricted Broker-Dealers upon such Restricted Broker- Dealers' reasonable request, and in no event later than two Business Days after such request, at any time during such 120-day period in order to facilitate such sales. 4. SHELF REGISTRATION a. Shelf Registration. If (i) Holdings is not required to file an Exchange Offer Registration Statement with respect to the Series B Notes because the Exchange Offer is not permitted by applicable law (after the procedures set forth in Section 6(a)(i) below have been complied with) or (ii) if any Holder of Transfer Restricted Notes shall notify Holdings in writing within 20 Business Days following the Consummation of the Exchange Offer that (A) such Holder is prohibited by law or Commission policy from participating in the Exchange Offer or (B) such Holder may not resell the Series B Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Series A Notes acquired directly from Holdings or one of its affiliates, then Holdings shall (x) cause to be filed on or prior to the earliest of (1) 45 days after the date on which Holdings is notified by the Commission or otherwise determines that it is not required to file the Exchange Offer Registration Statement pursuant to clause (i) above and (2) 45 days after the date on which Holdings receives the notice specified in clause (ii) above, a shelf registration statement pursuant to Rule 415 under the Act, (which may be an amendment to the Exchange Offer Registration Statement (in either event, the "Shelf Registration Statement")), relating to all Transfer Restricted Notes the Holders of which shall have provided the information required pursuant to Section 4(b) hereof, and (y) use their best efforts to cause such Shelf Registration Statement to become effective at the earliest possible time, but in no event later than 120 days after the date on which Holdings becomes obligated to file such Shelf Registration Statement. If, after Holdings has filed an Exchange Offer Registration Statement which satisfies the requirements of Section 3(a) above, Holdings is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer shall not be permitted under applicable federal law, then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above. Such an event shall have no effect on the requirements of clause (y) above, or on the Effectiveness Target Date as defined in Section 5 below. Holdings shall use its reasonable best efforts to keep the Shelf Registration Statement discussed in this Section 4(a) continuously effective, supplemented and amended as required by and subject to the provisions of Sections 6(b) and (c) hereof to the extent necessary to ensure that it is available for sales of Transfer Restricted Notes by the Holders thereof entitled to the benefit of this Section 4(a), and to ensure that it conforms with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least three years (as extended pursuant to Section 6(c)(i)) following the date on which such Shelf Registration Statement first becomes effective under the Act or such shorter period that will terminate when all Transfer Restricted Notes covered by the Shelf Registration Statement have been sold pursuant thereto. b. Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Notes may include any of its Transfer Restricted Notes in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to Holdings in writing, within 20 days after receipt of a request therefor, such information specified in item 507 of Regulation S-K under the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Notes shall be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until such Holder shall have used its best efforts to provide all such information. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish promptly to Holdings all information required to be disclosed in order to make the information previously furnished to Holdings by such Holder not materially misleading. 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the date specified for such filing in this Agreement, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the date specified for such effectiveness in this Agreement (the "Effectiveness Target Date"), (iii) the Exchange Offer has not been Consummated within 30 Business Days after the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (iv) subject to the provisions of Section 6(c)(i) below, any Registration Statement required by this Agreement is filed and declared effective but shall thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately (but in any event within five Business Days thereafter) by a post- effective amendment to such Registration Statement that cures such failure and that is itself declared effective within such five Business Day period, other than, in the case of clause (iv) above, for such period in which such Registration Statement shall cease to be effective as a result of post- effective amendments to incorporate annual filings which Holdings is required to file with the Commission or post-effective amendments not otherwise covered by Section 6(c)(i) hereof, provided that Holdings in good faith attempts to cause such Registration Statement to be declared effective as soon as reasonably practicable (each such event referred to in clauses (i) through (iv), a "Registration Default"), Holdings hereby agrees to pay to each Holder of Transfer Restricted Notes (or, if the Notes have not been issued, the Units), for the first 90-day period immediately following the occurrence of such Registration Default, liquidated damages in an amount equal to $.05 per week per $1,000 principal amount at maturity of Notes (or, if the Notes have not been issued, the Units) constituting Transfer Restricted Notes (or if the Notes have not been issued, the Units) held by such Holder for so long as the Registration Default continues. The amount of liquidated damages payable to each Holder shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Notes (or, if the Notes have not been issued, the Units) held by such Holder for each subsequent 90-day period up to a maximum of $.40 per week per $1,000 in principal amount of Notes (or, if the Notes have not been issued, the Units) constituting Transfer Restricted Notes (or, if the Notes have not been issued, the Units) held by such Holder; provided, however, that (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (ii) above, (3) upon Consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of (iv) above, the liquidated damages payable with respect to such Transfer Restricted Notes (or, if the Notes have not been issued, the Units) as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued liquidated damages shall be paid by Holdings to the Global Note Holder (or, if the Notes have not been issued, the Global Unit Holder) by wire transfer of immediately available funds or by federal funds check and to Holders of Certificated Securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified on each Damages Payment Date. All obligations of Holdings set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Note at the time such security ceases to be a Transfer Restricted Note shall survive until such time as all such obligations with respect to such security shall have been satisfied in full. 6. REGISTRATION PROCEDURES a. Exchange Offer Registration Statement. In connection with the Exchange Offer, Holdings shall comply with all applicable provisions of Section 6(c) below, shall use their best efforts to effect such exchange and to permit the sale of Broker-Dealer Transfer Restricted Notes being sold in accordance with the intended method or methods of distribution thereof, and shall comply with all of the following provisions: i. If, following the date hereof there has been published a change in Commission policy with respect to exchange offers such as the Exchange Offer, such that in the reasonable opinion of counsel to Holdings there is a substantial question as to whether the Exchange Offer is permitted by applicable federal law or Commission policy, Holdings hereby agrees to seek a no-action letter or other favorable decision from the Commission allowing Holdings to Consummate an Exchange Offer for such Series A Notes. Holdings hereby agrees to pursue the issuance of such a decision to the Commission staff level but shall not be required to take commercially unreasonable action to effect a change of Commission policy. In connection with the foregoing, Holdings hereby agrees, however, to take all such other actions as are requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to Holdings setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff of such submission. ii. As a condition to its participation in the Exchange Offer pursuant to the terms of this Agreement, each Holder of Transfer Restricted Notes shall furnish, upon the request of Holdings, prior to the Consummation of the Exchange Offer, a written representation to Holdings (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an affiliate of Holdings, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such Holder using the Exchange Offer to participate in a distribution of the securities to be acquired in the Exchange Offer (1) could not under Commission policy as in effect on the date of this Agreement rely on the position of the Commission enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the Commission's letter to Shearman & Sterling dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired by such Holder directly from Holdings or an affiliate thereof. iii. To the extent required by the Commission, prior to effectiveness of the Exchange Offer Registration Statement, Holdings shall provide a supplemental letter to the Commission (A) stating that Holdings is registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) including a representation that Holdings has not entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of Holdings' information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above. b. Shelf Registration Statement. In connection with the Shelf Registration Statement, Holdings shall comply with all the provisions of Section 6(c) below and shall use its best efforts to effect such registration to permit the sale of the Transfer Restricted Notes being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to Holdings pursuant to Section 4(b) hereof), and pursuant thereto Holdings will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Notes in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof. c. General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement to permit the sale or resale of Transfer Restricted Notes (including, without limitation, any Exchange Offer Registration Statement and the related Prospectus, to the extent that the same are required to be available to permit sales of Broker-Dealer Transfer Restricted Notes by Restricted Broker-Dealers), Holdings shall: i. use its reasonable efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain a material misstatement or omission or (B) not to be effective and usable for resale of Transfer Restricted Notes during the period required by this Agreement, Holdings shall file promptly an appropriate amendment to such Registration Statement, (1) in the case of clause (A), correcting any such misstatement or omission, and (2) in the case of either clause (A) or (B), use its reasonable efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter. Notwithstanding the foregoing, if (A) the Board of Directors of Holdings determines in good faith that it is in the best interests of Holdings not to disclose the existence of or facts surrounding any proposed or pending material corporate transaction involving Holdings or its subsidiaries and (B) Holdings notifies the Holders within two Business Days after the Board of Directors makes such determination, Holdings may allow the Shelf Registration Statement to fail to be effective and usable as a result of such nondisclosure for up to 60 days during the three-year period of effectiveness required by Section 4 hereof, but in