10-K 1 form10-k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED June 28, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 333-38951 GFSI HOLDINGS, INC. (Exact Name of Registrant as Specified in Charter) DELAWARE 74-2810744 --------------------------- ------------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 9700 Commerce Parkway Lenexa, KS 66219 (Address of Principal Executive Offices and Zip Code) (913) 888-0445 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes(X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ( ) No (X) The aggregate market value of the voting and non-voting stock held by non-affiliates (as defined in Rule 405) of the Registrant as of December 27, 2002, the last business day of the Registrant's most recently completed second fiscal quarter, was $185,750. On September 1, 2003, there were 1,765 shares of the Registrant's common stock, $.01 par value per share, issued and outstanding. 1 TABLE OF CONTENTS PART I Page ---- Item 1 - Business........................................................ 3 Item 2 - Properties...................................................... 7 Item 3 - Legal Proceedings............................................... 7 Item 4 - Submission of Matters to a Vote of Security Holders............. 7 PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters......................................................... 8 Item 6 - Selected Financial Data......................................... 8 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 10 Item 7A - Quantitative and Qualitative Disclosures About Market Risk..... 14 Item 8 - Consolidated Financial Statements and Supplementary Data........ 15 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 37 Item 9A - Controls and Procedures........................................ 37 PART III Item 10 - Directors and Executive Officers............................... 37 Item 11 - Executive Compensation......................................... 40 Item 12 - Security Ownership of Certain Beneficial Owners and Management..................................................... 41 Item 13 - Certain Relationships and Related Transactions................. 43 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 45 Signatures..................................................... 48 2 PART I Item 1 - Business GFSI Holdings, Inc. ("Holdings" ) was incorporated in the State of Delaware on February 24, 1997. Holdings, and its wholly owned subsidiary GFSI, Inc. ("GFSI", or collectively with Holdings the "Company") were organized by affiliates of The Jordan Company (TJC) and management to effect the acquisition of Winning Ways, Inc. ("Winning Ways"). On February 27, 1997, Holdings acquired all of the issued and outstanding capital stock of Winning Ways and immediately thereafter merged Winning Ways with and into GFSI, with GFSI as the surviving entity. All of the capital stock of Winning Ways acquired by Holdings in connection with the acquisition was contributed to GFSI along with the balance of equity contributions. The Company is a leading designer, manufacturer and marketer of high quality, custom designed sportswear and activewear bearing names, logos and insignia of resorts, corporations, national associations, colleges and professional sports leagues and teams. The Company custom designs and decorates an extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts, sweaters, shorts, pants, headwear and sports luggage. The Company markets its products through its well-established and diversified distribution channels. On January 29, 1998, the Company established a wholly owned subsidiary, Event 1, Inc. ("Event 1") to provide a concessionaire outlet for the Company's sportswear and activewear. Event 1 provides increasing sales for the Company's products with the National Collegiate Athletic Association ("NCAA"), Big 10 Conference, Big 12 Conference, the Atlantic Coast Conference and Professional Golf Association ("PGA") tournament events. On June 25, 2001, the Company acquired 100% of the stock of Champion Products, Inc., ("Champion") for approximately $9.5 million. In conjunction with the acquisition of Champion, the Company entered into a 15 year licensing agreement (the "Licensing Agreement") with the seller which permits the Company to sell decorated Champion apparel in the college bookstore, military and resort markets. Under the Licensing Agreement, the Company will pay a royalty to the seller based upon net sales beginning in fiscal 2004. On June 29, 2001, the Company sold its Tandem Marketing business for approximately $2.7 million in cash, net of closing costs, and the buyer's assumption of approximately $1.2 million in liabilities. The Company recognized a $629,787 gain on the sale of Tandem Marketing. The Company operates on a 52/53 week fiscal year which ends on the Saturday nearest June 30. The twelve month periods ended July 2, 1999, June 30, 2000, June 29, 2001, June 29, 2002, and June 28, 2003 each contain 52 weeks. Sales Divisions and Subsidiaries The Company believes that it enjoys distinct competitive advantages in each of its sales divisions and its subsidiaries because of its ability to quickly deliver high quality, customized products and provide excellent customer service. The Company operates state-of-the-art design, embroidery and screen print manufacturing and distribution facilities which management believes have set the standard in the sportswear and activewear industry for product quality and response time to orders and re-orders. This allows the Company's customers to carry less inventory, increase merchandise turnover and reduce the risk of obsolete merchandise. Resort Division. The Resort division is a leading marketer of custom logoed sportwear and activewear to over 7,400 active customer accounts, including destination resorts, family entertainment companies, hotel chains, golf courses, cruise lines and casinos. The Company distributes its Resort division products through its national sales force of approximately 35 independent sales agents. The Company believes that it is well known and respected in the resort and leisure industry because of its quick turn around for new orders and re-orders, its product innovation, its quality and its high level of service. Corporate Division. The Corporate division is a leading marketer of corporate identity sportswear and activewear for use by a diverse group of corporations for incentive programs, employee pride and recognition initiatives, corporate meetings and outings, company retail stores and catalog programs, dealer incentive programs as well as office casual wear and uniforms. 3 The Company provides its corporate identity sportswear products to over 1,500 of the leading independent marketing companies, who in turn each employ a sales staff to service a client base. The Company employs 20 regional sales personnel who are exclusively dedicated to promoting Corporate division products. The Company believes this marketing approach leverages the sales force and marketing contacts of these independent marketing companies. Prior to fiscal 2001, the Corporate division utilized approximately 40 independent sales agents to market directly to corporate customers. Licensed Apparel Division. The Licensed Apparel Division includes the college bookstore business, through both the Gear for Sports(R) and Champion(R) college brands, (through a subsidiary, CC Products, Inc.) sales under professional sports team, league and event licensing agreements and sales to the military. The Company has over 3,500 active college bookstore accounts, including nearly every major college and university in the United States. The largest college bookstore accounts include the major college bookstore lease operators as well as high volume, university managed bookstores. The Company's professional sports team, league and event licensors include, among others, the NBA, the NHL and Major League Baseball. The Company targets the upscale adult sports enthusiast through the Company's existing distribution channels as well as through new channels such as stadium stores and team retail outlets. The Company has over 800 active professional sports related customer accounts. Event 1 Subsidiary. The Event 1 subsidiary was established in fiscal 1998 to provide concessionaire services that create additional outlets for the Company's products. Since its inception, Event 1 has become the leading event merchandiser in the collegiate championship industry. The subsidiary has renewed and extended its agreements with the NCAA, Big 10 Conference, Big 12 Conference, the Atlantic Coast Conference, the Southeastern Conference, PGA and various other institutions and entities. GFSI Canada Company. In June 2002 the Company formed GFSI Canada Company ("GFSI Canada"), a wholly owned subsidiary of GFSI, Inc. organized under the Securities Act of Nova Scotia, Canada. The Company established GFSI Canada to enable it to conduct business in Canada and reach similar markets with it's existing product line. Certain of the Company's products had previously been available in the Canadian market through an international licensing agreement that expired in December 2001. In June 2002, GFSI Canada entered into a Management Agreement with Fletcher Leisure Group Inc. ("Fletcher"), a Canadian corporation headquartered in Quebec, Canada. The Fletcher Leisure Group provides certain selling, marketing, product distribution and administrative services to GFSI Canada Company under the management agreement. Products The Company's extensive product offerings include: fleecewear, outerwear, polo shirts, woven shirt, sweaters, T-shirts and bottoms, women's and other apparel items and accessories. These products are currently offered in over 1,000 combinations of style and color. While its products are generally characterized by a low fashion risk, the Company attempts to incorporate the latest trends in style, color and fabrics with a heavy emphasis on innovative graphics to create leading-edge fashion looks. The Company believes that the quality and breadth of its product lines and its innovative logo designs represent significant competitive advantages in its markets. The following illustrates the attributes of the Company's current product lines: Fleecewear. The Company's fleecewear products represented approximately 27% of net sales for fiscal 2003. Current styles offered by the Company include classic crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops, vests, and bottoms. Products are constructed of a wide range of quality fabrics including combed cotton, textured fleece ribbed knit cotton and inside out fleece. This product line offers customers a variety of styles ranging from relaxed, functional looks to more sophisticated, casual looks. T-Shirts and Bottoms. The Company's T-shirt and bottoms products represented approximately 15% of net sales for fiscal 2003. The Company's products are designed to address consumer needs for comfort, fit and function while providing innovative logo designs. The Company offers a full line of T-shirts, shorts and pants in a variety of styles, fabrics and colors. Outerwear. The Company's outerwear products represented approximately 12% of net sales for fiscal 2003. These products are designed to offer consumers contemporary styling, functional features and quality apparel. Product offerings include a variety of weights and styles, including heavy nylon parkas, denim jackets, corduroy hooded pullovers, nylon windshirts and water-resistant poplin jackets. The Company's products also provide a number of functional features such as adjustable cuffs, windflaps, vented backs, drawstring bottoms and heavyweight fleece lining. 4 Polo Shirts, Woven Shirts and Sweaters. The Company's polo shirt, woven shirt and sweater products represented approximately 11% of net sales for fiscal 2003. The Company's products in this category are designed to be suitable for both leisure and work-related activities with a full range of materials and styles. Women's. The Company's women's products represented approximately 15% of net sales for fiscal 2003. This product line offers customers a variety of styles ranging from relaxed, functional looks to more sophisticated, casual looks. Other. The Company also sells headwear, sports luggage, and a number of other miscellaneous apparel items. Event 1 also sells non-apparel items at events including basketballs, pennants and related items. Sales of "Other" items represented approximately 20% of net sales for fiscal 2003. Design, Manufacturing and Materials Sourcing The Company operates state-of-the-art design, embroidery and screen print manufacturing and distribution facilities in Lenexa, Kansas, Chillicothe, Missouri and Bedford, Iowa. The Company's design group consists of approximately 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 manufacturing process begins. This manufacturing process consists of embroidery and/or screen printing applications to Company-designed non-decorated apparel ("blanks"). Most of the screen printing and the embroidery operations are performed by the Company in its Lenexa, Kansas, Chillicothe, Missouri and Bedford, Iowa facilities. In addition, the Company outsources screen printing and embroidery work to independent contractors when necessary. All of the Company's blanks are sourced and manufactured to the Company's specifications by third party vendors. The Company closely monitors each of its vendors in order to ensure that its specifications and quality standards are met. A significant portion of the Company's blanks are contract manufactured in various off-shore plants. The Company's imported items are currently manufactured in China, Columbia, Guatemala, Honduras, Hong Kong, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Singapore, Taiwan, Thailand and Vietnam. No foreign country has a manufacturing concentration above 25%. The Company has long-standing contractual relationships with its independent buying agents who assist the Company in its efforts to control garment quality and delivery. None of these agents represent the Company on an exclusive basis. Competition The Company's primary competitors vary within each of its divisions and subsidiaries. In the resort division, there are few national competitors and even fewer that operate in all of the varied segments in which the Company operates. In the corporate identity market, there are several large manufacturers of corporate identity products. The Company believes it is one of the few manufacturers and marketers of corporate identity products that specializes in the activewear product segment. In the Licensed Apparel division's college bookstore market, the GEAR For Sports(R) and Champion(R) brands and their closest two competitors have traditionally held greater than 60% of the market. The following table sets forth the Company's primary competitors in each of its markets: Market Primary Competitors -------------- ----------------------------------------------------- Resort Cutter & Buck and local and regional competitors Corporate Cutter & Buck, Ashworth, Callaway, Land's End Licensed Apparel Jansport (VF Corp.), Cotton Exchange, Russell Athletic, Nike, Majestic, Addidas and M.V. Sports Competition in each of the Company's markets generally is based on product design and decoration, customer service, overall product quality and price. The Company believes that it has been able to compete successfully because of its ability to create diverse and innovative designs, provide excellent customer service, leverage its GEAR For Sports(R) and Champion(R) brand names and differentiate its products on the basis of quality. 5 Employees The Company employs approximately 806 people at its two facilities in Lenexa, Kansas, of which approximately 110 are members of management, 236 are involved in either product design, customer service, sales support or administration and 460 are involved in manufacturing. The Company employs approximately 85 people in its Bedford, Iowa embroidery facility and 120 at its Chillicothe, Missouri screen print facility, all of which are involved in manufacturing. None of the Company's employees is covered by a collective bargaining agreement. The Company believes that the dedication of its employees is critical to its success, and that its relations with its employees are excellent. Trademarks The Company markets its products primarily under the GEAR For Sports(R) and Champion(R) brand names. In addition, the Company markets its products under, among others, the Pro GEAR(R), Big Cotton(R), Winning Ways(R) and Yikes!(R) trademarks. Generally, the Company's trademarks will remain in effect as long as the trademark is used by the Company and the required renewals are obtained. The Company licenses its GEAR For Sports(R) trademark in Japan. This license agreement provides exclusive, non-transferable and non-assignable rights to manufacture, advertise and promote adult apparel, headwear and bags under the GEAR For Sports(R) brand name. The agreement provides for royalties as a percentage of net sales, contains annual royalty minimums, and gives the Company final control over product design and quality. The Company believes this licensing arrangement enables it to broaden its geographic distribution and extend the GEAR For Sports(R) brand name in a cost-effective manner. In connection with its acquisition of Champion, the Company entered into a license agreement with Sara Lee Corporation (the "Champion License Agreement"). Pursuant to the Champion License Agreement, the Company is granted the exclusive right to use the Champion(R) name and C(R) logo and related trademarks on certain products sold in the collegiate, military and resort markets in the United States. The Champion License Agreement is scheduled to expire on June 30, 2016. In consideration for the license grant, the Company pays Sara Lee a quarterly royalty based on a percentage of net sales of products bearing the licensed marks beginning in fiscal 2004. Licenses The Company markets its products, in part, under licensing agreements. In fiscal 2003, net sales under the Company's 465 active licensing agreements totaled $88.7 million, or approximately 42% of the Company's net sales. The Company's licensing agreements are mostly with (i) high volume, university bookstores, (ii) professional sports leagues such as Major League Baseball, the NBA, the NHL and PGA Tour and (iii) major sporting events such as the NCAA, U.S. Open, Ryder Cup and the Indianapolis 500. Such licensing agreements are generally renewable every one to three years with the consent of the licensor. On July 1, 2001, the Company entered into a 15 year license agreement with Sara Lee Corporation for the exclusive use of the Champion logo and related trademarks in the licensed apparel and resort markets. Under the license agreement the Company will pay a royalty to Sara Lee Corporation based upon net sales beginning in fiscal 2004. The royalty rate ranges from 3% to 6% of net sales from fiscal 2004 through fiscal 2017. 6 Item 2 - Properties The Company owns each of its four properties: its 250,000 square foot headquarters and manufacturing facility in Lenexa, Kansas, its 100,000 square foot distribution facility located approximately two miles from its headquarters, its 23,000 square foot embroidery facility located in Bedford, Iowa, and its 50,000 square foot screen print decoration facility located in Chillicothe, Missouri. Approximately 200,000 square feet of the headquarters/manufacturing facility, the distribution facility in Lenexa, the embroidery facility in Bedford and the Chillicothe screen print facility are devoted to the design and manufacture of the Company's products and to customer service. The Chillicothe facility was completed and began production in fiscal 2002. From time to time, the Company leases additional warehouse space under short term agreements to meet short term seasonal needs. Item 3 - Legal Proceedings The Company is not a party to any pending legal proceeding the resolution of which, the management of the Company believes, would have a material adverse effect on the Company's results of operations, cash flows, or financial condition, nor to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. Item 4 - Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 28, 2003. 7 PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters The only authorized, issued and outstanding class of capital stock of Holdings is common stock which is held by an aggregate of 29 holders. There is no established public trading market for Holdings' common stock. Holdings has not declared nor paid any cash dividends on its common stock since its formation in February 1997. Holdings' financing agreements contain restrictions on its ability to declare or pay dividends on its common stock. Equity Compensation Plan Information