no event for any period in excess of 30 consecutive days; provided, however, that the three-year period referred to in Section 4 hereof during which the Shelf Registration Statement is required to be effective and usable shall be extended by the number of days during which such registration statement was not effective or usable pursuant to the foregoing provisions. ii. prepare and file with the Commission such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, or such shorter period as will terminate when all Transfer Restricted Notes covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule_424 under the Act, and to comply fully with Rules 424 and 430A, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; iii. advise the underwriter(s), if any, and selling Holders promptly upon becoming aware and, if requested by such Persons, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Notes for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Notes under state securities or Blue Sky laws, Holdings shall use its reasonable efforts to obtain the withdrawal or lifting of such order at the earliest possible time; iv. in the case of a Shelf Registration Statement, use reasonable efforts to furnish to the Initial Purchaser, each selling Holder named in any Registration Statement or Prospectus and each of the underwriter(s) in connection with such sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement) prior to filing, reasonably respond to comments received from such persons, and make Holdings' representatives available for discussion of such documents and other customary due diligence matters. v. subject to execution of confidentiality agreements that are reasonably satisfactory to Holdings as to the disclosure of any non- public information obtained pursuant to this Section 6(c)(v) and upon reasonable notice and at reasonable times, make available for inspection at Holdings' offices located in Lenexa, Kansas by the selling Holders, any managing underwriter participating in any disposition pursuant to such Registration Statement and any attorney or accountant retained by such selling Holders or any of such underwriter(s), all financial and other records, pertinent corporate documents and properties of Holdings and cause Holdings' officers, directors and employees to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; vi. in the case of a Shelf Registration Statement, if requested by any selling Holders or the underwriter(s) in connection with such sale, if any, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post- effective amendment if necessary, such information as such selling Holders and underwriter(s), if any, may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Notes, information with respect to the principal amount of Transfer Restricted Notes being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Notes to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after Holdings is notified of the matters reasonably requested to be included in such Prospectus supplement or post-effective amendment; vii. in the case of a Shelf Registration Statement, furnish to each selling Holder and each of the underwriter(s) in connection with such sale, if any, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); viii. deliver to each selling Holder and each of the underwriter(s), if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; Holdings hereby consents to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each of the selling Holders and each of the underwriter(s), if any, in connection with the offering and the sale of the Transfer Restricted Notes covered by the Prospectus or any amendment or supplement thereto; ix. enter into such customary agreements and make such customary representations and warranties and take all such other customary actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Notes pursuant to any Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder of Transfer Restricted Notes or underwriter in connection with any sale or resale pursuant to any Registration Statement contemplated by this Agreement, and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an Underwritten Registration, Holdings shall: (A) furnish (or in the case of paragraphs (2) and (3), use its best efforts to furnish) to each selling Holder and each underwriter, if any, upon the effectiveness of the Shelf Registration Statement and to each Restricted Broker-Dealer upon Consummation of the Exchange Offer: (1) a certificate, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, signed on behalf of Holdings by (x) the President or any Vice President and (y) a principal financial or accounting officer of Holdings confirming, as of the date thereof, the matters set forth in paragraphs (a) through (c) of Section 9 of the Purchase Agreement and such other similar matters as the Holders and/or underwriter(s) may reasonably request; (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for Holdings, covering matters customarily covered in opinions requested in Underwritten Offerings and dated the date of effectiveness of the Shelf Registration Statement or the date of Consummation of the Exchange Offer, as the case may be; and (3) a customary comfort letter, dated as of the date of effectiveness of the Shelf Registration Statement or the date of Consummation of the Exchange Offer, as the case may be, from Holdings' independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with Underwritten Offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 9(g) of the Purchase Agreement, without exception; (B) set forth in full or incorporate by reference in the underwriting agreement, if any, in connection with any sale or resale pursuant to any Shelf Registration Statement the indemnification provisions and procedures of Section_8 hereof with respect to all parties to be indemnified pursuant to said Section; and (C) deliver such other documents and certificates as may be reasonably requested by the selling Holders or the underwriter(s), if any, to evidence compliance with clause_(A) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by Holdings pursuant to this clause (x)._ The above shall be done at each closing under such underwriting or similar agreement, as and to the extent required thereunder, and if at any time the representations and warranties of Holdings contemplated in (A)(1) above cease to be true and correct, Holdings shall so advise the underwriter(s), if any, and selling Holders promptly and if requested by such Persons, shall confirm such advice in writing; x. prior to any public offering of Transfer Restricted Notes, cooperate with the selling Holders, the underwriter(s), if any, and their respective counsel in connection with the registration and qualification of the Transfer Restricted Notes under the securities or Blue Sky laws of such jurisdictions as the selling Holders or underwriter(s), if any, may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Notes covered by the applicable Registration Statement; provided, however, that Holdings shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; xi. issue, upon the request of any Holder of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes, having an aggregate principal amount equal to the aggregate principal amount of Series A Notes surrendered to Holdings by such Holder in exchange therefor or being sold by such Holder; such Series B Notes to be registered in the name of such Holder or in the name of the purchaser(s) of such Notes, as the case may be; in return, the Series A Notes held by such Holder shall be surrendered to Holdings for cancellation; xii. in connection with any sale of Transfer Restricted Notes that will result in such securities no longer being Transfer Restricted Notes, cooperate with the selling Holders and the underwriter(s), if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Notes to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Notes in such denominations and such names as the Holders or the underwriter(s), if any, may request at least two Business Days prior to such sale of Transfer Restricted Notes; xiii. use its reasonable efforts to cause the disposition of the Transfer Restricted Notes covered by the Registration Statement to be registered with or approved by such other U.S. governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriter(s), if any, to consummate the disposition of such Transfer Restricted Notes, subject to the proviso contained in clause (xi) above; xiv. subject to Section 6(c)(i), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Notes, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; xv. provide a CUSIP number for all Transfer Restricted Notes not later than the effective date of a Registration Statement covering such Transfer Restricted Notes and provide the Trustee under the Indenture with printed certificates for the Transfer Restricted Notes that are in a form eligible for deposit with the Depository Trust Company; xvi. cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use its reasonable efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to enable the Holders selling Transfer Restricted Notes to consummate the disposition of such Transfer Restricted Notes; xvii. otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); xviii. cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders of Notes to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its reasonable efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and xix. provide promptly to each Holder upon request each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Note that, upon receipt of the notice referred to in Section 6(c)(i) or any notice from Holdings of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Notes pursuant to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof, or until it is advised in writing by Holdings that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (the "Advice"). If so directed by Holdings, each Holder will deliver to Holdings (at Holdings' expense) all copies, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Notes that was current at the time of receipt of either such notice._ In the event Holdings shall give any such notice, the time period regarding the effectiveness of such Registration Statement set forth in Section_3 or 4 hereof, as applicable, shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(c)(i) or Section 6(c)(iii)(D) hereof to and including the date when each selling Holder covered by such Registration Statement shall have received the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof or shall have received the Advice. 7. REGISTRATION EXPENSES a. All expenses incident to Holdings' performance of or compliance with this Agreement will be borne by Holdings, regardless of whether a Registration Statement becomes effective, including without limitation: (i)_all registration and filing fees and expenses (including filings made with the NASD and counsel fees in connection therewith); (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all printing expenses of printing (including printing certificates for the Series B Notes and printing of Prospectuses); (iv) all fees and disbursements of counsel for Holdings and, in accordance with Section 7(b) below, the Holders of Transfer Restricted Notes; and (v) all fees and disbursements of independent certified public accountants of Holdings (including the expenses of any special audit and comfort letters required by or incident to such performance). Holdings will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by Holdings. b. In connection with any Shelf Registration Statement required by this Agreement, Holdings will reimburse the Holders of Transfer Restricted Notes the distribution of which is being registered pursuant to the Shelf Registration Statement for the reasonable fees and disbursements of not more than one counsel chosen by the Holders of a majority of the principal amount of such Transfer Restricted Notes, which counsel shall be satisfactory to Holdings in its sole discretion. 8. INDEMNIFICATION (a) Holdings agrees to indemnify and hold harmless (i) each Holder and (ii) each person, if any, who controls (within the meaning of Section_15 of the Act or Section 20 of the Exchange Act) any Holder (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person") and (iii) the respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Holder"), from and against any and all losses, claims, damages, liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (or any amendment or supplement thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages, liabilities or judgments (i) are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any of the Holders furnished in writing to Holdings by or on behalf of any of the Holders expressly for use therein, (ii) with respect to the preliminary prospectus, result from the fact that the Holder sold Transfer Restricted Notes to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the prospectus, as amended or supplemented, if Holdings shall have previously furnished copies thereof to the Holder in accordance with this Agreement and the prospectus, as amended or supplemented, would have corrected such untrue statement or omission or (iii) are a result of the use by the Indemnified Holder of any prospectus, when, upon receipt of a notice from Holdings of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof contemplated by the last paragraph of Section 6 hereof, the Indemnified Holder was not permitted to do so. In case any action or proceeding shall be brought against any of the Indemnified Holders with respect to which indemnity may be sought against Holdings, such Indemnified Holder (or the Indemnified Holder controlled by such controlling person) shall promptly notify Holdings in writing (provided, that the failure to give such notice shall not relieve Holdings of its obligations pursuant to this Agreement). Such Indemnified Holder shall have the right to employ its own counsel in any such action but the fees and expenses of such counsel shall be at the expense of the Indemnified Holder or such controlling person unless (i) the employment of such counsel shall have been specifically authorized in writing by Holdings, (ii) Holdings shall have failed to assume the defense and employ counsel or (iii) the named parties to any such action (including any impleaded parties) include both the Indemnified Holder or such controlling person and Holdings and the Indemnified Holder or such controlling person shall have been advised in writing by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to Holdings (in which case Holdings shall not have the right to assume the defense of such action on behalf of the Indemnified Holder or such controlling person), it being understood, however, that Holdings shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for such Indemnified Holders, which firm shall be designated by the Holders and be reasonably satisfactory to Holdings. Holdings shall not be liable for any settlement of any such action or proceeding effected without Holdings' prior written consent, which consent shall not be withheld unreasonably, but if settled with Holdings' written consent, and Holdings agrees to indemnify and hold harmless any Indemnified Holder from and against any loss or liability by reason of such settlement. Holdings shall not, without the prior written consent of each Indemnified Holder effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Holder is or could have been a party and indemnity could have been sought hereunder by such Indemnified Holder, unless such settlement includes an unconditional release of such Indemnified Holder from all liability on claims that are the subject matter of such proceeding. (b) Each Holder of Transfer Restricted Notes agrees, severally and not jointly, to indemnify and hold harmless (i) Holdings, (ii) any person controlling Holdings (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) and (iii) the directors, officers, partners, employees, representatives, and agents of Holdings to the same extent as the foregoing indemnity from Holdings to each of the Indemnified Holders, but only with respect to information relating to such Holder furnished in writing by such Holder expressly for use in any Registration Statement. In case any action or proceeding shall be brought against Holdings or its directors or officers or any such controlling person in respect of which indemnity may be sought against a Holder of Transfer Restricted Notes, such Holder shall have the rights and duties given Holdings, and Holdings or its directors or officers or such controlling person shall have the rights and duties given to each Holder by the preceding paragraph. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) If the indemnification provided for in this Section 8 is unavailable to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by Holdings on the one hand and the Holders on the other hand from their sale of Transfer Restricted Notes or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect the relative fault of Holdings on the one hand and of the Indemnified Holder on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of Holdings on the one hand and of the Indemnified Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by Holdings or by the Indemnified Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and judgments referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 8(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. Holdings and each Holder of Transfer Restricted Notes agree that it would not be just and equitable if contribution pursuant to this Section 8(c) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, none of the Holders (and their related Indemnified Holders) shall be required to contribute, in the aggregate, any amount in excess of the amount by which the dollar amount of proceeds received by any such Holder upon the sale of Transfer Restricted Notes exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Series A Notes held by each of the Holders hereunder and not joint. 9. RULE 144A Holdings hereby agrees with each Holder, for so long as any Transfer Restricted Notes remain outstanding and during any period in which Holdings is not subject to Section 13 or 15(d) of the Securities Exchange Act, to make available, upon request of any Holder of Transfer Restricted Notes, to any Holder or beneficial owner of Transfer Restricted Notes in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Notes designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Notes pursuant to Rule 144A. 10. UNDERWRITTEN REGISTRATIONS No Holder may participate in any Underwritten Registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Notes on the basis provided in customary underwriting arrangements entered into in connection therewith and (b) completes and executes all reasonable questionnaires, powers of attorney, lock-up letters and other documents required under the terms of such underwriting arrangements. 11. SELECTION OF UNDERWRITERS Subject to Holdings' consent, for any Underwritten Offering, the investment banker or investment bankers and manager or managers for any Underwritten Offering that will administer such offering will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Notes included in such offering. Such investment bankers and managers are referred to herein as the "underwriters." 12. MISCELLANEOUS a. Remedies. Each Holder, in addition to being entitled to exercise all rights provided herein, in the Indenture, the Purchase Agreement or granted by law, including recovery of liquidated or other damages, will be entitled to specific performance of its rights under this Agreement. Holdings agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. b. No Inconsistent Agreements. Holdings will not, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Holdings has not previously entered into any agreement granting any registration rights with respect to its securities to any Person. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of Holdings' securities under any agreement in effect on the date hereof. c. Adjustments Affecting the Notes. Holdings will not take any action, or voluntarily permit any change to occur, with respect to the Notes that would materially and adversely affect the ability of the Holders to Consummate any Exchange Offer. d. Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless Holdings has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Notes. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose securities are being tendered pursuant to the Exchange Offer and that does not affect directly or indirectly the rights of other Holders whose securities are not being tendered pursuant to such Exchange Offer may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Notes subject to such Exchange Offer. e. Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to Holdings: GFSI Holdings, Inc. 9700 Commerce Parkway Lenexa, KS 66219 Telecopier No.: (913) 752-3346 Attention: Director of Finance With copies to: The Jordan Company 9 West 57th Street 40th Floor New York, NY 10019 Telecopier No.: (212) 755-5263 Attention: Richard Caputo, Jr. Mayer, Brown & Platt 190 South LaSalle Street Chicago, Illinois 60603 Telecopier No.: (312) 701-7711 Attention: Phil Niehoff All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. f. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders of Transfer Restricted Notes; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign acquired Transfer Restricted Notes directly from such Holder at a time when such Holder could not transfer such Transfer Restricted Notes pursuant to a Shelf Registration Statement. g. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. h. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. i. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. j. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. k. Entire Agreement. This Agreement together with the other Operative Documents (as defined in the Purchase Agreement) is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by Holdings with respect to the Transfer Restricted Notes. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter [NEXT PAGE IS SIGNATURE PAGE] IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. GFSI HOLDINGS, INC. By: /s/ Richard Caputo ------------------------------- Name: A. Richard Caputo, Jr. Title: Vice President DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ Tyler Wolfram -------------------- Name: Tyler Wolfram Title: Vice President EX-5 9 OPINION OF MAYER, BROWN & PLATT Exhibit 5 October 27, 1997 GFSI Holdings, Inc. 9700 Commerce Parkway Lenexa, Kansas 66219 Re: $50 million initial Accreted Value 11 3/8% Series B Senior ---------------------------------------------------------- Discount Notes due 2009 ----------------------- Ladies and Gentlemen: We have acted as counsel to GFSI Holdings, Inc., a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Act") of an exchange offer (the "Exchange Offer") relating to $50 million initial Accreted Value of Series A 11 3/8% Senior Discount Notes due 2009 (the "Series A Notes"). The Series A Notes were issued under an indenture (the "Indenture") between the Company and State Street Bank and Trust Company, as trustee. We have also participated in the preparation and filing with the Securities and Exchange Commission under the Act of a registration statement on Form S-4 (the "Registration Statement") relating to $50 million initial Accreted Value of Series B 11 3/8% Senior Discount Notes due 2009 (the "Series B Notes"), with respect to the proposed Exchange Offer for the Series A Notes. In this connection, we have examined such corporate and other records, instruments, certificates and documents as we considered necessary to enable us to express this opinion. Based on the foregoing, it is our opinion that, upon completion of the Exchange Offer, the Series B Notes will have been duly authorized for