~~FISCAL YEARS ENDED~~ ---------------------------------------------------------------- ~~(Dollars in thousands) JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 29, 1998 (5) 1999 2000 2001 2002~~ --------- -------- --------- --------- --------------------------- ~~STATEMENTS~~Plan OFCategory ~~OPERATIONS~~Number ~~DATA:~~of ~~Net~~securities ~~sales.....................................~~to $be ~~214,894~~Weighted-average $exercise ~~208,025~~Number $of ~~205,500~~securities $issued ~~185,305~~upon $exercise ~~197,250~~of ~~Gross~~price ~~profit..................................~~of ~~86,068~~outstanding ~~83,236~~remaining ~~79,326~~available 70for outstanding options,~~726~~ 73options,~~627~~ ~~Operating~~warrants ~~expenses~~and rights future issuance under equity warrants and rights (1b)~~........................~~ ~~48,401~~compensation ~~52,424~~plans ~~48,103~~(excluding ~~50,008~~(a) ~~50,933~~securities reflected in column (a)) (c) ---------- ---------- ---------- ---------- -------------------------------------------------------------------------------------- ~~Operating~~Equity ~~income..............................~~compensation ~~37,667~~plans ~~30,812~~0 ~~31,223~~0 ~~20,718~~0 ~~22,694~~approved ~~Other~~by ~~expense.................................~~security ~~(24,259)~~holders ~~(24,774) (24,610) (24,241) (24,653)~~ ---------- ---------- ---------- ---------- -------------------------------------------------------------------------------------- ~~Income~~Equity ~~(loss)~~compensation ~~before~~plans ~~taxes~~not ~~and~~approved ~~extraordinary~~by ~~item......................~~security ~~13,408~~holders: ~~6,038~~------------------------------------------------------------------------------------------------------------------------------ ~~6,613~~Class ~~(3,523)~~A ~~(1,959)~~Common ~~Income~~Stock ~~tax~~110 ~~(expense) benefit~~$100.~~.................~~00 ~~(5,257)~~0 ~~(2,165) (2,614) 1,483 764 Extraordinary item, net of tax benefit (2).... (203)~~ -- -- -- ~~(606)~~ ---------- ---------- ---------- ---------- -------------------------------------------------------------------------------- ~~Net~~Class ~~income~~A ~~(loss).............................~~Preferred $Stock ~~7,948 $ 3,873 $ 3,999 $ (2,040) $ (~~195.1~~,801)~~ ~~========= ========== ========== ========== ========== BALANCE SHEET DATA (AS OF PERIOD END): Cash and cash equivalents....................~~ $ ~~41,361 $ 10,278 $~~ 1,~~461 $ 5,324 $ 328 Total assets~~322.~~................................~~00 ~~106,532~~0 ~~105,680 99,436 95,488 105,825 Long~~-~~term~~----------------------------------------------------------------------------------------------------------------------------- ~~debt~~The ~~(including current portion) and redeemable preferred stock......... 250,245 246,407 240,334 233,574 246,702 Total stockholders'~~ equity ~~(deficiency)......~~compensation ~~(166,815)~~plan ~~(163,368)~~is ~~(159,792)~~described ~~(162,249)~~in ~~(164,462)~~Item ~~OTHER DATA: Cash flows from operating activities........ $ 3,893 $ 21,039 $ 7,216 $ 22,546 $ (3,710) Cash flows from investing activities........ (2,648) (2,041) (1,937) (~~8~~,412)~~ ~~(4,189)~~of ~~Cash~~this ~~flows~~annual ~~from~~report ~~financing~~in ~~activities........~~the ~~(1,001)~~Notes ~~(10,080)~~to ~~(14,097)~~Consolidated ~~(10,272)~~Financial 2Statements,~~904~~ ~~EBITDA~~paragraph ~~(3)~~11.................................. 40,605 33,894 34,459 23,764 26,789 Depreciation and amortization............... 2,938 3,083 3,235 3,046 4,095 Capital expenditures........................ 2,972 2,291 1,998 1,788 4,203 EBITDA margin (4)........................... 18.9% 16.3% 16.8% 12.8% 13.6%

Item 6 - Selected Financial Data Holdings is structured as a holding company whose only significant asset is the capital stock of GFSI. The following table presents: (i) historical operating and other data of the Company for fiscal years ended July 2, 1999, June 30, 2000, June 29, 2001, June 29, 2002, and June 28, 2003; and (ii) balance sheet data as of July 2, 1999, June 30, 2000, June 29, 2001, June 29, 2002, and June 28, 2003. The historical financial statements for the Company for fiscal 1999 and 2000 have been audited by Deloitte & Touche LLP. The historical financial statements for the Company for fiscal 2001 have been audited by PricewaterhouseCoopers LLP. The historical financial statements for the Company for fiscal 2002 and 2003 have been audited by KPMG LLP. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the historical consolidated financial statements of the Company and the related notes thereto included elsewhere in this annual report. Certain reclassifications have been made to the financial data for the years ended July 2, 1999, June 30, 2000, June 29, 2001, and June 29, 2002 to conform to the June 28, 2003 presentation. 8

~~AFTER~~Fiscal 5Years ~~CONTRACTUAL~~Ended ~~OBLIGATIONS~~(3) ~~TOTAL~~(Dollars ~~YEAR~~in 1thousands) ~~YEARS~~July 2-3, ~~YEARS~~June ~~4-5~~30, ~~YEARS~~June 29, June 29, June 28, 1999 2000 2001 2002 2003 ----- ----- ----- ----- ---- Statements of Operations Data: Net sales..................................... $ 208,025 $ 205,500 $ 185,305 $ 197,250 $ 209,273 Gross profit.................................. 83,236 79,326 70,726 73,627 78,155 Operating expenses (1)........................ 52,424 48,103 50,008 50,933 53,940 ---------- --------- --------- ---------- ------- ~~Long~~-~~term~~-- ~~debt~~Operating ~~$240~~income.............................. 30,~~989~~812 31,~~090~~223 ~~$ 72~~20,~~018~~718 ~~$ 30~~22,~~711,346~~694 ~~$125~~24,~~057,197~~215 $Other 85expense,~~148,529~~ ~~Capital~~principally ~~lease~~interest........... ~~obligations~~(24,774) ~~308~~(24,~~207~~610) ~~105~~(24,~~069~~241) ~~193~~(24,~~292~~652) 9(23,~~846~~684) --Gain ~~Operating~~(loss) ~~leases~~on ~~1,462,482~~early ~~734,856~~extinguishment ~~689,871~~of ~~37,755~~debt... -- ~~Redeemable~~-- ~~preferred~~-- ~~stock~~(994) 89,~~067,666~~610 -- -------- ---------- ~~8,067,666~~ ---------- ---------- ----------- Income (loss) before taxes (2)................ 6,038 6,613 (3,523) (2,952) 10,141 Income tax (expense) benefit.................. (2,165) (2,614) 1,483 1,151 (3,970) ---------- -- -------- ---------- ---------- ----------- ~~Total~~Net ~~Contractual~~income ~~Cash~~(loss)............................. ~~Obligations~~ $~~250~~ 3,~~827,445~~873 $ ~~911~~3,~~943~~999 $ 31(2,~~594,509~~040) $~~125~~ (1,~~104,798~~801) $ 936,~~216,195~~171 ============ =========== ============ ============ ============ Balance Sheet Data (as of period end): Cash and cash equivalents.................... $ 10,278 $ 1,461 $ 5,324 $ 328 $ 1,401 Total assets................................ 105,680 99,436 95,488 105,824 104,024 Long-term debt (including current portion and redeemable preferred stock)............. 246,407 240,334 233,574 246,702 238,559 Total stockholders' equity (deficiency).... (163,368) (159,792) (162,249) (164,462) (158,503) Other Data: Cash flows from operating activities........ $ 21,039 $ 7,216 $ 22,547 $ (3,710) $ 11,697 Cash flows from investing activities........ (2,041) (1,937) (8,412) (4,189) (3,325) Cash flows from financing activities........ (10,080) (14,097) (10,272) 2,903 (7,481) Depreciation and amortization............... 3,083 3,235 3,046 4,095 4,137 Capital expenditures........................ 2,291 1,998 1,787 4,203 3,369

(1) Operating expenses for fiscal 2001 include $836 of restructuring charges, $1,110 of pre-acquisition integration costs related to the acquisition of Champion and a $630 gain on the sale of Tandem Marketing division. (2) Income (loss) before taxes includes gains (losses) on the early extinguishment of debt of $9,600 in fiscal 2003 and ($994) in fiscal 2002. (3) The Company's fiscal year ends on the last Saturday in June, which results in a 53 week year from time to time. All fiscal years presented above are comprised of 52 week periods. 9 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the Company's results of operations and its liquidity and capital resources should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this annual report. Forward-Looking Statements Management's discussion and analysis of financial condition and results of operations and other sections of this annual report contain forward-looking statements relating to future results of the Company. Such forward-looking statements are identified by use of forward-looking words such as "anticipates", "believes", "plans", "estimates", "expects", and "intends" or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for the Company's products, acceptance of new products and developments affecting the Company's products. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. Critical accounting policies The following discussion and analysis of financial condition, results of operations, liquidity and capital resources is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Generally accepted accounting principles require estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, long-lived assets, deferred income taxes, accrued expenses, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. The Company's management believes that some of its significant accounting policies involve a higher degree of judgment or complexity than other accounting policies. Identified below are the policies deemed critical to its business and the understanding of its results of operations. Revenue recognition. The Company recognizes revenues when goods are shipped, title has passed, the sales price is fixed and collectibility is reasonably assured. Returns, discounts and sales allowance estimates are based on projected sales trends, historical data and other known factors. If actual returns, discounts and sales allowances are not consistent with the historical data used to calculate these estimates, net sales could either be understated or overstated. Accounts receivable. Accounts receivable consist of amounts due from customers and business partners. The Company maintains an allowance for doubtful accounts to reflect expected credit losses and provides for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the credit-worthiness of each customer. Furthermore, these judgments must be continually evaluated and updated. If the historic data used to evaluate credit risk does not reflect future collections, or, if the financial condition of the Company's customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods. Inventories. Inventories are carried at the lower of cost or market determined under the First-In, First-Out (FIFO) method. The Company writes down obsolete and unmarketable inventories to their estimated market value based upon, among other things, assumptions about future demand and market conditions. If actual market conditions are less favorable than projected, additional inventory write-downs may be required. The Company also records changes in valuation allowances due to changes in its operating strategy, such as the discontinuances of certain product lines and other merchandising decisions related to changes in demand. It is possible that further changes in required inventory allowances may be necessary in the future as a result of market conditions and competitive pressures. 10 Results of Operations The following table sets forth certain historical financial information of the Company, expressed as a percentage of net sales, for fiscal 2003, 2002 and 2001: Fiscal Year Ended ------------------------------------- June 28, June 29, June 29, 2003 2002 2001 --------- --------- -------- Net sales........................ 100.0% 100.0% 100.0% Gross profit..................... 37.3 37.3 38.2 Operating income................. 11.6 11.5 11.2 Fiscal year ended June 28, 2003 compared to fiscal year ended June 29, 2002 Net Sales. Net sales in fiscal 2003 increased 6% to $209.3 million from $197.3 million in fiscal 2002. The increase in net sales was due to strong growth from college bookstore sales, which was fueled by a 40% increase in revenue from Champion Custom Products ("CCP") to $60.9 million. The net sales increase from CCP was partially offset by a 18% decline in Corporate division sales. Net sales for CCP in fiscal 2003 were $17.5 million greater than last year while Corporate division sales were $5.3 million less than last year. Management believes that the Company's customers have shifted their purchases to lower priced apparel with less expensive decoration, which has enhanced the sales of CCP's more moderately priced goods. A soft economy and consequent reductions in corporate spending on marketing and employee incentive programs have had a detrimental effect on the net sales of the Corporate division. Gross Profit. Gross profit for fiscal 2003 increased 6% to $78.2 million from $73.6 million last year. Gross profit as a percentage of net sales was 37.3%, approximately the same as last year. Operating Expenses. Operating expenses for fiscal 2003 increased 6% to $53.9 million from $50.9 million last year. Higher sales created the increase in operating expenses. Operating expenses as a percentage of net sales were 25.8% for fiscal 2003 and fiscal 2002. The favorable impact of cost control measures offset the higher royalty and distribution channel costs attributable to increased college bookstore sales. In fiscal 2004, the Company will begin to incur a 3% royalty expense related to its CCP sales. The royalty will be paid to Sara Lee Corporation under its 15 year license agreement. Operating Income. Operating income increased 7% to $24.2 million in fiscal 2003 from $22.7 million in fiscal 2002. Operating income as a percentage of net sales increased to 11.6% in fiscal 2003 from 11.5% in fiscal 2002. Cost control measures combined with higher sales resulted in the increase in operating income as a percentage of sales. Interest Expense. Interest expense in fiscal 2003 was $23.7 million, $1 million less than the comparable period last year. The decrease in interest expense was due to lower borrowings and lower interest rates in comparison to last year. Gain (Loss) on Early Extinguishment of Debt. In December 2002, the Company's wholly-owned subsidiary, GFSI, Inc., completed the private placement of $9.9 million of unregistered 9.625% senior subordinated notes ("Exchange Notes") in exchange for $24 million aggregate principal amount at maturity of the Company's 11.375% Senior Discount Notes (the "Holdings Discount Notes") with an accreted book value of $19.9 million. The acquisition of the Holdings Discount Notes by GFSI, Inc. is considered an early extinguishment of debt, and accordingly, the Company recorded a pre-tax gain on the transaction of approximately $9.6 million, net of related costs. The Company subsequently filed a registration statement with the Securities and Exchange Commission which allowed the holder of the Exchange Notes to exchange them for publicly registered notes having terms substantially identical to the Exchange Notes. In fiscal 2002, the Company entered into a $65 million Revolving Bank Credit Agreement ("RBCA") and repaid its existing $40 million bank credit facility ahead of its scheduled expiration. A pre-tax charge of $994,000 was recorded in the third quarter of fiscal 2002 to write off deferred debt origination costs related to the previous bank credit facility. Net Income (Loss). Net income for fiscal 2003 was $6.2 million, compared to a net loss of $1.8 million in fiscal 2002. The gain on early extinguishment of debt, improved operating income and the decrease in interest expense all combined to create the $8 million increase in net income over last year. 11 Fiscal year ended June 29, 2002 compared to fiscal year ended June 29, 2001 Net Sales. Net sales increased 6.4% in fiscal 2002 to $197.2 million from $185.3 million in fiscal 2001. The increase was primarily attributable to the addition of CCP college bookstore net sales of $43.4 million. The net sales increase from CCP was partially offset by declines in Corporate and Resort division sales. The terrorist attacks of September 11, 2001 and the resulting political and economic uncertainties created in the aftermath, directly affected the travel plans and the marketing and employee incentive programs of the customers of these two sales divisions. In addition, the Tandem Marketing ("Tandem") business was sold in June 2001. Tandem contributed $11.7 million in sales in fiscal 2001. Gross Profit. Gross profit for fiscal 2002 increased 4.1% to $73.6 million from $70.7 million in fiscal 2001 due to the increase in net sales. Gross profit as a percentage of net sales decreased to 37.3% from 38.2% last year. The decrease in gross profit as a percentage of sales was the result of lower Corporate division sales, which generally provide a higher gross profit than sales from the CCP college bookstore sales. Fiscal 2002 gross profit was also adversely affected by both (i) increased loss on sales of close-out and discontinued merchandise and (ii) the start-up production costs at the new Chillicothe, Missouri facility. Operating Expenses. Operating expenses increased $.9 million or 1.8%, to $50.9 million in fiscal 2002 from $50.0 million in fiscal 2001. Operating expenses as a percentage of net sales decreased in fiscal 2002 to 25.8% from 27.0% in fiscal 2001. Operating expenses in fiscal 2001 included costs incurred from the following non-recurring activities: $1.1 million of integration costs associated with the acquisition of CCP and $0.8 million in costs associated with severance and employee termination benefits related to the execution of a restructuring plan; which were partially offset by $0.6 million in gain related to the sale of Tandem. If these items were excluded, operating expenses as a percentage of sales would have decreased in fiscal 2002 to 25.8% from 26.3% in fiscal 2001. Cost control measures created the decrease in operating expenses. Operating Income. Operating income for fiscal 2002 increased $2.0 million to $22.7 million in fiscal 2002 from $20.7 million in fiscal 2001. Operating income as a percentage of net sales increased to 11.5% in fiscal 2002 from 11.2% in fiscal 2001. The increase in operating income was the result of the increase in sales and lower operating expenses. Interest Expense. Interest expense in fiscal 2002 was $24.7 million, approximately the same as in fiscal 2001. Increased interest expense on the Holdings Discount Notes off-set the favorable affects of lower interest rates. Loss on Early Extinguishment of Debt. In fiscal 2002, the Company entered into a $65 million RBCA and repaid its existing bank credit facility ahead of its scheduled expiration. A $994,000 pre-tax charge recorded in the third quarter of fiscal 2002 to write off deferred debt origination costs related to the previous bank credit facility. Net Income (Loss). The Company had a net loss of $1.8 million in fiscal 2002 compared to a net loss of $2.0 million in fiscal 2001. The increase in fiscal 2002 operating income created the improvement over fiscal 2001. Liquidity and Capital Resources In December 2002 the Company's wholly-owned subsidiary, GFSI, Inc. completed the private placement of $9.9 million of unregistered 9.625% Exchange Notes in exchange for $24 million aggregate principal amount at maturity of the Company's 11.375% Holdings Discount Notes. The Exchange Notes are unsecured obligations of GFSI, Inc., mature on March 1, 2007, pay interest semi- annually on March 1 and September 1, and were issued under an indenture with substantially identical terms as the indenture governing the $125 million aggregate principal amount at maturity of GFSI, Inc. Senior Subordinated Notes issued on February 28, 1997. The Exchange Notes were guaranteed by each of GFSI, Inc.'s wholly-owned subsidiaries (Event 1, CCP and GFSI Canada Company). GFSI, Inc. subsequently filed an exchange offer registration statement with the Securities and Exchange Commission which publicly registered the Exchange Notes. Cash provided by (used in) operating activities in fiscal 2003, 2002 and 2001 was $11.9 million, ($3.7) million, and $22.5 million, respectively. Higher net income and reduced inventories created the change in cash provided (used in) operating activities between fiscal 2003 and fiscal 2002. Increases in accounts receivable and inventory to support the acquired Champion Custom Products college bookstore business created the change in cash provided by (used in) operating activities between fiscal 2002 and fiscal 2001. Cash used in investing activities for fiscal 2003, 2002 and 2001 was $3.3 million, $4.2 million, and $8.4 million, respectively. Cash used in investing activities in fiscal 2003 and fiscal 2002 was principally related to capital expenditures associated with the construction of a new garment decoration facility in Chillicothe, Missouri. The cash used in investing activities in 12 fiscal 2001 was related to the purchase of Champion Custom Products and capital expenditures, partially offset by $2.7 million in proceeds from the sale of the Tandem Marketing division. Cash provided by (used in) financing activities for fiscal 2003, 2002 and 2001 was $(7.5) million, $2.9 million, and ($10.3) million, respectively. The $7.5 million used in financing activities in fiscal 2003 was principally used to reduce borrowings under the Revolving Bank Credit Agreement. The net $2.9 million provided from financing activities in fiscal 2002 was created by borrowings under the Revolving Bank Credit Agreement to replace existing bank loans and support increased working capital and equipment needs related to the acquisition of the Champion Custom Products business. The cash used in financing activities in fiscal 2001 was primarily related to long-term debt repayments. GFSI, Inc. anticipates paying dividends to the Company to pay corporate income taxes, pursuant to a Tax Sharing Agreement, interest on subordinated discount notes issued by the Company, fees payable under consulting agreements, fees payable under a non- competition agreement between the Company and Robert M. Wolff, and certain other ordinary course expenses. The Company is dependent upon the cash flows of GFSI, Inc. to provide funds to service the Holdings Discount Notes. Holdings Discount Notes do not have an annual cash flow requirement until March 2005 as they accrue interest at 11.375% per annum, compounded semi-annually to an aggregate principal amount of $84.5 million at September 15, 2004. Thereafter, the Holdings Discount Notes will accrue interest at the rate of 11.375% per annum, payable in semi-annual cash installments of $4.8 million on March 15 and September 15 of each year. Additionally, GFSI Holdings' cumulative non-cash preferred stock ("Holdings Preferred Stock") dividends total approximately $400,000 annually. Holdings Preferred Stock may be redeemed at stated value (approximately $3.4 million) plus accrued dividends with mandatory redemption in fiscal 2009. A summary of the Company's contractual cash obligations by maturity date as of June 28, 2003 is as follows:

~~JUNE~~After ~~29, JUNE 29, 2002 2001 -------- -------- ASSETS Current assets: Cash and cash equivalents........................................ $ 328,330 $~~ 5~~,323,536~~ ~~Accounts~~Contractual ~~receivable,~~Obligations ~~net~~(in ofthousands) ~~allowance~~Total ~~for~~Year doubtful accounts of $766,557 and $696,988 at June 29, 2002 and June 29, 2001...... 32,626,431 22,694,322 Inventories, net................................................. 45,728,918 37,735,617 Income tax receivable............................................ 284,183 1~~,690,907~~ ~~Deferred~~Years ~~income taxes............................................ 844,513 910,828 Prepaid expenses and other current assets........................ 1,268,478 1,143,310~~ 2-------------- -------------- Total current assets.......................................... 81,080,853 69,498,520 Property, plant and equipment, net.................................... 19,670,864 18,574,473 Other assets: Deferred financing costs, net of accumulated amortization of $3~~,683,770~~ ~~and~~Years ~~$5,141,940 at June 29, 2002 and June 29, 2001..~~ 4~~,062,548~~ -5~~,409,083~~ ~~Other.............................................................~~Years ~~1,010,268 2,006,082~~ -------------- --------- ----- ~~5,072,816 7,415,165~~ ------ --------- --------- ----- ~~Total~~Long-term ~~assets..................................................~~debt $(including ~~105,824,533~~capital $lease ~~95,488,158 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY~~obligations) ~~Current~~$ ~~liabilities:~~232,889 ~~Accounts~~$ ~~payable..................................................~~324 $ 1223,~~010,292~~246 $ 12135,~~777,790~~060 ~~Accrued~~$ ~~interest expense.......................................... 4~~74,~~364,497~~259 ~~3,774,778~~Inventory ~~Accrued~~on ~~expenses..................................................~~open ~~5,983,235~~purchase ~~5,895,123~~orders ~~Current~~(generally ~~portion~~for ofdelivery ~~long-term~~within ~~debt.................................~~90 ~~177~~days) 19,~~087~~047 619,~~699,631~~047 -- --~~----------~~ --~~------------~~ ~~Total~~Guaranteed ~~current~~minimum ~~liabilities....................................~~royalties ~~22,535,111~~and ~~29,147,322~~operating ~~Deferred~~lease ~~income~~obligations ~~taxes..................................................~~3,468 ~~699~~2,~~338~~138 1,~~189,369~~330 ~~Long~~-~~term~~- ~~debt, less current portion .................................. 241,120,210 221,728,746 Other long~~-~~term~~- ~~obligations............................................ 526~~Consulting,~~804~~ ~~526,804~~employment ~~Redeemable preferred stock............................................. 5,405,391 5,145,212 Commitments~~ and ~~contingencies~~non-competition ~~(note~~agreements ~~2 and 5)........................... Stockholders' equity (Deficiency): Series A common stock~~8,790 ~~$.01 par value,~~ 1,~~105~~055 ~~shares authorized~~2,170 1,~~000~~985 ~~shares issued at June 29~~3,580 ~~2002~~Redeemable ~~and~~preferred ~~June 29, 2001....... 10 10 Series B common~~ stock, ~~$.01 par value~~7,882 ~~1,000~~-- ~~shares~~-- ~~authorized, 1,000 shares issued at June 29, 2002 and June 29, 2001....... 10 10 Additional paid~~-in- capital....................................... 199,980 199,980 Accumulated deficiency........................................... (164,651,069) (162,442,293) Treasury stock, at cost (152.5 and 100 Series A shares at June 29, 2002 and June 29, 2001, respectively)............... (11,252) (7,~~002)~~882 ----------- --- ------- ------- ~~Total stockholders' equity (deficiency)...................... (164,462,321) (162,249,295)~~ ---- ---------- --- ----------- Total ~~liabilities~~Contractual ~~and~~Cash ~~stockholders'~~Obligations ~~equity~~$ ~~(deficiency)~~272,076 $ ~~105~~22,~~824~~564 $ 26,~~533~~746 $ 95137,~~488~~045 $ 85,~~158~~721 =========== ========== =========== ============= ~~See Notes to Consolidated Financial Statements.~~===========