issuance and, when the Series B Notes are duly executed, authenticated, issued and delivered, such notes will constitute valid and legally binding obligations of the Company entitled to the benefits of the Indenture, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditor's rights and to general equity principles (whether considered in a proceeding at law or in equity). GFSI Holdings, Inc. October 27, 1997 Page 2 We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the caption "Legal Matters." We further confirm our opinion as to certain matters set forth in the section "Certain Federal Income Tax Considerations" and consent to the reference to us under such section. Very truly yours, /s/ Mayer Brown & Platt ------------------------------- MAYER, BROWN & PLATT EX-10.2 10 AMENDMENT NO. 1 TO CREDIT AGREEMENT 9/17/97 Exhibit 10.2 AMENDMENT NO. 1 Dated as of September 17, 1997 to CREDIT AGREEMENT Dated as of February 27, 1997 THIS AMENDMENT NO. 1 ("Amendment") is made as of September 17, 1997 by and among GFSI, INC. (the "Borrower"), the financial institutions listed on the signature pages hereof (the "Lenders") and THE FIRST NATIONAL BANK OF CHICAGO, in its individual capacity as a Lender and in its capacity as agent ("Agent") under that certain Credit Agreement dated as of February 27, 1997 by and among the Borrower, the Lenders and the Agent (the "Credit Agreement"). Defined terms used herein and not otherwise defined herein shall have the respective meanings given to them in the Credit Agreement. WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit Agreement; and WHEREAS, GFSI Holdings, Inc. ("Holdings") intends to (i) issue $25.0 million in aggregate principal amount of 11.375% Subordinated Discount Notes due 2009 (the "New Holdings Subordinated Notes") and (ii) amend its Certificate of Incorporation to provide for a new Series D Preferred Stock (the "Series D Preferred Stock"); and WHEREAS, the Holders of the Holdings Subordinated Notes and the Preferred Stock intend to exchange their Holdings Subordinated Notes for New Holdings Subordinated Notes and approximately 86.9% of their Series A, B and C Preferred Stock for Series D Preferred Stock and to sell, in a private placement, the New Holdings Subordinated Notes and the Series D Preferred Stock as units ("Units") to unaffiliated third parties (the "Offering"); and WHEREAS, the Units sold in the Offering will be exchangeable, at the option of the Holdings, after 30 days from the closing of the Offering, for 11.375% Senior Discount Notes of Holdings (the "Holdings Senior Notes"); and WHEREAS, the Borrower, the Lenders and the Agent have agreed to amend the Credit Agreement on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders and the Agent have agreed to the following amendments to the Credit Agreement. 1. Amendment to Credit Agreement. Effective as of the Effective Date (as defined below) and subject to the satisfaction of the condition precedent set forth in Section 3 below, the Credit Agreement is hereby amended as follows: -1- 1.1 Section 1.1 of the Credit Agreement is amended (a) by adding thereto the following defined terms: "Exchange Date" means the date on which the Exchangeable Units are exchanged for Holdings Senior Notes. "Exchangeable Units" means the 50,000 exchangeable units, each unit consisting of $500 principal amount of Holdings Subordinated Notes and $500 liquidation preference of 11.375% Series D Preferred Stock of Holdings, having the terms described in and offered pursuant to the Offering Memorandum. "Holdings Senior Notes" means the 11.375% Senior Discount Notes due 2009 of Holdings in the aggregate principal amount (at maturity) of $50,000,000 to be issued by Holdings in exchange for the Exchangeable Units and having the terms described in the Offering Memorandum, and all substitutions, modifications and renewals thereof, provided such substitutions, modifications or renewals would be permitted under the terms of Section 6.3(O) as if such Section (other than clause (viii) thereof with respect to subordination provisions) were applicable thereto (with all references therein to the Borrower and the Restricted Subsidiaries being instead to Holdings, the Borrower and the Restricted Subsidiaries). "L/C Trigger Event" means the giving of notice by the Swing Line Bank to the Lenders of its election to cause them to purchase participations in all Swing Line Letters of Credit, whether such notice is given before or after the occurrence, or during the continuance, of a Default or Unmatured Default. An L/C Trigger Event shall be deemed to occur on the date such notice is given. "Offering Memorandum" means the Preliminary Offering Memorandum dated September 12, 1997, prepared by Holdings with respect to the Exchangeable Units, copies of which the Borrower has delivered to the Lenders. "Swing Line Letter of Credit" means each Letter of Credit issued by the Swing Line Bank as an Issuing Lender pursuant to Section 2.21 and designated in the Borrower's notice referred to in such Section as a "Swing Line Letter of Credit" if, immediately after giving effect to such issuance, the aggregate amount of L/C Obligations in respect of such Letter of Credit and all then outstanding Swing Line Letters of Credit would not exceed $5,000,000, provided, however, that the status of a Swing Line Letter of Credit as such shall automatically terminate upon the occurrence of an L/C Trigger Event, after which time such Letter of Credit shall remain a Letter of Credit but shall not be a Swing Line Letter of Credit. and (b) by amending the following defined terms: (i) the definition of "Holdings Subordinated Notes" is amended in its entirety to read as follows: -2- "Holdings Subordinated Notes" means the 11.375% Subordinated Discount Notes due 2009 of Holdings in the aggregate principal amount of $25,000,000, having the terms described in the Offering Memorandum. (ii) the definition of "Permitted Holdings Indebtedness" is amended by deleting clause (a) thereof in its entirety and substituting therefor the following: (a) prior to the Exchange Date, the Holdings Subordinated Debt, and from and after the Exchange Date, the Holdings Senior Notes; and by amending clause (c) thereof to add after the words "Preferred Stock" the parenthetical phrase "(other than Series D thereof)". (iii) the definition of "Preferred Stock" is amended in its entirety to read as follows: "Preferred Stock" means the Series A, B and C 12% Cumulative Preferred Stock, par value $0.01 per share, of Holdings issued to each of the holders thereof listed on Schedule 5.8 attached hereto, and, prior to the Exchange Date, the 11.375% Series D Preferred Stock, par value $0.01 per share, of Holdings, having the terms described in the Offering Memorandum. (iv) the definition of "Pro Rata Share" is amended by adding in clause (x) thereof immediately after the words "Swing Line Loans" and before the comma the words "and Swing Line Letters of Credit"; (v) the definition of "Swing Line Bank" is amended in its entirety to read as follows: "Swing Line Bank" means First Chicago and its successors and assigns. and (vi) the definition of "Swing Line Commitment" is amended in its entirety to read as follows: "Swing Line Commitment" means, (a) with respect to Swing Line Loans, the obligation of the Swing Line Bank to make Swing Line Loans up to a maximum aggregate principal amount of $2,000,000 at any one time outstanding, and (b) with respect to Swing Line Letters of Credit (in addition to the obligation to make Swing Line Loans), the obligation of the Swing Line Bank to issue Swing Line Letters of Credit up to a maximum -3- aggregate amount of L/C Obligations with respect thereto not to exceed $5,000,000 at any one time outstanding. 1.2 Section 2.22 of the Credit Agreement is amended by designating the existing Section 2.22 as clause (a), by adding after the words "Letter of Credit" the first place such words appear therein, the parenthetical phrase "(or upon the occurrence of an L/C Trigger Event, in the case of a Swing Line Letter of Credit)", and by adding thereto a new clause (b) to read as follows: (b) No Lender shall purchase or be deemed to have purchased an L/C Interest in any Swing Line Letter of Credit unless and until an L/C Trigger Event shall have occurred with respect to such Swing Line Letter of Credit, at which time each Lender with a Revolving Loan Commitment greater than zero shall be deemed to have purchased an L/C Interest in such Swing Line Letter of Credit pursuant to Section 2.22(a). 1.3 Section 2.25 of the Credit Agreement is amended by adding thereto after the words "Pro Rata Shares," the first place such words appear therein the phrase "or for the sole account of the Swing Line Bank, in the case of a Swing Line Letter of Credit". 1.4 Schedule 5.8 to the Credit Agreement is amended by deleting therefrom the description of the Preferred Stock of Holdings and substituting therefor the description of Preferred Stock set forth on Schedule 5.8 Amendment attached hereto and by deleting therefrom in its entirety the "Shareholder Summary" attached to Schedule 5.8 and substituting therefor the "Shareholder Summary" attached to Schedule 5.8 Amendment. 1.5 Section 6.3(F) of the Credit Agreement is amended (a) by amending clause (iii)(a) thereof in its entirety to read as follows: (a) payments required to be made by and actually made by Holdings in respect of interest due on an unaccelerated basis on the Holdings Senior Notes; provided, however, the Borrower may make such distributions with respect to the Holdings Senior Notes only on March 15 and September 15 of each year (or the Business Day immediately prior thereto if such date is not a Business Day), commencing March 15, 2005; and (b) by amending clause (d) of the proviso thereto to delete the words "Holdings Subordinated Notes" and "Holdings Subordinated Debt" therein and to substitute for such words in each case the words "Holdings Senior Notes". 1.6 Schedule 6.3(H) to the Credit Agreement is amended by adding thereto the agreements set forth on Schedule 6.3(H) Supplement attached hereto. 1.7 Section 6.3(O) of the Credit Agreement is amended by adding after the words "Holdings Subordinated Debt" therein the words "the Holdings Senior Notes". -4- 1.8 Section 7.1 of the Credit Agreement is amended by adding a new clause (y) thereto as follows: (y) Exchange of Securities. Holdings shall fail to effect the exchange of the Holdings Senior Notes for the Exchangeable Units on or prior to November 30, 1997. 2. Consent. Effective as of the Effective Date and subject to the satisfaction of the condition precedent set forth in Section 3 below, the Lenders hereby consent to (i) the issuance by Holdings of the New Holdings Subordinated Notes in exchange for the Holdings Subordinated Notes, (ii) the amendment by Holdings of its Certificate of Incorporation to authorize the Series D Preferred Stock and the issuance by Holdings of the Series D Preferred Stock in exchange for a portion of the Preferred Stock, (iii) the issuance by Holdings of the Holdings Senior Notes in exchange for the Exchangeable Units, and (iv) the payment in cash to MCIT on the Effective Date of accrued interest on the Holdings Subordinated Notes through the Effective Date in an amount not to exceed $1,500,000. 3. Conditions of Effectiveness. The effectiveness of this Amendment is subject to the condition precedent that the Agent shall have received counterparts of this Amendment duly executed by the Borrower, the Required Lenders and the Agent and the Consent attached hereto duly executed by Holdings. Upon the satisfaction of the foregoing condition precedent, this Amendment shall become effective on the date of the closing of the Offering and the issuance of the New Holdings Subordinated Notes and the Series D Preferred Stock in connection therewith (the "Effective Date"). 