Under our Champion product license, the Company has guaranteed the payment of $1 million as minimum royalty payments in each of fiscal 2004 and fiscal 2005. There are no guaranteed minimum royalty payments thereafter. It is anticipated that other product licenses with annual guaranteed minimum royalty payments and leases that expire will be renewed or replaced, and future guaranteed minimum royalty commitments and lease commitments are not expected to aggregate less than the amount shown in year 1. During fiscal 2002, the Company replaced its existing bank credit agreement by entering into a Revolving Bank Credit Agreement with a group of financial institutions to provide a $65 million revolving line of credit which matures in January 2005. At June 28, 2003, $32.9 million was available for future borrowing under the Revolving Bank Credit Agreement. We believe that cash flows from operating activities and borrowings under the Revolving Bank Credit Agreement will be adequate to meet our short-term and future liquidity requirements prior to the maturity of the Revolving Bank Credit Agreement in fiscal 2005 although no assurance can be given in this regard. 13 New Accounting Standards In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145 "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". The new standard eliminated the requirement to classify all gains and losses related to debt extinguishments as extraordinary items. The Company adopted SFAS No. 145 in the first quarter of fiscal 2003, and reported the $9.6 million gain related to the GFSI, Inc. bond exchange as a component of pre-tax income. The Company has reclassified the fiscal 2002 extraordinary loss on extinguishment of debt as other income (expense) in accordance with the transition provisions of SFAS No. 145. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating what impact, if any, this standard will have. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities". The Interpretation addresses consolidation by business enterprises of variable interest entities which meet certain characteristics and is effective for all variable interest entities created after January 31, 2003 and otherwise for the fiscal year beginning after June 15, 2003. The Interpretation does not have any effect on the Company's financial position or results of operation. 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 2003, net sales of the Company during the first half and second half of the fiscal year were approximately 55% and 45%, respectively. The seasonality of sales is primarily due to higher college bookstore sales volume during the first two fiscal quarters. Sales at the Company's Resort and Corporate divisions typically show no significant seasonal variations. The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results. Item 7A - Quantitative and Qualitative Disclosures about Market Risk The Company's market risk exposure is primarily due to possible fluctuations in interest rates. The fixed rate portion of the Company's long-term debt does not bear significant interest rate risk. The variable rate debt would be affected by interest rate changes to the extent the debt is not matched with an interest rate swap or cap agreement or to the extent, in the case of the RBCA, that balances are outstanding. An immediate 1 percent increase in interest rates would not have a material effect on the Company's results of operations over the next fiscal year, although there can be no assurances that interest rates will not significantly change. 14 Item 8 - Consolidated Financial Statements and Supplementary Data Page Independent Auditors' Report........................................... 16 Report of Independent Auditors......................................... 17 Consolidated Balance Sheets - June 28, 2003 and June 29, 2002......... 18 Consolidated Statements of Operations - Years Ended June 28, 2003, June 29, 2002 and June 29, 2001................................... 19 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) - Years Ended June 28, 2003, June 29, 2002 and June 29, 2001.................................................. 20 Consolidated Statements of Cash Flows - Years Ended June 28, 2003, June 29, 2002 and June 29, 2001................................... 21 Notes to Consolidated Financial Statements............................. 22 Schedule I - GFSI Holdings, Inc. Parent Company Only Financial Statements......................................... 34 15 Independent Auditors' Report The Board of Directors GFSI Holdings, Inc.: We have audited the accompanying consolidated balance sheets of GFSI Holdings, Inc. and subsidiaries (Holdings) as of June 28, 2003 and June 29, 2002, and the related consolidated statements of operations, changes in stockholders' equity (deficiency) 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 consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GFSI Holdings, Inc. and subsidiaries as of June 28, 2003 and June 29, 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Kansas City, Missouri August 22, 2003 16 Report of Independent Auditors To The Board of Directors GFSI Holdings, Inc. In our opinion, the accompanying consolidated statements of operations, of changes in stockholders' equity (deficiency) and of cash flows of GFSI Holdings, Inc. and its subsidiaries present fairly, in all material respects, the results of their operations and their cash flows for the year ended June 29, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Kansas City, Missouri September 12, 2001 17 GFSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)

~~YEARS~~June ~~ENDED ------------------------------------------------------- JUNE 29~~28, ~~JUNE~~June 29, ~~JUNE~~ASSETS ~~30,~~2003 2002 ~~2001 2000~~ -------- ---- ---- -------- ~~Net~~Current ~~sales~~assets: Cash and cash equivalents........................................ $ 1,401 $ 328 Accounts receivable, net of allowance for doubtful accounts of $906 and $767 at June 28, 2003 and June 29, 2002.............. ~~$ 197~~34,~~249,505~~357 ~~$ 185~~32,~~304,630~~626 ~~$ 205~~Inventories,~~500,222~~ ~~Cost of sales~~net................................................. ~~123~~42,~~622,656~~663 ~~114~~45,~~578,443~~729 ~~126,173,741~~Income ~~----------------~~tax ~~--------------- -------------- Gross profit~~receivable............................................ ~~73,626,849~~-- ~~70,726,187~~284 ~~79,326,481~~Prepaid ~~Operating~~ expenses: ~~Selling~~and other current assets........................ 1,323 1,268 Deferred income taxes............................................ 241,~~582,462 22,~~303~~,126~~ ~~23,293,887~~845 ~~General~~--------- ~~and~~--------- ~~administrative~~Total current assets........................................ 2681,~~350,017~~047 2681,~~387,951~~080 24Property,~~808,927~~ ~~Restructuring~~plant ~~costs~~and equipment, net..................................... --19,883 ~~836~~19,~~291~~671 --Other ~~Acquisition~~assets: Deferred financing costs, net of ~~business~~accumulated amortization of $4,661 and $3,684 at June 28, 2003 and June 29, 2002.......... 3,085 4,063 Other....................... ~~-- 1,110,331 -- Gain on disposition of business~~...................................... --9 ~~(629~~1,~~787)~~010 -- -------~~---------~~ ---------~~------~~ ~~-------------- 50~~3,~~932,479~~094 505,~~007,912~~073 ~~48,102,814~~ ---------~~-------~~ ---------~~------~~ ~~--------------~~Total ~~Operating income~~assets........................................... ~~22,694,370~~$ 20104,~~718,275~~024 31$ 105,~~223,667~~824 ~~Other~~========= ~~income~~========= LIABILITIES AND STOCKHOLDERS' EQUITY (~~expense~~DEFICIENCY) Current liabilities: ~~Interest~~Accounts ~~expense~~payable.................................................. ~~(24~~$ 7,~~674~~843 $ 12,~~443)~~010 ~~(24~~Accrued interest expense.......................................... 4,~~655,958)~~365 ~~(24~~4,~~821,625)~~365 ~~Other~~Accrued expenses.................................................. 206,~~877~~279 ~~414~~5,~~320~~983 ~~211,279~~Income ~~----------------~~taxes ~~---------------~~payable.............................................. 33 --~~------------~~ ~~(24,653,566)~~Current ~~(24,241,638)~~portion ~~(24,610,346)~~of long-~~---------------~~term debt................................. 324 177 ----------~~-----~~ ---------~~-----~~ ~~Income~~Total ~~(loss)~~current ~~before~~liabilities.................................... 18,844 22,535 Deferred income taxes.................................................. (14,~~959,196)~~957 ~~(3,523,363)~~699 6Long-term debt,~~613,321~~ ~~Income~~less ~~tax~~current ~~(expense)~~portion ~~benefit~~.................................. ~~764~~232,~~135~~565 1241,~~482,981~~120 ~~(2,614,146)~~Other long-~~---------------~~term ~~---------------~~obligations............................................ ~~--------------~~491 ~~Net~~527 ~~income~~Redeemable ~~(loss)~~preferred ~~before extraordinary item~~stock............................................. (15,~~195,061)~~670 (25,~~040,382)~~405 ~~3,999,175~~Commitments ~~Extraordinary~~and ~~item,~~contingencies ~~net~~(Note of2 ~~tax~~and ~~benefit~~5)........................... Stockholders' equity (~~606,298~~deficiency): --Series A Common Stock, $.01 par value, 1,105 shares authorized, 1,000 shares issued at June 28, 2003 and June 29, 2002....... -- --~~--------------~~ Series B Common Stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued at June 28, 2003 and June 29, 2002....... --~~-------------~~ --~~------------~~ ~~Net~~Additional ~~income~~paid-in ~~(loss)~~capital....................................... ~~(1,801,359)~~200 ~~(2,040,382)~~200 ~~3,999,175~~Accumulated ~~Preferred stock dividends~~deficiency........................................... (~~407~~158,~~417~~689) (~~412~~164,~~299~~651) Treasury Stock, at cost (~~421~~195 and 152.5 Series A shares at June 28,~~353~~ 2003 and June 29, 2002, respectively).............. ~~----------------~~(14) (11) ----------~~-----~~ ----------~~----~~ ~~Net~~Total ~~income~~stockholders' equity (~~loss~~deficiency) ~~attributable to common shareholders~~...................~~...................~~ $(158,503) (2164,~~208,776~~462) $---------- ---------- Total liabilities and stockholders' equity (~~2,452,681~~deficiency) $ 3104,~~577~~024 $ 105,~~822~~824 ==========~~======~~ ==========~~=====~~ ~~==============~~ See notes to consolidated financial statements.

18 GFSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)

~~SERIES~~Years AEnded ~~SERIES B ADDITIONAL COMMON COMMON PAID~~-IN----------------------------------- ~~ACCUMULATED~~June ~~TREASURY~~28, ~~STOCK~~June ~~STOCK~~29, ~~CAPITAL~~June ~~DEFICIENCY~~29, ~~STOCK~~2003 ~~TOTAL~~2002 2001 ---------- ---------- ---------- Net sales ...................................... $ 209,273 $ 197,250 $ 185,305 Cost of sales .................................. 131,118 123,623 114,579 ----------- --------- --------- ~~Balance~~Gross profit ......................... 78,155 ~~July~~73,627 270,726 ~~1999~~Operating $expenses: 10Selling $................................... 1027,185 ~~$199~~24,~~980~~583 ~~$(163~~22,~~567,434)~~304 $General ~~(501)~~and ~~$(163,367,935)~~administrative ~~Net income~~................ 326,~~999~~755 26,~~175~~350 326,~~999,175~~388 ~~Accrued~~Restructuring ~~dividends~~costs ~~on redeemable preferred stock~~....................... ~~(421,353)~~-- ~~(421,353)~~-- ~~Treasury~~836 ~~stock~~Acquisition ~~purchase~~of business ................... (-- -- 1,~~701)~~110 Gain on disposition of business ........... -- -- (~~1,701~~630) ------- --- ----- ----- --- ------- 53,940 50,933 50,008 ------- --- ------ ---- ---------- ~~Balance,~~Operating ~~June~~income ~~30, 2000~~..................... ~~10 10 199~~24,~~980~~215 ~~(159~~22,~~989,612)~~694 (220,~~202)~~718 Other income (~~159,791,814~~expense): ~~Net~~Interest ~~loss~~expense .......................... (223,~~040~~708) (24,~~382~~674) (224,~~040,382~~656) ~~Accrued~~Gain ~~dividends~~(loss) on ~~redeemable~~early ~~preferred~~extinguishment ~~stock~~of debt 9,610 (994) -- Other ..................... ~~(412,299) (412,299) Treasury stock purchase~~................ ~~(4,800)~~24 ~~(4,800)~~22 415 ---------- -------- -- ------ ---- (14,074) (25,646) (24,241) ---------- ---------- ----------~~----~~ ~~Balance,~~Income ~~June~~(loss) ~~29,~~before ~~2001~~income taxes .............. 10 ~~10 199~~,~~980~~141 (~~162~~2,~~442,293~~952) (73,~~002~~523) Income tax (~~162,249,295~~expense) ~~Net~~benefit ~~loss~~................... (13,~~801,359~~970) (1,~~801~~151 1,~~359)~~483 ~~Accrued~~---------- ~~dividends~~---------- on---------- ~~redeemable~~Net ~~preferred~~income ~~stock~~(loss) ......................... 6,171 (~~407~~1,~~417~~801) (~~407~~2,~~417~~040) ~~Treasury~~Preferred stock ~~purchase~~dividends ...................... (~~4,250~~391) (~~4,250~~408) ~~-------~~(412) -------- --~~------~~ ----------~~----~~ ---------- ~~--------------~~Net ~~Balance,~~income ~~June~~(loss) ~~29,~~attributable ~~2002~~to common shareholders ........................ $ ~~10 $ 10 $199~~5,~~980~~780 $ (~~164~~2,~~651,069~~209) $ (112,~~252~~452) ~~$(164,462,321)~~ ======= ===~~====~~ ======== ==~~============~~ ========== ~~============== See notes to consolidated financial statements.~~

See notes to consolidated financial statements. 19

~~YEARS~~GFSI ~~ENDED ------------------------------------------------ JUNE 29~~HOLDINGS, ~~2002 JUNE 29, 2001 JUNE 30, 2000 ------------- ------------- ------------- Cash flows from operating activities: Net income (loss)~~INC.~~.......................................................~~ $AND ~~(1,801,359)~~SUBSIDIARIES $CONSOLIDATED ~~(2,040,382)~~STATEMENTS $OF ~~3,999,175~~CHANGES ~~Adjustments~~IN toSTOCKHOLDERS' ~~reconcile~~EQUITY ~~net income~~ (~~loss~~DEFICIENCY) toYears ~~net~~Ended ~~cash~~June ~~provided by operating activities: Depreciation........................................................... 3~~28,~~094,579~~ 32003,~~045,912~~ ~~3,235,324~~June ~~Amortization of deferred financing costs............................... 1~~29,~~178,892~~ 12002,~~215,214~~ ~~1,181,977~~and ~~Amortization~~June ~~of other intangibles...................................... 1~~29,~~000,000~~ --2001 ~~-- Gain on disposition of business........................................ --~~ (~~629,787)~~in ~~-- (Gain~~thousands) ~~loss~~Series onA ~~sale~~Series orB ~~disposal~~Additional ofCommon ~~property,~~Common ~~plant~~Paid-In ~~and~~Accumulated ~~equipment.......~~Treasury ~~(1,561)~~Stock ~~(99,015)~~Stock ~~56,545~~Capital ~~Deferred~~Deficiency ~~income~~Stock ~~taxes..................................................~~Total ~~(423~~Balance,~~716)~~ ~~156,388~~June ~~534~~30,~~079~~ ~~Accretion~~2000 of$ ~~discount on long~~-~~term~~- ~~debt................................~~$ ~~8,901,013 7,968,787 7,134,194 Extraordinary loss on early extinguishment of debt..................... 993,899~~ -- --$ ~~Changes~~200 in$ ~~operating assets and liabilities: Accounts receivable~~(159,990) ~~net...............................................~~$ (~~9,932,110~~2) ~~5,109,405~~$ (1159,~~420,388~~792) ~~Inventories,~~Net ~~net~~loss..............~~.........................................~~ (72,~~993,301~~040) ~~8,498,301~~ (32,~~816,043~~040) ~~Prepaid~~Accrued ~~expenses,~~dividends ~~other~~on ~~current~~redeemable ~~assets~~preferred ~~and other assets~~stock................. (~~129,353~~412) (~~113,918~~412) ~~(76,255)~~Treasury ~~Income~~stock ~~tax~~purchase ~~receivable.................................................. 1,406,724~~ (~~1,998,823~~5) ~~307,915 Accounts payable, accrued expenses and other long-term obligations.....~~ (~~3,949~~5) ~~1,434,463 (3,920,224)~~ ---------~~-----~~ --------~~----~~ --------~~----~~ ~~Net cash provided by (used in) operating activities.............. (3,710,242) 22,546,545 7,216,299~~ -------------- ------~~------~~ ------------ ~~Cash~~Balance, ~~flows~~June ~~from investing activities: Proceeds from sales of property~~29, ~~plant and equipment~~2001......~~............~~ ~~13,600~~-- ~~202,919~~-- 61200 (162,~~489~~442) ~~Purchases~~(7) ~~of property~~(162,249) ~~plant~~Net ~~and equipment~~loss...............~~.............~~ (~~4,203,011) (~~1,~~787,532~~801) (1,~~998,240~~801) ~~Proceeds~~Accrued ~~from~~dividends ~~disposition~~on ofredeemable ~~business.................................~~preferred --(408) ~~2,672,458~~(408) ~~-- Acquisition of business~~stock..................~~.............................~~ --(4) (~~9,500,000~~4) --Treasury stock purchase ---------~~-----~~ --------~~----~~ --------~~----~~ ~~Net cash used in investing activities............................ (4,189,411) (8,412,155) (1,936,751)~~ -------------- ------~~------~~ ------------ ~~Cash~~Balance, ~~flows~~June ~~from financing activities: Net changes to revolving credit agreement borrowings.................. 30~~29,~~527,000~~ ~~-- -- Issuance of long-term debt~~2002......~~.....................................~~ ~~300,000~~ -- -- ~~Payments~~200 ~~on long-term debt............................................~~ (26164,~~859,092~~651) (~~15,061,032~~11) (14164,~~035,648~~462) ~~Cash~~Net ~~paid for financing costs~~income.............~~............................~~ ~~(911~~6,~~973)~~171 ~~(189~~6,~~922)~~171 --Foreign ~~Redemption~~currency oftranslation ~~preferred stock~~gain...................~~......................~~ ~~(799,616)~~182 ~~(173,987)~~182 ~~(59,703)~~Accrued ~~Seller~~dividends ~~financing~~on ~~for~~redeemable ~~acquisition~~preferred ~~of business.......................... -- 5,158,000 -- Proceeds from sale of~~ stock..................~~.........................~~ ~~652,378~~(391) --(391) -- Treasury stock purchase~~...............................................~~ (~~4,250~~3) (~~4,800~~3) ~~(1,701)~~ ---------~~-----~~ --------~~----~~ --------~~----~~ ~~Net cash provided by (used in) financing activities 2,904,447 (10,271,741) (14,097,052)~~ -------------- ------~~------~~ ------------ ~~Net increase (decrease) in cash and cash equivalents (4~~Balance,~~995,206)~~ ~~3,862,649~~June (828,~~817,504)~~ ~~Cash and cash equivalents Beginning of period~~2003......~~.............................................~~ ~~5,323,536~~$ ~~1,460,887 10,278,391~~ --~~------------~~ ~~------------~~$ --~~----------~~ ~~End of period.........................................................~~ $ ~~328,330~~200 $ 5(158,~~323,536~~689) $ 1,460,887 ============== ============ ============ Supplemental cash flow information: Interest paid.................................................... $ 14,004,814 $15,697,623 $16,329,449 ============== ============ ============ Income taxes paid (~~refunded~~14)~~.....................................~~ $ (2158,~~391,366~~503) ~~$ 359,451 $ 1,530,298~~ =========~~=====~~ ========~~====~~ ========~~====~~ ~~Supplemental schedule of non-cash investing and financing activities: Accrual of preferred stock dividends................................... $ 407,417 $ 412,299 $ 421,353~~ ============== ======~~======~~ ===========~~= Equipment purchased under capital lease................................ $ -- $ 93,920 $ 468,338 ============== ============ ============ See notes to consolidated financial statements.~~

See notes to consolidated financial statements. 20 GFSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

~~JUNE~~Years Ended -------------------------------------------- June 28, 2003 June 29, 2002 ~~JUNE~~June 29, 2001 -------------- ------------- ~~Land~~------------- Cash flows from operating activities: Net income (loss).................................................. $ 6,171 $ (1,801) $ (2,040) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation.................................................. $3,137 23,~~455~~095 3,~~373~~046 $Amortization 2of deferred financing costs...................... 1,~~455~~008 1,~~373~~179 ~~Buildings~~1,215 Amortization of other intangibles............................. 1,000 1,000 -- Gain on disposition of business............................... -- -- (630) (Gain) loss on sale or disposal of property, plant and ~~Improvements~~equipment (24) (2) (99) Deferred income taxes......................................... 213,~~648~~800 (424) 156 Accretion of discount on long-term debt....................... 8,~~710~~812 218,~~004~~901 7,~~636~~969 ~~Furniture~~(Gain) loss on early extinguishment of debt................... (9,610) 994 -- Changes in operating assets and ~~Fixtures~~liabilities: Accounts receivable, net...................................... (1,731) (9,932) 5,109 Inventories, net.............................................. 193,~~461~~066 (7,~~891~~993) 188,~~285~~498 Prepaid expenses,~~124~~ other current assets and other assets....... (54) (129) (114) Income tax receivable (payable)............................... 317 1,406 (1,999) Accounts payable, accrued expenses and other long-term obligations (4,195) (4) 1,436 ----------- ----------- ---------- 43Net cash provided by (used in) operating activities........ 11,~~565~~697 (3,~~974~~710) 4122,~~745,133~~547 ~~Less~~---------- ----------- ---------- Cash flows from investing activities: ~~accumulated~~Proceeds ~~depreciation~~from sales of property, plant and equipment............ 44 14 203 Purchases of property, plant and equipment...................... 25(3,~~928~~369) (4,~~438~~203) 23(1,~~202~~787) Proceeds from disposition of business........................... -- -- 2,~~103~~672 Acquisition of business......................................... -- -- (9,500) ---------- ----------- ---------- 17Net cash used in investing activities...................... (3,~~637~~325) (4,~~536~~189) 18(8,~~543~~412) ---------- ----------- ---------- Cash flows from financing activities: Net changes to revolving credit agreement borrowings............ (7,~~030~~535) ~~Construction~~30,527 in-- ~~progress~~Issuance of long-term debt..................................... 450 300 -- Payments on long-term debt...................................... 2(196) (26,~~033~~859) (15,~~328~~061) 31Cash paid for financing costs................................... (69) (912) (190) Redemption of preferred stock................................... (128) (800) (174) Seller financing for acquisition of business.................... -- -- 5,~~443~~158 Proceeds from sale of stock..................................... -- 651 -- Treasury stock purchase......................................... (3) (4) (5) ---------- ---------- ---------- $Net ~~19,670,864~~cash $provided ~~18,574,473~~by ~~============~~(used ~~=============~~in) ~~Assets~~financing ~~under~~activities ~~capital~~(7,481) ~~leases were summarized as follows: JUNE 29~~2,903 ~~2002 JUNE 29~~(10,272) ~~2001~~ ---------- ---- ------ ---------- ~~Furniture~~Effect ~~and~~of ~~fixtures~~foreign exchange rate changes on cash...................... 182 -- -- ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 1,073 (4,996) 3,863 Cash and cash equivalents Beginning of period.................. ~~$ 571,264 $ 565,777 Less: accumulated amortization~~...........................~~......~~ ~~255~~328 5,~~426~~324 ~~143~~1,~~383~~461 ---------- --- ------- ---------- ~~Net~~End ~~assets~~of ~~under~~period................................................... ~~capital~~$ ~~lease~~1,401 $ 328 $ 5,324 ========== ========== ========== Supplemental cash flow information: Interest paid.............................................. $ ~~315~~13,~~838~~888 $ ~~422~~14,~~394~~005 $ 15,698 ========== ========== ========== Income taxes paid (refunded)............................... $ (147) $ (2,391) $ 359 Supplemental schedule of non-cash investing and financing activities: ========== ========== ========== Accrual of preferred stock dividends............................. $ 391 $ 408 $ 412 ========== ========== ========== See notes to consolidated financial statements.