4. Representations and Warranties of the Borrower. The Borrower hereby represents and warrants as follows: (a) This Amendment and the Credit Agreement as previously executed and as amended hereby, constitute legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms. (b) Upon the effectiveness of this Amendment, the Borrower hereby reaffirms all covenants, representations and warranties made in the Credit Agreement, as amended hereby, and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Effective Date of this Amendment. 5. Reference to and Effect on the Credit Agreement. (a) Upon the effectiveness of Section 1 hereof, each reference to the Credit Agreement in the Credit Agreement and each other Loan Document shall mean and be a reference to the Credit Agreement as amended hereby. -5- (b) Except as specifically amended above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or the Lenders, nor constitute a waiver of any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith. 6. Governing Law. This Amendment shall be governed by and construed in accordance with the internal laws (as opposed to the conflict of law provisions) of the State of Illinois. 7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 8. Counterparts. This Amendment may be executed by one or more of the parties to the Amendment on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. -6- IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written. GFSI, INC. By ---------------------------- Title: ------------------------ THE FIRST NATIONAL BANK OF CHICAGO, as Agent By ---------------------------- Title: ------------------------ LENDERS: THE FIRST NATIONAL BANK OF CHICAGO, as a Lender By ---------------------------- Title: ------------------------ THE BANK OF NOVA SCOTIA, as a Lender By ---------------------------- Title: ------------------------ BANQUE PARIBAS, as a Lender By ---------------------------- Title: ------------------------ CAISSE NATIONALE DE CREDIT AGRICOLE, as a Lender By ---------------------------- Title: ------------------------ -7- DLJ CAPITAL FUNDING, INC., as a Lender By ---------------------------- Title: ------------------------ MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, as a Lender By ---------------------------- Title: ------------------------ MERCANTILE BANK NATIONAL ASSOCIATION, as a Lender By ---------------------------- Title: ------------------------ SENIOR DEBT PORTFOLIO, as a Lender By: Boston Management and Research as Investment Advisor By ----------------------- Title: ------------------- VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, as a Lender By ---------------------------- Title: ------------------------ IMPERIAL BANK, as a Lender By ---------------------------- Title: ------------------------ -8- SCHEDULE 5.8 AMENDMENT Subsidiaries ------------ Preferred Stock - --------------- - - Series A Preferred Stock, par value $0.01 per share - - 13,500 shares authorized, 1,773.92120 of which are issued and outstanding - - Series B Preferred Stock, par value $0.01 per share - - 11,000 shares authorized, 1,445.41727 of which are issued and outstanding - - Series C Preferred Stock, par value $0.01 per share - - 2,500 shares authorized, 328.50393 of which are issued and outstanding - - Series D Preferred Stock, par value $0.01 per share - - 25,000 shares authorized, all of which are issued and outstanding Ownership - --------- See attached. -9- SCHEDULE 6.3(H) SUPPLEMENT Transactions with Shareholders and Affiliates --------------------------------------------- 12. Exchange Solicitation Statement dated September 12, 1997, made by Holdings with respect to the exchange of 12% Subordinated Notes due 2008 for 11.375% Subordinated Discount Notes due 2009, and related Tender executed by MCIT. 13. Exchange and Consent Solicitation dated September 12, 1997, made by Holdings with respect to the Preferred Stock, and related Tender and Consent executed by the holders thereof. -10- CONSENT The undersigned, as Guarantor under the Guaranty dated as of February 27, 1997 (the "Guaranty") in favor of the Lenders and the Agent parties to the Credit Agreement referred to in the foregoing Amendment, hereby consents to said Amendment and hereby confirms and agrees that, notwithstanding the effectiveness of said Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby confirmed and ratified in all respects. Dated: September 17, 1997 GFSI HOLDINGS, INC. By __________________________ Title:________________________ -11- EX-12 11 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12 STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
- ------------------------------------------------------------------------------ FISCAL YEARS ENDED JUNE 30, - ------------------------------------------------------------------------------ 1993 1994 1995 1996 1997 - ------------------------------------------------------------------------------ HISTORICAL - ------------------------------------------------------------------------------ Registrant's pretax income $20,055 $22,105 $26,220 $30,226 $26,940 from continuing operations - ------------------------------------------------------------------------------ Interest 2,473 2,455 2,522 2,608 8,704 - ------------------------------------------------------------------------------ Amortization of debt 9 9 9 9 394 expense and discount on premium - ------------------------------------------------------------------------------ Total fixed charges 2,482 2,464 2,531 2,617 9,098 - ------------------------------------------------------------------------------ Total earnings and fixed $22,537 $24,569 $28,751 $32,843 $36,038 charges - ------------------------------------------------------------------------------ Preferred stock dividends 1,080 - ------------------------------------------------------------------------------ Total fixed charges and $ 2,482 $ 2,464 $ 2,531 $ 2,617 $10,178 preferred stock dividends - ------------------------------------------------------------------------------ Ratio 9.1x 10.0x 11.4x 12.5x 3.5x - ------------------------------------------------------------------------------ PRO FORMA - ------------------------------------------------------------------------------ Pretax income from $11,106 continuing operations - ------------------------------------------------------------------------------ Interest 25,015 - ------------------------------------------------------------------------------ Total earnings and fixed 36,121 charges - ------------------------------------------------------------------------------ Preferred stock dividends 228 - ------------------------------------------------------------------------------ Total fixed charges 25,243 - ------------------------------------------------------------------------------ Pro forma ratio 1.4x - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
EX-23.2 12 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of GFSI Holdings, Inc. on Form S-4 of our report dated August 22, 1997, appearing in the Prospectus, which is part of this Registration Statement, and of our report dated August 22, 1997 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the headings, "Selected Financial Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Kansas City, Missouri October 27, 1997 EX-23.3 13 CONSENT OF DONNELLY MEINERS JORDAN AND KLINE Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of GFSI Holdings, Inc. on Form S-4 of our report dated July 26, 1996, appearing in the Prospectus, which is part of this Registration Statement, on the financial statements of Winning Ways, Inc. for the year ended June 30, 1995, in this Registration Statement. We also consent to the reference to us under the headings, "Selected Financial Data" and "Experts" in such Prospectus. Donnelly Meiners Jordan Kline Kansas City, Missouri October 27, 1997 EX-25 14 STATEMENT OF ELIGIBILITY OF TRUSTEE EXHIBIT 25 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM T-1 ---------------------------- STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF l939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE [_] CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(B)(2) STATE STREET BANK AND TRUST COMPANY ------------------------------------------------------------ (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 - ------------------------------ ------------------------- (State of incorporation if (I.R.S. Employer not a national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) John R. Towers, Executive Vice President and General Counsel, 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 ------------------------------------------------------------ (Name, address and telephone number of agent for service) GFSI HOLDINGS, INC. ------------------------------------------------------------ (Exact name of obligor as specified in its charter) Delaware 74-2810744 - ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9700 Commerce Parkway, Lenexa Kansas 66219 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) 11.375% Series B Senior Discount Notes Due 2009 ------------------------------------------------------------ (Title of the indenture securities) Item l. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject: Department of Banking and Insurance of The Commonwealth of Massachusetts 100 Cambridge Street Boston, Massachusetts Board of Governors of the Federal Reserve System Washington, D.C. Federal Deposit Insurance Corporation Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers: The trustee is so authorized. Item 2. Affiliations with obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None with respect to the trustee or its parent, State Street Corporation. Item l6. List of exhibits. List below all exhibits filed as a part of this statement of eligibility and qualification. 1. A copy of the Articles of Association of the trustee as now in effect. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A copy of the Certificate of Authority of the trustee to do Business. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities -2- and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 3. A copy of the Certification of Fiduciary Powers of the Trustee. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A copy of the By-laws of the trustee as now in effect. A copy of the By-Laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 5. Consent of the trustee required by Section 32l(b) of the Act. 6. A copy of the latest Consolidated Reports of Condition of the trustee, published pursuant to law or the requirements of its supervising or examining authority. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 6 and made a part hereof. -3- NOTES Inasmuch as this Form T-l is filed prior to the ascertainment by the trustee of all facts on which to base its answer to Item 2, the answer to said Item is based upon incomplete information. Said Item may, however, be considered correct unless amended by an amendment to this Form T-l. -4- SIGNATURE Pursuant to the requirements of the Trust Indenture Act of l939, the trustee, State Street Bank and Trust Company, a Massachusetts trust company, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Hartford, and State of Connecticut, on the 24th day of October, 1997. STATE STREET BANK AND TRUST COMPANY, Trustee By /s/ Jacqueline Connor ----------------------------------- Name: Jacqueline Connor Title: Assistant Vice President -5- EXHIBIT 5 CONSENT OF THE TRUSTEE REQUIRED BY SECTION 321(b) OF THE TRUST INDENTURE ACT OF 1939 ---------------------------------- The undersigned, as Trustee under an Indenture to be entered into between GFSI Holdings, Inc. and State Street Bank and Trust Company, Trustee, does hereby consent that, pursuant to Section 321(b) of the Trust Indenture Act of 1939, reports of examinations with respect to the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY, Trustee By /s/ Jacqueline Connor ----------------------------------- Name: Jacqueline Connor Title: Assistant Vice President Dated: October 24, 1997 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business March 31, 1997, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