21 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 28, 2003, JUNE 29, 2002 AND JUNE 29, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business--GFSI Holdings, Inc. ("Holdings" or the "Company") through its wholly-owned subsidiary, GFSI, Inc. ("GFSI") is a leading designer, manufacturer and marketer of high quality, custom designed sportswear and activewear bearing names, logos and insignia of resorts, corporations, colleges and professional sports organizations. The Company's customer base is spread throughout the United States and Canada. Principles of Consolidation--The consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiary, GFSI. All significant intercompany accounts and transactions have been eliminated. Fiscal Year--The Company utilizes a 52/53 week fiscal year which ends on the Saturday nearest June 30. The twelve month periods ended June 28, 2003, June 29, 2002 and June 29, 2001, each contain 52 weeks. Revenue Recognition--The Company recognizes revenues when goods are shipped, title has passed, the sales price is fixed and collectibility is reasonably assured. Returns, discounts and sales allowance estimates are based on projected sales trends, historical data and other known factors. If actual returns, discounts and sales allowances are not consistent with the historical data used to calculate these estimates, net sales could either be understated or overstated. The Company recognizes the costs of customer incentive programs and volume rebates as a reduction of net sales. The Company records as revenue amounts billed to customers for shipping and handling. Cost of Sales, Selling, General and Administrative Costs-- Cost of sales includes the cost of blank garment acquisition, freight, decoration, warehousing, related overhead costs and shipping and handling costs to deliver product to customers. Selling, general and administrative expenses include sales commissions, license royalties, marketing expenses, salaries, profit sharing, technology, professional services and other similar costs. Cash and Cash Equivalents--The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Accounts Receivable--Accounts receivable consist of amounts due from customers and business partners. The Company maintains an allowance for doubtful accounts to reflect expected credit losses and provides for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the credit-worthiness of each customer. Furthermore, these judgments must be continually evaluated and updated. If the historic data used to evaluate credit risk does not reflect future collections, or, if the financial condition of the Company's customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods. Inventories--Inventories are carried at the lower of cost or market determined under the First-In, First-Out (FIFO) method. The Company writes down obsolete and unmarketable inventories to their estimated market value based upon, among other things, assumptions about future demand and market conditions. If actual market conditions are less favorable than projected, additional inventory write-downs may be required. The Company also records changes in valuation allowances due to changes in its operating strategy, such as the discontinuances of certain product lines and other merchandising decisions related to changes in demand. It is possible that further changes in required inventory allowances may be necessary in the future as a result of market conditions and competitive pressures. Inventories consist primarily of non-decorated apparel ("blanks"). The following is a summary of inventories at June 28, 2003 and June 29, 2002: (in thousands) June 28, 2003 June 29, 2002 ------------- ------------- Undecorated apparel ("blanks") and supplies $ 37,924 $ 42,431 Work in process............................ 609 1,114 Finished goods............................. 4,887 2,691 ----------- ----------- 43,420 46,236 Markdown allowances........................ (757) (507) ------------ ----------- $ 42,663 $ 45,729 ============ =========== 22 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property, Plant and Equipment--Property, plant and equipment are recorded at cost. Major renewals and betterments that extend the life of the asset are capitalized; other repairs and maintenance are expensed when incurred. Depreciation and amortization are provided for on the straight-line method over the following estimated useful lives: Buildings and improvements................. 40 years Furniture and fixtures..................... 3-10 years Long-Lived Assets-- The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews for impairment its long-lived assets and certain identifiable intangibles to be held and used whenever events or changes in circumstance indicate that the carrying amount of its assets might not be recoverable. The Company has concluded no financial statement adjustment is required. Deferred Financing Costs--Deferred financing costs are amortized using the straight-line method over the shorter of the terms of the related loans or the period such loans are expected to be outstanding. Amortization of deferred financing costs is included in interest expense. Advertising Costs-- All costs related to advertising the Company's products are expensed in the period incurred. Advertising expenses totaled $2.0 million, $1.5 million and $1.8 million for the years ended June 28, 2003, June 29, 2002 and June 29, 2001, respectively. Income Taxes-- The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. The liability method provides that deferred tax assets and liabilities are recorded based on the difference between tax basis of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates which will be in effect when these differences are expected to reverse. The Company files a consolidated federal tax return and is a party to a tax sharing agreement with its wholly-owned subsidiary, GFSI, Inc. Use of Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Segment Information-- Substantially all of the Company's net sales are derived from sources within the United States of America and substantially all of its assets are located within the United States of America. During fiscal 2003 sales to one customer represented approximately 12% of consolidated net sales. No single customer represented 10% or more of consolidated net sales in fiscal 2002 or 2001. New Accounting Standards-- In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145 "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". The new standard eliminated the requirement to classify all gains and losses related to debt extinguishments as extraordinary items. The Company adopted SFAS No. 145 in the first quarter of fiscal 2003, and accordingly reported a $9.6 million gain related to the GFSI,Inc. Bond exchange as a component of pre-tax income. The Company has reclassified the 2002 loss on extinguishment of debt, previously reported as an extraordinary item, net of income taxes, as other income (expense) in accordance with the provisions of SFAS No. 145. Net income, shareholders equity or cash flows were not impacted by the adoption of this new standard. In May 2003, the FASB issued Statement of SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating what impact, if any, this standard will have on its financial position and results of operations. 23 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities". The Interpretation addresses consolidation by business enterprises of variable interest entities which meet certain characteristics and is effective for all variable interest entities created after January 31, 2003 and otherwise for the fiscal year beginning after June 15, 2003. The Interpretation does not have any effect on the Company's financial position or results of operation. Reclassifications-- Certain reclassifications have been made to the fiscal 2002 and 2001 consolidated financial statements to conform to the fiscal 2003 presentation. 2. RESTRUCTURING, ACQUISITION AND DISPOSITION During fiscal 2001, the Company recorded approximately $836,000 in severance and employee termination benefits related to the execution of a restructuring plan that eliminated approximately 50 positions. On April 20, 2001, the Company signed a Stock Purchase Agreement to purchase 100% of the issued and outstanding stock of Champion Products, Inc. ("CPI" or "Champion") through a wholly-owned subsidiary, CC Products, Inc. ("CCP"), and on June 25, 2001 the transaction closed. The Company paid approximately $9.5 million for the common stock of CPI and a non-competition agreement which was payable in four installments through October 1, 2001. In addition, the Company entered into a 15 year License Agreement (the "License Agreement") with Sara Lee Corporation (the former parent company of CPI) for the exclusive use of the Champion logo and related trademarks on certain products sold beginning July 1, 2001. Under the License Agreement, the Company will pay a royalty to Sara Lee Corporation based upon net sales beginning in fiscal 2004. The royalty rate ranges from 3% to 6% of net sales from years 3 to 15 of the License Agreement. The License Agreement provides for guaranteed minimum royalties of $1 million per year in years 3 and 4 of the License Agreement. CCP was designated a restricted subsidiary under the Senior Subordinated Notes and executed a guaranty for that debt instrument in June 2001. On June 29, 2001, the Company sold the assets related to its Tandem Marketing business for approximately $2.7 million in cash, net of closing costs, and the buyer's assumption of $1.2 million in Tandem related liabilities. The Company recognized a $630,000 gain on the sale of Tandem Marketing. Tandem Marketing had revenues of $11.7 million and had operating income of $.5 million for the fiscal year ended June 29, 2001. 3. PROPERTY, PLANT AND EQUIPMENT (in thousands) June 28, 2003 June 29, 2002 ------------- ------------- Land....................................... $ 2,540 $ 2,455 Buildings and improvements................. 23,739 21,649 Furniture and fixtures..................... 21,344 19,462 --------- ---------- 47,623 43,566 Less: accumulated depreciation............. 28,469 25,928 --------- ---------- 19,154 17,638 Construction in progress................... 729 2,033 --------- ---------- $ 19,883 $ 19,671 ========= ========== 24

~~JUNE~~GFSI 29HOLDINGS, ~~JUNE~~INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LONG-TERM DEBT AND CREDIT AGREEMENT Long-term debt consists of: (in thousands) June 28, June 29, 2003 2002 ~~2001~~ ---------~~----~~ ---------~~----~~ Senior Subordinated Notes, 9.625% interest rate, due 2007............~~...........~~ $ ~~125~~134,~~000,000~~900 $ 125,000~~,000~~ Revolving Bank Credit Agreement, variable interest rate, due 2005....~~...........~~ 22,992 30,527~~,000~~ --Senior Term Loan A, variable interest rate, 7.5% at June 29, 2001, due 2002.................................................. -- 11,053,395 Term Loan B, variable interest rate, 8.0% at June 29, 2001, due 2004.................................................. -- 15,604,794 Subordinated Discount Notes, 11.375% interest rate, due 2009...............~~.....~~ 8473,~~987,957~~926 7684,~~086,944~~988 ~~Mortgage payable to the City of Bedford, Iowa, 7.60% interest rate.............. 219,293 275,957 Capital lease obligations....................................................... 268,326 407,287~~ Other................................................................~~...........~~ ~~294~~1,~~721~~071 --782 ---------~~----~~ ----------~~---~~ 232,889 241,297~~,297~~ ~~228,428,377~~ Less current portion.................................................~~...........~~ 324 177~~,087~~ ~~6,699,631~~ ---------~~----~~ ----------~~---~~ $ ~~241~~232,~~120,210~~565 $ ~~221~~241,~~728,746~~120 =========~~====~~ ==========~~===~~

In December 2002 the Company's wholly-owned subsidiary, GFSI, Inc., completed the private placement of $9.9 million of unregistered 9.625% senior subordinated notes ("Exchange Notes") in exchange for $24 million aggregate principal amount at maturity of the Company's 11.375% Senior Discount Notes (the "Holdings Discount Notes") with an accreted book value of $19.9 million. The acquisition of the Holdings Discount Notes by GFSI, Inc. was considered an early extinguishment of debt, and accordingly, the Company recorded a pre-tax gain on the transaction of approximately $9.6 million, net of related costs, in fiscal 2003. In future periods, GFSI Holding's consolidated financial statements will reflect a net reduction in annual interest expense of approximately $2.3 million as a result of this exchange. The Exchange Notes are unsecured obligations of GFSI, Inc., mature on March 1, 2007, pay interest semi-annually on March 1 and September 1, and were issued under an indenture with substantially identical terms as the indenture governing the $125 million aggregate principal amount at maturity of GFSI, Inc. Senior Subordinated Notes issued on February 28, 1997. The Exchange Notes were guaranteed by each of GFSI, Inc's wholly-owned subsidiaries (Event 1, CCP and GFSI Canada Company). GFSI, Inc. subsequently filed an exchange offer registration statement with the Securities and Exchange Commission which publicly registered the notes. In fiscal 2002 the Company replaced its existing bank Credit Agreement by entering into a Revolving Bank Credit Agreement ("RBCA") with a group of financial institutions to provide a revolving line of credit which matures in January 2005. Proceeds from borrowings under the replacement RBCA were used to retire the Company's existing bank debt which was comprised of both term loans and revolving debt. The Company incurred fees and expenses totaling approximately $900,000 to close the credit facility. The RBCA provides for borrowings on a revolving basis of up to $65 million at an interest rate based upon LIBOR or prime. The weighted average interest rate in effect at June 28, 2003 was 3.3%. In addition, the RBCA provides for the issuance of letters of credit on behalf of the Company. At June 28, 2003 and June 29, 2002 the Company had $4.5 million and $8.8 million in letters of credit outstanding and $32.9 million and $23.2 million in unused borrowing availability under the RBCA, respectively. The Company recorded a pre-tax charge of $994,000 in fiscal 2002 to write off deferred debt origination costs related to the previous bank credit facility. 25 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The RBCA is secured by substantially all of GFSI's assets and is guaranteed by GFSI's wholly-owned subsidiaries and Holdings. Borrowings under the RBCA are subject to certain restrictions and covenants. GFSI and its wholly-owned subsidiary guarantors are limited with respect to paying dividends, providing loans and distributions (except certain permitted distributions to Holdings), the incurrence of certain debt, the incurrence of certain liens, and restricted regarding certain consolidations, mergers and business combinations, asset acquisitions and dispositions. The RBCA requires the Company, among other things, to maintain a minimum fixed charge coverage ratio as defined in the RBCA. At the most restrictive level, the Company must maintain a fixed charge coverage ratio of 1.15 to 1.0. As of June 28, 2003, the Company was in compliance with the restrictions and covenants of the RBCA. On February 27, 1997, GFSI issued the 9.625% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") in the aggregate principal amount of $125,000,000. Interest on the Senior Subordinated Notes is payable semi-annually in cash in arrears on September 1 and March 1 each year. The Senior Subordinated Notes mature on March 1, 2007 and are redeemable, in whole or in part, at the option of the Company at any time at the redemption prices listed below: Year Percentage ---- ----------- 2003 103.208% 2004 101.604 2005 and thereafter 100.000 Upon the occurrence of a change of control, GFSI will be required, subject to certain conditions, to make an offer to purchase the Senior Subordinated Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase. The Senior Subordinated Notes are publicly traded over the counter. At June 28, 2003, the quoted market price for the Senior Subordinated Notes was 82/100. At June 28, 2003, the Senior Subordinated Notes estimated fair value approximated $110.6 million. The Senior Subordinated Notes are senior unsecured obligations of GFSI and pursuant to the terms of the Senior Subordinated Notes indenture, rank pari passu in right of payment to any future subordinated indebtedness of GFSI, and effectively rank junior to secured indebtedness of GFSI, including borrowings under the RBCA. The Senior Subordinated Notes Indenture includes covenants that, among other things, limit payments of dividends and other restricted payments and the incurrence of additional indebtedness. As of June 28, 2003, the Company was in compliance with all such covenants. The Senior Discount Notes ("Holdings Discount Notes") were issued in 1997 to repay $25.0 million of Holdings' Subordinated Notes and $25.0 million of Holdings' Preferred Stock and accrued dividends. The Holdings' Discount Notes accrue interest at a rate of 11.375% compounded semi-annually to an aggregate principal amount of $84.5 million at September 15, 2004. Thereafter, the Holdings Discount Notes accrue interest at the rate of 11.375% per annum, payable semi-annually, in cash on March 15 and September 15 of each year, commencing on March 15, 2005. Holdings is dependent on GFSI to provide funds to service the indebtedness. 26 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Interest on the Holdings Discount Notes is an unsecured obligation of Holdings and pursuant to the terms of the Holdings Discount Notes, effectively rank junior to the unsecured debt of GFSI, including the Senior Subordinated Notes, and the secured indebtedness of GFSI, including borrowings under the RBCA. The Holdings Discount Notes include certain affirmative and negative covenants. As of June 28, 2003, the Company was in compliance with all such covenants. The Holdings Discount Notes are publicly traded over the counter. At June 28, 2003, the quoted market price for the Holdings Discount Notes was 32/100. At June 28, 2003, the Holdings Discount Notes estimated fair value approximated $27 million. On June 1, 1998, GFSI purchased a building and land in Bedford, Iowa for approximately $428,000 in the form of a mortgage note payable of approximately $6,000 per month from July 1998 through June 2004 with a lump sum payment of $98,000 in June 2004. The note payable to the City of Bedford, Iowa is secured by the property mortgaged. Aggregate maturities of the Companys' long-term debt as of June 28, 2003 are as follows: (in thousands) Year ---- 2004................................. $ 324 2005................................. 23,158 2006................................. 88 2007................................. 134,979 2008................................. 81 Thereafter........................... 74,259 ------------- Total $ 232,889 ============= 5. COMMITMENTS AND CONTINGENCIES Rental expense for all operating leases aggregated approximately $1.2 million, $727,000 and $598,000 in fiscal years 2003, 2002 and 2001, respectively. It is anticipated that leases that expire will be renewed or replaced, and future lease commitments are not expected to aggregate less than the amount shown in fiscal 2003. 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. 6. REDEEMABLE PREFERRED STOCK The holders of Preferred Stock are entitled to annual dividends of $120 per share. The dividend has been accrued annually and the annual payment deferred since 1997. Mandatory redemption of Preferred Stock at $1,000 per share plus accrued and unpaid dividends is to occur on March 1, 2009. 27 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Redeemable preferred stock consists of the following: (in thousands, except share data) June 28, June 29, 2003 2002 ---------- --------- Series A 12% Cumulative Preferred Stock, $0.1 par value 1,428 and 1,503 shares outstanding at June 28, 2003 and June 29, 2002, respectively.................. $ 2,529 $ 2,480 Series B 12% Cumulative Preferred Stock, $0.1 par value, 1,445 shares outstanding at June 28, 2003 and June 29, 2002................................ 2,559 2,383 Series C 12% Cumulative Preferred Stock, $0.1 par value, 329 shares outstanding at June 28, 2003 and June 29, 2002. .............................. 582 542 ----------- --------- $ 5,670 $ 5,405 =========== ========= 7. PROFIT SHARING AND 401(K) PLAN The Company has a defined contribution (401k) plan which includes employee directed contributions with an annual Company matching contribution of 50% on up to 4% of a participant's annual compensation. In addition, the Company may make additional profit sharing contributions at the discretion of the Board of Directors. Participants exercise control over the assets of their account and choose from a broad range of investment alternatives. Contributions made by the Company to the plan related to the 401(k) match and profit sharing portions totaled approximately $576,000, $528,000 and $617,000 for the years ended June 28, 2003, June 29, 2002 and June 29, 2001, respectively. 8. INCOME TAXES The provisions for income taxes for the years ended June 28, 2003, June 29, 2002 and June 29, 2001 consist of the following: June 28, June 29, June 29, 2003 2002 2001 -------- ---------- --------- Current income tax provision (benefit)...... $ 170 $ (727) $ (1,639) Deferred income tax provision (benefit)..... 3,800 (424) 156 -------- ---------- --------- Total income tax provision (benefit)... $ 3,970 $ (1,151) $ (1,483) ======== ========== ========= The income tax provisions differ from amounts computed at the statutory federal year ended income tax rate as follows:

~~Redeemable~~June ~~preferred~~28, ~~stock~~2003 ~~consists~~June ~~of the following: JUNE~~ 29, ~~JUNE~~2002 June 29, ~~2002~~ 2001 -------------- ------------- ~~Series~~------------- AAmount 12% ~~Cumulative~~Amount ~~Preferred~~% ~~Stock,~~Amount ~~$0.1~~% ~~par~~-------- ~~value~~------- ~~1,503~~--------- ~~and~~------ ~~1,597~~-------- ~~shares~~------- ~~outstanding~~Income attax ~~June~~provision ~~29,~~(benefit) ~~2002~~at ~~and~~the ~~June~~statutory ~~29,~~rate ~~2001~~$ 3,549 ~~respectively~~35.~~.................................~~0% $ 2(1,~~479,604~~033) $(35.0)% 2$(1,~~437,697~~233) ~~Series B 12~~(35.0)% ~~Cumulative~~Effect ~~Preferred~~of ~~Stock,~~state ~~$0.1~~income ~~par value~~taxes, ~~1,445~~net ~~shares~~of ~~outstanding~~federal atbenefit ~~June~~395 ~~29,~~3.9 ~~2002~~(115) ~~and~~(3.9) ~~June~~(163) ~~29,~~(4.6) ~~2001~~Other ................................................ ~~2,383,975~~26 ~~2,206,120~~0.1 ~~Series~~(3) ~~C 12% Cumulative Preferred Stock, $~~(0.1) ~~par~~(87) ~~value, 329 shares outstanding at June 29, 2002 and June 29, 2001~~(2.5) ~~..............................................~~------- ~~541,812~~------ ~~501,395~~ -------- ------- -------- ------- $ 53,~~405,391~~970 39.0% $(1,151) 5(39.0)% $(1,~~145,212~~483) (42.1)% ======= ====== ======== ======= ======== =======

28 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The sources of the differences that give rise to the deferred income tax assets and liabilities as of June 28, 2003 and June 29, 2002, along with the income tax effect of each, were as follows:

~~JUNE~~June 2928, ~~JUNE~~2003 June 29, ~~JUNE~~2002 ~~30,~~-------------- ~~2002~~------------- ~~2001~~Deferred ~~2000~~Income Tax Deferred Income Tax ------------------- ------------------- Assets Liabilities Assets Liabilities ------ ----------- ~~Current~~------ ~~income~~----------- ~~tax~~Allowance ~~provision~~for ~~(benefit)~~doubtful accounts ..............~~........~~ $ ~~(1,115,619)~~352 $ ~~(1,639,369)~~-- $ ~~2,080,067~~299 ~~Deferred~~$ ~~income~~-- ~~tax~~Property, ~~provision~~plant, ~~(benefit)~~and equipment................~~.....~~ ~~(36,116) 156,388 534,079~~ --~~------------~~ ~~-------------~~1,549 --~~---------~~ ~~Total~~1,038 ~~income~~Accrued ~~tax provision (benefit)~~expenses.............................. $392 ~~(1,151,735)~~-- $346 ~~(1,482,981)~~-- $Long-term ~~2,614,146~~debt ~~============== ============= =========== Allocated to: Operating activities~~extinguishment................. -- 3,763 -- -- Other assets, non current..................... $676 ~~(764,135)~~-- $338 ~~(1,482,981)~~-- ~~$ 2,614,146 Extraordinary loss~~Other......................................... ~~(387,600)~~390 --152 --348 147 -------------- ---------- --- ---- -------- Total ~~income tax provision~~......................................... $ (1,~~151~~810 $ 5,~~735)~~464 $ (1,~~482,981)~~331 $ 21,~~614,146~~185 ============== ========== === ==== ========

9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires that GFSI disclose estimated fair values for its financial instruments which include cash and cash equivalents, accounts receivables, short-term borrowings, accounts payables, long-term debt. 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. Accounts payable--The carrying amount of accounts payable approximates fair value because of the short-term nature of the financial instruments. Long-term debt-- Current market values, if available, are used to determine fair values of debt issues with fixed rates. The carrying value of floating rate debt is a reasonable estimate of its fair value because of the short-term nature of its pricing. The following summarizes the estimated fair value of financial instruments, by type: (in thousands) June 28, 2003 June 29, 2002 --------------- -------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- --------- --------- -------- Assets and liabilities: Cash and cash equivalents...... $ 1,401 $ 1,401 $ 328 $ 328 Accounts receivable............ 34,357 34,357 32,626 32,626 Accounts payable............... 7,843 7,843 12,010 12,010 Long-term debt................. 232,889 161,712 241,297 167,305 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. 29 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. RELATED PARTY TRANSACTIONS The Jordan Company Management Corporation has an agreement through February 2007 to render services to the Company including consultation on its financial and business affairs, its relationship with its lenders and stockholders, and the operation and expansion of its business. The agreement will renew for successive one year terms unless either party, within 60 days prior to renewal, elects to terminate the agreement. The Company incurred consulting fees totaling $500,000, $500,000 and $440,000 for years ended June 28, 2003, June 29, 2002 and June 29, 2001, respectively. Holdings has a non-competition agreement with a shareholder and an officer. In exchange for the covenant not to compete, the shareholder is paid $250,000 per annum for a period of ten years. For each of the years ended, June 28, 2003, June 29, 2002 and June 29, 2001, $250,000 of expense related to this agreement was included in general and administrative expenses. The Company has employment agreements with Robert M. Wolff, Chairman and Chief Executive Officer, a Director and a stockholder of the Company. The terms of the employment agreements provide for Mr. Wolff to serve as Chairman of the Company in exchange for a base salary and other employee benefits through 2016. Under the terms of the employment agreements, Mr. Wolff received an annual salary of approximately $212,000, $195,000, and $209,000, and use of a Company vehicle for the years ended June 28, 2003, June 29, 2002 and June 29, 2001, respectively. 11. STOCK OPTIONS The Board of Directors' grant stock options to certain officers on a discretionary basis. The grants are in the combined form of Class A common and Class A preferred shares. The grant price of the option is generally determined by a formula which places a nominal value on the Class A common share and a par plus accrued and unpaid dividend value on the Class A preferred shares. Management believes this formula reasonably approximates fair value. The Company's stock is not publicly traded and has no quoted per share value. The Company recognizes compensation expense to the extent an option is granted for an exercise price that is less than the formula value at the date of the grant. The following table summarizes activity for options to purchase Class A common and preferred stock.

~~JUNE~~Common ~~29,~~Stock ~~2002~~Preferred ~~JUNE~~Stock ~~29, 2001 JUNE 30, 2000~~ ------------ -- ------------- Weighted-average Weighted-~~-----------~~average ~~AMOUNT~~Class %A ~~AMOUNT~~Shares %exercise ~~AMOUNT~~price %Class A Shares exercise price -------------- ------- ------- ----- ------ --- ------- ------- ~~Income~~Outstanding ~~tax provision (benefit)~~ at ~~the~~June ~~statutory rate... $(685~~29,~~719)~~ ~~(35.0)%~~2002 50 $~~(1,233,177)~~ ~~(35~~100 88.~~0)%~~7 $~~2,248,529~~ ~~34.0% Effect of state income taxes~~1,247 ~~net~~Granted of70 ~~federal~~100 ~~benefit~~124...2 ~~(70~~1,~~696)~~304 ~~(3.6)~~Exercised (~~163,183~~5) 100 (48.69) ~~342,044~~-- ~~5.2~~Forfeited ~~Other..................................................~~ (~~7,720~~5) ~~(.4)~~100 (~~86,621) (2~~8.59) 231,~~573~~646 .3 -------~~---~~ ------- ~~------------~~Outstanding ~~-------~~at ~~----------~~June ~~----- $(764~~28,~~135)~~ ~~(39.0)%~~2003 110 $~~(1,482,981)~~ ~~(42~~100 195.1)% $2 1,~~614,146~~322 ~~39.5%~~ =======~~===~~ ======= ~~============~~Options ~~=======~~exercisable ~~==========~~at ~~=====~~June 29, 2002 10 $ 100 17.7 $ -- Options exercisable at June 28, 2003 25 $ 100 44.3 $ 1,247

30 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides certain information with respect to stock options outstanding at June 28, 2003: Stock Options Weighted-average Range of Outstanding exercise price Exercise Prices ------------- ---------------- --------------- Common Stock Options 110 $ 100 $ 100 Preferred Stock Options: 35.5 $ -- $ -- 159.6 $ 1,616 $1,559-$1,721 The following table provides certain information with respect to stock options exercisable at June 28, 2003: Stock Options Weighted-average Range of Outstanding exercise price Exercise Prices ------------- ---------------- --------------- Common Stock Options 25 $ 100 $ 100 Preferred Stock Options: 8.9 $ -- $ -- 35.4 $ 1,559 $ 1,559 The Company follows APB Opinion 25 to account for stock options granted to employees. Had the Company accounted for its stock options granted to employees under FASB Statement 123, the effect would have been insignificant. 12. SUBSEQUENT EVENT In August 2003, the Company sold its 100,000 square foot distribution facility located in Lenexa, Kansas, for approximately $2.8 million. The Company will record a pre-tax gain on the sale of approximately $900,000 in the first quarter of fiscal 2004. The facility was sold as part of a warehouse consolidation and automation initiative which will combine the distribution operations from this facility and several other smaller leased warehouses. In August 2003, the Company entered into an operating lease for approximately 240,000 square feet of space in an existing industrial building near its Lenexa headquarters to support the distribution automation initiative. Annual rent under the ten year operating lease is approximately $730,000 and provides for one ten year extension. The agreement also allows the Company an option to expand into an additional 65,000 square feet of existing space. The Company expects to complete its move to the new distribution facility in the second half of fiscal 2004. 31 INDEPENDENT AUDITORS' REPORT To the Board of Directors GFSI Holdings, Inc. We have audited the consolidated financial statements of GFSI Holdings, Inc. and subsidiaries as of June 28, 2003 and June 29, 2002, and for the years then ended and have issued our report thereon dated August 22, 2003. In connection with our audits of the aforementioned consolidated financial statements, we also audited the financial statement schedule as of June 28, 2003 and June 29, 2002 and for the years then ended. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ KPMG LLP Kansas City, Missouri August 22, 2003 32 REPORT OF INDEPENDENT AUDITORS To the Board of Directors GFSI Holdings, Inc. Our audit of the accompanying consolidated financial statements of GFSI Holdings, Inc. and subsidiaries referred to in our report dated September 12, 2001 also included an audit of the financial statement schedule which follows. In our opinion, the financial statement schedule presents fairly in all material respects, the information set forth therein, when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Kansas City, Missouri September 12, 2001 33