ASSETS Thousands of Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin............................................ 1,665,142 Interest-bearing balances..................................................................... 8,193,292 Securities....................................................................................... 10,238,113 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and of its Edge subsidiary.................................... 5,863,144 Loans and lease financing receivables: Loans and leases, net of unearned income.............................................4,936,454 Allowance for loan and lease losses.....................................................70,307 Loans and leases, net of unearned income and allowance........................................ 4,866,147 Assets held in trading accounts.................................................................. 957,478 Premises and fixed assets........................................................................ 380,117 Other real estate owned.......................................................................... 884 Investments in unconsolidated subsidiaries....................................................... 26,835 Customers' liability to this bank on acceptances outstanding..................................... 45,548 Intangible assets................................................................................ 158,080 Other assets..................................................................................... 1,066,957 ---------- TOTAL ASSETS..................................................................................... 33,450,737 ========== LIABILITIES Deposits: In domestic offices........................................................................... 8,270,845 Noninterest-bearing................................................................6,318,360 Interest-bearing...................................................................1,952,485 In foreign offices and Edge subsidiary........................................................ 12,760,086 Noninterest-bearing...................................................................53,052 Interest-bearing..................................................................12,707,034 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary......................... 8,216,641 Demand notes issued to the U.S. Treasury and Trading Liabilities................................. 926,821 Other borrowed money............................................................................. 671,164 Subordinated notes and debentures................................................................ 0 Bank's liability on acceptances executed and outstanding......................................... 46,137 Other liabilities................................................................................ 745,529 ---------- TOTAL LIABILITIES................................................................................ 31,637,223 ========== EQUITY CAPITAL Perpetual preferred stock and related surplus.................................................... 0 Common Stock..................................................................................... 29,931 Surplus.......................................................................................... 360,717 Undivided profits and capital reserves/Net unrealized holding gains (losses)..................... 1,426,881 Cumulative foreign currency translation adjustments.............................................. (4,015) TOTAL EQUITY CAPITAL............................................................................. 1,813,514 ---------- TOTAL LIABILITIES AND EQUITY CAPITAL............................................................. 33,450,737 ==========
I, Rex S. Schuette, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Charles F. Kaye EX-27 15 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the GFSI Holdings, Inc. Audited Financial Statements and is qualified in its entirety by reference to such financial statements. YEAR YEAR JUN-30-1996 JUN-27-1997 JUL-01-1995 JUL-01-1996 JUN-30-1996 JUN-27-1997 139,977 1,116,512 0 0 23,055,544 24,284,682 472,092 579,093 27,782,953 37,561,766 51,308,693 64,597,119 37,560,280 36,733,961 14,521,591 15,186,104 78,711,305 96,153,361 23,614,694 26,036,520 20,617,878 214,625,000 0 28,080,000 0 0 149,100 20 34,329,633 (174,215,151) 78,711,305 96,153,361 169,320,620 183,297,733 169,320,620 183,297,733 97,307,746 102,606,239 136,487,076 147,358,391 490 99,326 0 0 2,608,154 9,098,218 30,225,880 26,940,450 0 1,440,000 30,225,880 25,500,450 0 0 0 (1,484,451) 0 0 30,225,880 24,015,999 0 0 0 0
EX-99 16 FORM OF LETTER OF TRANSMITTAL Exhibit 99 LETTER OF TRANSMITTAL FOR TENDERS OF $50,000,000 Initial Accreted Value of 11 3/8% Series A Senior Discount Notes due 2009 GFSI HOLDINGS, INC. Pursuant to the Prospectus dated ________, 1997 of GFSI Holdings, Inc. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _____________, 1997 (UNLESS EXTENDED) (THE "EXPIRATION DATE"). TENDERED OLD SECURITIES MAY BE WITHDRAWN AT ANY TIME ON OR PRIOR TO THE EXPIRATION DATE OF THE EXCHANGE OFFER. Deliver to: State Street Bank and Trust Company, Exchange Agent:
By Registered or Certified Mail: By Overnight Courier or Hand: State Street Bank State Street Bank *State Street Bank and Trust Company and Trust Company and Trust Company P.O. Box 778 Two International Place or 61 Broadway, Concourse Level Boston, MA 02102-0078 Boston, MA 02110 Corporate Trust Window Attn: Kellie Mullen Attn: Kellie Mullen New York, New York 10006 *only during business hours By Facsimile for Eligible Institutions: (617) 664-5395 For confirmation call: (617) 664-5587
Delivery of this instrument to an address other than as set forth above, or transmission of instructions via facsimile other than as set forth above, will not constitute a valid delivery. The undersigned acknowledges that he or she has received the Prospectus, dated ________, 1997 (the "Prospectus"), of GFSI Holdings, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal, which may be amended from time to time (this "Letter"), which together constitute the Company's offer (the "Exchange Offer") to exchange up to $50 million Intial Accreted Value of 11 3/8% Series B Senior Discount Notes due 2009 (the "New Notes") of the Company for a like principal amount of the Company's issued and outstanding 11 3/8% Series A Senior Discount Notes due 2009 (the "Old Notes" and together with the New Notes, are sometimes referred to as the "Notes"), with the holders (each holder of Old Notes, a "Holder") thereof. For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having an initial Accreted Value equal to that of the surrendered Old Note. The New Notes will accrete interest from the most recent date to which interest has accreted on the Old Notes or, if no interest has accreted on the Old Notes, from October 23, 1997. Old Notes accepted for exchange will cease to accrete 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 accretion or payment in respect of 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. This Letter is to be used: (i) by all Holders who are not members of the Automated Tender Offering Program ("ATOP") at the Depository Trust Company ("DTC"); (ii) by Holders who are ATOP members but choose not to use ATOP; or (iii) if the Old Notes are to be tendered in accordance with the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 2. Delivery of this Letter to DTC does not constitute delivery to the Exchange Agent. Notwithstanding anything to the contrary in the registration rights agreements dated September 17, 1997 among the Company and the original purchasers of Old Notes (the "Registration Rights Agreements"), the Company will accept for exchange any and all Old Notes validly tendered on or prior to 5:00 p.m., New York City time, on _________, 1997 (unless the Exchange Offer is extended by the Company) (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. IMPORTANT: HOLDERS WHO WISH TO TENDER OLD NOTES IN THE EXCHANGE OFFER MUST COMPLETE THIS LETTER OF TRANSMITTAL AND TENDER THE OLD NOTES TO THE EXCHANGE AGENT AND NOT TO THE COMPANY. 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 conditions. Please see the Prospectus under the section titled "The Exchange Offer--Conditions to the Exchange Offer." The Exchange Offer is not being made to, nor will tenders be accepted from or on behalf of, Holders of Old Notes in any jurisdiction in which the making or acceptance of the Exchange Offer would not be in compliance with the laws of such jurisdiction. The instructions included with this Letter of Transmittal must be followed in their entirety. Questions and request for assistance or for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address listed above. -2- APPROPRIATE SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY LADIES AND GENTLEMEN: The undersigned hereby tenders to the Company the initial Accreted Value of Old Notes indicated below under "Description of Old Notes," in accordance with and upon the terms and subject to the conditions set forth in the Prospectus, receipt of which is hereby acknowledged, and in this Letter of Transmittal, for the purpose of exchanging each $500 face amount of Old Notes designated herein held by the undersigned and tendered hereby for $500 face amount of the New Notes. New Notes will be issued only in integral multiples of $500 to each tendering Holder of Old Notes whose Old Notes are accepted in the Exchange Offer. Holders may tender all or a portion of their Old Notes pursuant to the Exchange Offer. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered herewith in accordance with the terms of the Exchange Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to all such Old Notes that are being tendered hereby and that are being accepted for exchange pursuant to the Exchange Offer. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent also acts as the agent of the Company), with respect to the Old Notes tendered hereby and accepted for exchange pursuant to the Exchange Offer with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to deliver the Old Notes tendered hereby to the Company (together with all accompanying evidences of transfer and authenticity) for transfer or cancellation by the Company. All authority conferred or agreed to be conferred in this Letter of Transmittal shall not be affected by, and shall survive, the death or incapacit y of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, executors, administrators, legal representatives, successors and assigns of the undersigned. Any tender of Old Notes hereunder may be withdrawn only in accordance with the procedures set forth in the instructions contained in this Letter of Transmittal. See Instruction 4 hereto. The undersigned hereby represents and warrants that he or she has full power and authority to tender, exchange, assign and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the assignment and transfer of the Old Notes tendered. The undersigned has read and agrees to all of the terms of the Exchange Offer. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal Rights" section of the Prospectus. The name(s) and address(es) of the registered Holder(s) should be printed herein under "Description of Old Notes" (unless a label setting forth such information appears thereunder), exactly as they appear on the Old Notes tendered hereby. The certificate number(s) and the principal amount of Old Notes to which this Letter of Transmittal relates, together with the principal amount of such Old Notes that the undersigned wishes to tender, should be indicated in the appropriate boxes herein under "Description of Old Notes." -3- The undersigned agrees that acceptance of any tendered Old Notes by the Company and the issuance of New Notes in exchange therefor shall constitute performance in full by the Company of its obligations under the Registration Rights Agreements and that, upon the issuance of the New Notes the Company will have no further obligations or liabilities thereunder. The undersigned understands that the tender of Old Notes pursuant to one of the procedures described in the Prospectus under "The Exchange Offer-- Procedures for Tendering Old Securities" and the Instructions hereto will constitute the tendering Holder's acceptance of the terms and the conditions of the Exchange Offer. The undersigned hereby represents and warrants to the Company that the New Notes to be acquired by such Holder pursuant to the Exchange Offer are being acquired in the ordinary course of such Holder's business, that such Holder has no arrangement or understanding with any person to participate in the distribution of the New Notes. The Company's acceptance for exchange of Old Notes tendered pursuant to the Exchange Offer will constitute a binding agreement between the tendering Holder and the Company upon the terms and subject to the conditions of the Exchange Offer. THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT IT IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION OF THE NEW NOTES. The undersigned also acknowledges that this Exchange Offer is being made based on interpretations by the staff of the Securities and Exchange Commission (the "Commission") set forth in no-action letters issued to third parties in other transactions substantially similar to the Exchange Offer, which lead the Company to believe that the New Notes issued in exchange for the Old Notes 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 provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders are not participating and have no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of such New Notes. If the undersigned is not a broker-dealer, the undersigned represents 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 or is engaged in or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such holder (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. If the undersigned is a broker- dealer that will receive New Notes for its own account in exchange of Old Notes, it represents that the Old Notes to be exchanged for the New Notes were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of Section 2(11) of the Securities Act. The undersigned understands that the New Notes issued in consideration of Old Notes accepted for exchange, and/or any principal amount of Old Notes not tendered or not accepted for exchange, will only be issued in the name of the Holder(s) appearing herein under "Description of Old Notes." Unless otherwise indicated under "Special Delivery Instructions," please mail the New Notes issued in consideration of Old Notes accepted for exchange, and/or any principal amount of Old Notes not tendered or not accepted for exchange (and accompanying documents, as appropriate), to the Holder(s) at the address(es) appearing herein under "Description of Old Notes." In the event that the Special Delivery Instructions are completed, please mail the -4- New Notes issued in consideration of Old Notes accepted for exchange, and/or any Old Notes for any principal amount not tendered or not accepted for exchange, in the name of the Holder(s) appearing herein under "Description of Old Notes," and send such New Notes and/or Old Notes to the address(es) so indicated. Any transfer of Old Notes to a different holder must be completed, according to the provisions on transfer of Old Notes contained in the Indenture. THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" BELOW AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX BELOW. -5- INSTRUCTIONS Forming Part of the Terms and Conditions of the Exchange Offer 1. Guarantee of Signatures. Signatures on this Letter of Transmittal or notice of withdrawal, as the case may be, must be guaranteed by an institution which falls within the definition of "eligible guarantor institution" contained in Rule 17Ad-15 as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (hereinafter, an "Eligible Institution") unless (i) the Old Notes tendered hereby are tendered by the Holder(s) of the Old Notes who has (have) not completed the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii) the Old Notes are tendered for the account of an Eligible Institution. 2. Delivery of this Letter of Transmittal and Old Notes; Guaranteed Delivery Procedures. This Letter of Transmittal is to be used: (i) by all Holders who are not ATOP members, (ii) by Holders who are ATOP members but choose not to use ATOP or (iii) if the Old Notes are to be tendered in accordance with the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer--Guaranteed Delivery Procedures." To validly tender Old Notes, a Holder must physically deliver a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and all other required documents to the Exchange Agent at its address set forth on the cover of this Letter of Transmittal prior to the Expiration Date (as defined below) or the Holder must properly complete and duly execute an ATOP ticket in accordance with DTC procedures. Otherwise, the Holder must comply with the guaranteed delivery procedures set forth in the next paragraph. Notwithstanding anything to the contrary in the Registration Rights Agreements, the term "Expiration Date" means 5:00 p.m., New York City time, on ___________, 1997 (or such later date to which the Company may, in its sole discretion, extend the Exchange Offer). If this Exchange Offer is extended, the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company expressly reserves the right, at any time or from time to time, to extend the period of time during which the Exchange Offer is open by giving oral (confirmed in writing) or written notice of such extension to the Exchange Agent and by making a public announcement of such extension prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. LETTERS OF TRANSMITTAL SHOULD NOT BE SENT TO THE COMPANY OR TO DTC. If a Holder of the Old Notes desires to tender such Old Notes and time will not permit such Holder's required documents to reach the Exchange Agent before the Expiration Date, a tender may be effected if (a) the tender is made through an Eligible Institution; (b) on or prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery (by telegram, facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes and the principal amount Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the Expiration Date, any documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (c) all other documents required by the Letter of Transmittal are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. See "The Exchange Offer--Guaranteed Delivery Procedures" as set forth in the Prospectus. Only a Holder of Old Notes may tender Old Notes in the Exchange Offer. The term "Holder" as used herein with respect to the Old Notes means any person in whose name Old Notes are registered on the books of the Trustee. If the Letter of Transmittal or any Old Notes are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, -6- 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 so submitted. Any beneficial Holder whose Old Notes are registered in the name of his broker, dealer, commercial bank, trust company or other nominee and who wishes to validly surrender those Old Notes in the Exchange Offer should contact such registered Holder promptly and instruct such registered Holder to tender on his behalf. If such beneficial Holder wishes to tender on his own behalf, such beneficial Holder must, prior to completing and executing the Letter of Transmittal, make appropriate arrangements to register ownership of the Old Notes in such beneficial holder's name. It is the responsibility of the beneficial holder to register ownership in his own name if he chooses to do so. The transfer of record ownership may take considerable time. The method of delivery of this Letter of Transmittal (or facsimile hereof) and all other required documents is at the election and risk of the exchanging Holder, but, except as otherwise provided below, the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If sent by mail, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to assure timely delivery to the Exchange Agent before the Expiration Date. No Letters of Transmittal or Old Notes should be sent to the Company. No alternative, conditional or contingent tenders will be accepted. All tendering Holders, by execution of this Letter of Transmittal (or facsimile hereof), waive any right to receive notice of acceptance of their Old Notes for exchange. 3. Inadequate Space. If the space provided herein is inadequate, the certificate numbers and principal amount of the Old Notes to which this Letter of Transmittal relates should be listed on a separate signed schedule attached hereto. 4. Withdrawal of Tender. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To be effective, a written or facsimile transmission notice of withdrawal must (i) be received by the Exchange Agent at the address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date: (ii) specify the name of the person having tendered the Old Notes to be withdrawn; (iii) identify the Old Notes to be withdrawn; and (iv) be (a) signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or (b) accompanied by evidence satisfactory to the Company that the Holder withdrawing such tender has succeeded to beneficial ownership of such Old Notes. If Old Notes have been tendered pursuant to the ATOP procedure with DTC, any notice of withdrawal must otherwise comply with the procedures of DTC. Old Notes properly withdrawn will thereafter be deemed not validly tendered for purposes of the Exchange Offer; provided, however, that withdrawn Old Notes may be retendered by again following one of the procedures described herein at any time prior to 5:00 p.m., New York City time, on the Expiration Date. All questions as to the validity, form and eligibility (including time of receipt) of notice of withdrawal will be determined by the Company, whose determinations will be final and binding on all parties. Neither the Company, the Exchange Agent, nor any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. The Exchange Agent intends to use reasonable efforts to give notification of such defects and irregularities. 5. Partial Tenders; Pro Rata Effect. Tenders of the Old Notes will be accepted only in integral multiples of $500. If less than the entire principal amount evidenced by any Old Notes is to be tendered, fill in the principal amount that is to be tendered in the box entitled "Principal Amount Tendered" below. The entire -7- principal amount of all Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 6. Signatures on this Letter of Transmittal; Bond Powers and Endorsements. If this Letter of Transmittal is signed by the registered Holder(s) of the Old Notes tendered hereby, the signature must correspond with the name as written on the face of the certificate representing such Old Notes without alteration, enlargement or any change whatsoever. If any of the Old Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any of the Old Notes tendered hereby are registered in different names, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal and any necessary accompanying documents as there are different registrations. When this Letter of Transmittal is signed by the Holder(s) of Old Notes listed and tendered hereby, no endorsements or separate bond powers are required. If this Letter of Transmittal is signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative 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. 7. Special Delivery Instructions. Tendering Holders should indicate in the applicable box the name and address to which New Notes issued in consideration of Old Notes accepted for exchange, or Old Notes for principal amounts not exchanged or not tendered, are to be sent, if different from the name and address of the person signing this Letter of Transmittal. 8. Waiver of Conditions. The Company reserves the absolute right to waive any of the specified conditions in the Exchange Offer, in whole at any time or in part from time to time, in the case of any Old Notes tendered hereby. See "The Exchange Offer--Conditions to the Exchange Offer" in the Prospectus. 9. Transfer Taxes. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, New Notes and/or substitute Old Notes for principal amounts not exchanged are to be delivered to any person other than the Holder of the Old Notes or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted, the amount of such transfer taxes will be billed directly to such tendering Holder. 10. Irregularities. All questions as to validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be resolved by the Company, in its sole discretion, whose determination shall be final and binding. The Company reserves the absolute right to reject any or all tenders of any particular Old Notes that are not in proper form, or the acceptance of which would, in the opinion of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defect, irregularity or condition of tender with regard to any particular Old Notes. The Company's interpretation of the terms of, and conditions to, the Exchange Offer (including the instructions herein) will be final and binding. Unless waived, any defects or irregularities in connection with tenders must be cured within such time as the Company shall determine. Neither the Company nor the Exchange Agent shall be under any duty to give notification of defects in such tenders or shall 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. Tenders -8- of Old Notes will not be deemed to have been made until all defects and irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holder, unless otherwise provided by this Letter of Transmittal, as soon as practicable following the Expiration Date. 11. Interest on Exchanged Old Notes. Holders whose Old Notes are accepted for exchange will not receive accrued interest or dividends thereon on the date of exchange. Instead, interest accreting from October 23, 1997 through the Expiration Date will be recognized on the New Notes on March 15, 1998, in accordance with the terms of the New Notes. See "The Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of New Notes" and "Description of Notes" as set forth in the Prospectus. 12. Mutilated, Lost, Stolen or Destroyed Certificates. Holders whose certificates for Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), TOGETHER WITH ALL REQUIRED DOCUMENTS, OR A NOTICE OF GUARANTEED DELIVERY, MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. -9- PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY SPECIAL DELIVERY INSTRUCTIONS (See Instructions 1 and 7) To be completed ONLY if the New Notes issued in consideration of Old Notes exchanged, or certificates for Old Notes in a principal amount not surrendered for exchange are to be mailed to someone other than the undersigned or to the undersigned at an address other than that below. Mail to: Name:_________________________________________________________ _____________ (Please Print) Address:_______________________________________________________ ______________ (Zip Code) DESCRIPTION OF OLD NOTES (See Instructions 2 and 7)
Name(s) and Certificate(s) Address(es) of (Attach additional signed list, if necessary) Registered Holder(s) (Please fill in, in blank) - ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- Certificate Number(s)/1/ Aggregate Principal Principal Amount of Amount of Old Notes Old Notes Tendered/2/ Evidenced by (must be integral Certificate(s) multiples of $1,000) ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- Total ====================================================================================================
-10- (Boxes below to be checked by Eligible Institutions only) [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ___________________________________________ DTC Account Number ______________________________________________________ Transaction Code Number _________________________________________________ [ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s)__________________________________________ Window Ticket Number (if any)____________________________________________ Date of Execution of Notice of Guaranteed Delivery_______________________ Name of Institution which Guaranteed Delivery____________________________ If Guaranteed Delivery is to be made by Book-Entry Transfer:_____________ Name of Tendering Institution____________________________________________ DTC Account Number_______________________________________________________ Transaction Code Number__________________________________________________ [ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OLD NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE. [ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OLD NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name _________________________________________________________________________ Address ______________________________________________________________________ -11- PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY PLEASE SIGN HERE WHETHER OR NOT OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY X __________________________________________ ____________ X __________________________________________ ____________ Signature(s) of Owner(s) Dated of Authorized Signatory Area Code and Telephone Number:_______________________________________________ This box must be signed by registered holder(s) of Old Notes as their name(s) appear(s) on certificate(s) for Old Notes hereby tendered or on a security position listing, or by any person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Letter (including such opinions of counsel, certifications and other information as may be required by the Company or the Trustee for the Old Notes to comply with the restrictions on transfer applicable to the Old Notes). If signature is by an attorney-in-fact, trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. Name(s)_______________________________________________________________________ ______________________________________________________________________________ (Please Print) Capacity (full title)__________________________________________________________ Address _______________________________________________________________________ ______________________________________________________________________________ (Include Zip Code) Tax Identification or Social Security Number(s)________________________________ Guarantee of Signature(s) (See Instructions 1 and 6 to determine if required) Authorized Signature___________________________________________________________ Name___________________________________________________________________________ Name of Firm___________________________________________________________________ Title__________________________________________________________________________ ________________________________________________________________________________ -12- GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 Guidelines for Determining the Proper Identification Number to Give the Payer. Social Security numbers have nine digits separated by two hyphens: i.e., 000-00- 0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer.
----------------------------------------------------------- ----------------------------------------------- For this type Give the SOCIAL For this type Give the EMPLOYER of account: SECURITY number of account: IDENTIFICATION of-- number of-- ---------------------------------------------------------- ----------------------------------------------- 1. Individual The individual 6. Sole proprietorship The owner/3/ 2. Two or more individuals The actual owner of the 7. A valid trust, estate, or Legal entity /5/ (joint account) account or, if combined pension trust funds, the first individual on the account. /4/ 8. Corporate The corporation 3. Custodian account of a The minor /6/ 9. Association, club, The organization minor (Uniform Gift to religious, charitable, Minors Act) educational or other tax- exempt organization 10. Partnership The partnership 4.a. The usual revocable The grantor-trustee 11. A broker or registered The broker or nominee savings trust (grantor is nominee also trustee) b. So-called trust account The actual owner 12. Account with the The public entity that is not a legal or valid Department of trust under State law Agriculture in the name of a public entity (such as 5. Sole proprietorship The owner 1/ a State or local government, school district, or prison) that receives agricultural program payments
-13- GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 Obtaining a Number If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. Payees Exempt from Backup Withholding The following is a list of payees exempt from backup withholding and for which no information reporting is required. For interest and dividends, all listed payees are exempt except item (9). For broker transactions, payees listed in items (1) through (13) and a person registered under the Investment Advisers Act of 1940 who regularly acts as a broker are exempt. Payments subject to reporting under sections 6041 and 6041A are generally exempt from backup withholding only if made to payees described in items (1) through (7), except a corporation that provides medical and health care services or bills and collects payments for such services is not exempt from backup withholding or information reporting. Only payees described in items (2) through (6) are exempt from backup withholding for barter exchange transactions, patronage dividends, and payments by certain fishing boat operators. (1) A corporation. (2) An organization exempt from tax under section 501(a), or an individual retirement plan or custodial account under section 403(b)(7). (3) The United States or any agency or instrumentality thereof. (4) A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. (5) A foreign government, a political subdivision of a foreign government, or an agency or instrumentality thereof. (6) An international organization or any agency or instrumentality thereof. (7) A foreign central bank of issue. (8) A dealer in securities or commodities required to register in the U.S. or a possession of the U.S. (9) A futures commission merchant registered with the Commodity Futures Trading Commission. (10) A real estate investment trust. (11) An entity registered at all times under the Investment Company Act of 1940. (12) A common trust fund operated by a bank under section 584(a). (13) A financial institution. (14) A middleman known in the investment community as a nominee or listed in the most recent publication of the American Society of Corporate Secretaries, Inc. Nominee List. (15) An exempt charitable remainder trust, or a non-exempt trust described in section 4947. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. . Payments of patronage dividends not paid in money. . Payments made by certain foreign organizations. -14- Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). . Payments described in section 6049(b)(5) to nonresident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER. WRITE "EXEMPT" ON THE FACE OF THE FORM AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, royalties, and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. Privacy Act Notice. Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. Penalties (1) Penalty for Failure to Furnish Taxpayer Identification Number. If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) Failure to Report Certain Dividend and Interest Payments. If you fail to include any portion of an includible payment for interest, dividends, or patronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under- payment attributable to that failure unless there is clear and convincing evidence to the contrary. (3) Civil Penalty for False Information with Respect to Withholding. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) Criminal Penalty for Falsifying Information. Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. -15- -----END PRIVACY-ENHANCED MESSAGE-----