~~JUNE~~SCHEDULE I GFSI HOLDINGS, INC. PARENT COMPANY ONLY BALANCE SHEETS June 28, 2003 and June 29, 2002 ~~JUNE~~(in thousands, except share data) June 28, June 29, ~~2001~~ASSETS 2003 2002 ------ -------- --------~~-----~~ ~~DEFERRED~~Current ~~INCOME~~assets: ~~TAX~~Cash.............................................................. ~~DEFERRED~~$ ~~INCOME~~14 ~~TAX~~$ 15 Income tax receivable............................................. 8,817 5,371 -------- --------~~-----~~ 8,831 5,386 Deferred financing costs............................................... 126 189 --------- --------~~----~~ ~~ASSETS~~Total ~~LIABILITIES~~assets................................................... ~~ASSETS~~$ 8,957 $ 5,575 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) ----------- ----------- ----------- ---------------- ~~Allowance~~Negative ~~for~~investment ~~doubtful~~in ~~accounts~~GFSI, Inc....................................... ~~$ 298~~83,~~957~~972 ~~$ -- $ 271~~79,~~825~~644 $Deferred --income ~~Property, plant, and equipment~~taxes.................................................. ~~-- 1~~3,~~037,903~~892 -- ~~1,031,191~~Long-term ~~Accrued expenses~~debt......................................................... ~~345~~73,~~574~~926 ~~-- 779~~84,~~277~~988 --Redeemable ~~Deferred~~preferred ~~financing costs~~stock............................................. --5,670 ~~-- -- 523~~5,~~975~~405 ~~Other~~Stockholders' ~~assets,~~deficiency: ~~non~~Common ~~current~~stock.................................................. ~~338,000~~ -- -- Additional paid--in ~~Other~~capital.................................... 200 200 Accumulated deficiency........................................ ~~348~~(158,~~315~~689) ~~147~~(164,~~768~~651) ~~369~~Treasury stock,~~697~~ ~~144~~at cost (195 and 152.5 Series A shares at June 28,~~174~~ 2003 and June 29, 2002, respectively)............ (14) (11) ---------- ---------- Total stockholders' equity (deficiency)................ (158,503) (164,462) ---------- ---------- Total liabilities and stockholders' equity (deficiency)......~~....................................................~~ $~~1,330,846~~ $18,~~185,671~~957 $~~1,420,799~~ $15,~~699,340~~575 ========== =========~~= ========== ==========~~

See independent auditors report on schedules. 34

~~JUNE~~SCHEDULE I GFSI HOLDINGS, INC. PARENT COMPANY ONLY STATEMENTS OF OPERATIONS Years Ended June 28, 2003, June 29, 2002 ~~JUNE~~and June 29, 2001 (in thousands) Years Ended ------------------ ------------------------------- ~~CARRYING~~June ~~FAIR~~28, ~~CARRYING~~2003 ~~FAIR~~June ~~AMOUNT~~29, ~~VALUE~~2002 ~~AMOUNT~~June ~~VALUE~~29, 2001 -------- ------ ------------- ------------- ~~Assets~~General and ~~liabilities:~~administrative ~~Cash and cash equivalents~~expenses.................................... $ ~~328,330~~-- $ ~~328,330~~-- $ ~~5,323,536~~(10) $Interest 5expense....................................................... (8,~~323~~836) (8,~~536~~927) ~~Accounts~~(7,995) ~~receivable~~Gain on early extinguishment of debt................................... 329,~~626,431~~610 32-- -- ------------- ------------ ----------- Income (loss) before income taxes and equity in net income of GFSI,~~626,431~~ 22Inc. 774 (8,~~694,322~~927) 22(8,~~694,322~~005) ~~Accounts~~Income ~~payable~~tax benefit (expense)........................................... 12(317) 3,~~010~~482 3,~~292~~114 12------------- ------------ ----------- Income (loss) before equity in net income of GFSI,~~010~~ Inc................. 457 (5,~~292~~445) 12(4,~~777~~891) Equity in net income of GFSI,~~790~~ 12Inc...................................... 5,~~777~~714 3,~~790~~644 ~~Long~~2,851 -~~term~~------------ ~~debt~~------------ ----------- Net income (loss)...................................................... ~~241~~6,~~297~~171 (1,~~297~~801) ~~167~~(2,~~305~~040) Preferred stock dividends.............................................. (391) (408) (412) ------------- ------------ ----------- Net income (loss) attributable to common shareholders.................. $ 5,~~340~~780 ~~228~~$ (2,~~428,377~~209) ~~143~~$ (2,~~754,000~~452) ============= ============ ===========

See independent auditors report on schedules. 35

~~JUNE~~SCHEDULE 29I GFSI HOLDINGS, ~~JUNE~~INC. PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS Years Ended June 28, 2003, June 29, 2002 and June 29, 2001 (in thousands) Years Ended ----------------------------------------------- June 28, 2003 June 29, 2002 June 29, 2001 ------------- ~~ASSETS~~------------- ------------- ~~Current~~Cash ~~assets~~flows from operating activities: ~~Cash~~Net income (loss)........................................................~~......~~ $ 156,~~349~~171 $ 14(1,~~682~~801) ~~Income~~$ ~~tax~~(2,040) ~~receivable~~Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in net income of GFSI, Inc................................ (5,714) (3,644) (2,851) Distributions received from GFSI, Inc............................ ~~5,371,305~~324 ~~1,889,615~~152 ~~-------------~~179 ~~------------~~Amortization ~~5,386,654~~of ~~1,904,297~~deferred ~~Deferred~~ financing costs......................... 24 26 26 Accretion of discount on long-term debt.......................... ~~189~~8,~~180~~812 ~~215~~8,~~577~~901 ~~-------------~~7,969 ~~------------~~Gain ~~Total~~on ~~Assets~~early extinguishment of debt............................. (9,610) -- -- Changes in: Income tax receivable...................................... $(3,445) 5(3,~~575~~481) (1,~~834~~889) $Accrued ~~2,119,874~~expenses ~~=============~~and ~~============~~income ~~LIABILITIES~~taxes ~~AND~~payable.................. ~~STOCKHOLDERS'~~(195) ~~EQUITY~~-- (~~DEFICIENCY~~215) Deferred income taxes...................................... 3,763 -- -- ---------- --------- ------------ Net cash provided by operating activities........... 130 153 1,179 ---------- --------- ~~Negative~~------------ ~~investment~~Cash inflows from financing activities: Capital contribution to GFSI, Inc...................................~~....~~ ~~79,644,807~~-- 83-- (1,~~137,013~~000) ~~Long-term~~Redemption ~~debt~~of preferred stock....................................... (128) (800) (174) Proceeds from sale of stock......................................... ~~84,987,957~~-- ~~76,086,944~~652 ~~Redeemable~~-- ~~preferred~~Treasury stock purchase............................................. (3) (5~~,405,391~~) (5~~,145,212~~) ~~Stockholders'~~---------- ~~deficiency:~~--------- ~~Common~~------------ ~~stock~~Net cash used in financing activities.............. (131) (153) (1,179) ---------- --------- ------------ Net increase in cash........................................ ~~20 20 Accumulated deficiency~~............. (1) -- -- Cash, beginning of period............................... ~~(164,451,089) (162,242,313) Treasury stock, at cost (152~~.~~5 and 100 Series A shares at June 29, 2002 and June 29, 2001, respectively)~~................. ~~(11,252)~~15 ~~(7,002)~~15 15 ---------- ---- ----- ------------ ~~Total~~Cash, ~~stockholders'~~end ~~equity~~of ~~(deficiency)~~period...................................................... ~~(164,462,321)~~$ ~~(162,249,295)~~14 ~~--------------~~$ 15 $ 15 ========== ========= ============ Supplemental schedule of non-~~-------------~~cash ~~Total~~financing ~~liabilities~~activities: ~~and~~Accrual ~~stockholders'~~of ~~equity~~preferred ~~(deficiency)~~stock dividends................................ $ ~~5,575,834~~391 $ ~~2,119,874~~408 $ 412 ========== ==== ===== ============

See independent auditors report on schedules. 36 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9 A. - Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period ended June 28, 2003. Based on that evaluation, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. PART III Item 10 - Directors and Executive Officers The following sets forth the names and ages of Holdings' directors and executive officers and the positions they hold as of the date of this annual report:

~~YEARS~~Name ~~ENDED~~Age ~~------------------------------------------------~~Position ~~JUNE~~with ~~29,~~Company ~~2002 JUNE 29, 2001 JUNE 30, 2000~~ ---- ---~~------~~ ------------- --------~~-----~~ ~~General~~Robert ~~and administrative expenses~~M.~~...................................~~ $Wolff --68 $Chief ~~(9,600)~~Executive $Officer ~~(9,500) Interest expense....................................................... (8,927,411) (7,995,184) (7,160,591) -------------- ------------- ------------- Loss before income taxes~~ and ~~equity~~Chairman ~~in net income~~ of ~~GFSI,~~the ~~Inc.........~~Board ~~(8,927,411)~~Larry ~~(8,004,784) (7,170,091) Income tax benefit~~D.~~....................................................~~ ~~3,481,690~~Graveel ~~3,113,861~~54 2President,~~563,537~~ ~~--------------~~Chief ~~--------------~~Operating ~~------------~~Officer ~~Loss~~and ~~before~~Director ~~equity~~J. inCraig ~~net~~Peterson ~~income~~51 ofSenior ~~GFSI,~~Vice ~~Inc.......................... (5~~President,~~445,721)~~ ~~(4,890,923)~~Chief ~~(4,606,554)~~Financial ~~Equity~~Officer inand ~~net~~Director ~~income~~Michael ofH. ~~GFSI,~~Gary ~~Inc......................................~~51 ~~3,644,362~~Executive ~~2,850,541~~Vice 8President,~~605,729~~ ~~--------------~~Sales ~~--------------~~Administration ~~------------~~and ~~Net~~Director ~~income (loss)~~A.~~.....................................................~~ ~~(1,801,359)~~Richard (2Caputo,~~040,382)~~ ~~3,999,175 Preferred stock dividends~~Jr.~~.............................................~~ ~~(407,417)~~37 ~~(412,299)~~Director ~~(421,353)~~John ~~--------------~~W. ~~--------------~~Jordan ~~-------------~~II ~~Net~~55 ~~income~~Director ~~(loss)~~David ~~attributable to common shareholders~~W.~~.................~~ $Zalaznick ~~(2,208,776)~~49 ~~$(2,452,681) $ 3,577,822 ============== ============ =============~~Director

Set forth below is a brief description of the business experience of each director and executive officer of Holdings including each person's principal occupations and employment during the past five years, the name and principal business of any corporation or other organization in which such occupations and employment were carried on and whether such corporation or organization is a parent, subsidiary or other affiliate of the registrant. Robert M. Wolff has served as Chairman of the Company since its inception in 1974. Larry D. Graveel has served as President since September 2000. He has served as a director of the Company since February 1997 and as Chief Operating Officer of the Company since 1999. Prior to that, Mr. Graveel served as a Senior Vice President, Merchandising from 1993 to 1999 and as a merchandising manager of the Company since 1984. J. Craig Peterson has served as Senior Vice President and Chief Financial Officer of the Company since March 2001. Prior to that, Mr. Peterson served as Chief Financial Officer at eScout.com LLC, an on-line, internet based marketplace (2000 - 2001), Chief Financial Officer at Gold Bancshares Corp. (1999 - 2000), and Chief Financial Officer at Unitog Company, a uniform apparel manufacturer (1991 - 1998). Prior to those positions, Mr Peterson was a partner at KPMG LLP, a public accounting firm. Michael H. Gary has served as Executive Vice President, Sales Administration of the Company since 1993. Prior to that, Mr. Gary held several management positions in sales administration with the Company since 1982. A. Richard Caputo, Jr. has served as a director of the Company since February 1997. Mr. Caputo is a managing director of The Jordan Company, a private merchant banking firm, with which he has been associated since 1990. Mr. Caputo is also a director of AmeriKing, Inc. and Jackson Products, Inc. as well as other privately held companies. 37 John W. Jordan II has served as a director of the Company since February 1997. Mr. Jordan has been a managing director of The Jordan Company since 1982. Mr. Jordan is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc., American Safety Razor Company, Apparel Ventures, Inc., AmeriKing, Inc., Jordan Telecommunication Products, Inc., Motors and Gears, Inc., Jackson Products, Inc. and Rockshox, Inc. as well as other privately held companies. David W. Zalaznick has served as a director of the Company since February 1997. Mr. Zalaznick has been a managing director of The Jordan Company since 1982. Mr. Zalaznick is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc., American Safety Razor Company, Apparel Ventures, Inc., Marisa Christina, Inc., AmeriKing, Inc., Jordan Telecommunications Products, Inc., Motors and Gears, Inc. and Jackson Products, Inc. as well as other privately held companies. Stockholders Agreement In connection with the acquisition, Holdings, the Management Investors (as defined therein) and the Jordan Investors (as defined therein) entered into a subscription and stockholders agreement (the "Stockholders Agreement") which sets forth certain rights and restrictions relating to the ownership of Holdings stock and agreements among the parties thereto as to the governance of Holdings. The Stockholders agreement contains material provisions which, among other things and subject to certain exceptions, including any restrictions imposed by applicable law or by the Company's debt agreements, (i) provide for put and call rights in the event a Stockholder (as defined therein) is no longer employed by the Company, (ii) restrict the ability of all Stockholders to transfer their respective ownership interests, other than with respect to transfers to Permitted Transferees (as defined therein), including rights of first refusal and tag along rights held by each of the remaining stockholders, (iii) grant drag along rights to Selling Stockholders (as defined therein) in which the holders of 75% or more of the common stock of Holdings who agree to transfer their stock in an arms-length transaction to a nonaffiliated party may require the remaining stockholders to sell their stock on the same terms and conditions and (iv) grant each Stockholder piggyback registration rights to participate in certain registrations initiated by the Company. The Stockholders agreement also contains certain material governance provisions which, among other things, (i) provide for the election of three directors (the "Management Directors") nominated by the Management Investors, three directors (the "Jordan Directors") nominated by the Jordan Investors and one director nominated by the Stockholders, (ii) prohibit the removal of the Management Directors other than by the Management Investors or the Jordan Directors other than by the Jordan Investors and (iii) require the approval of at least five directors of certain fundamental transactions affecting Holdings or GFSI, including any proposed dissolution, amendment to the certificate of incorporation or by-laws or merger, consolidation or sale of all or substantially all of the assets of the Company. The provisions described under "Stockholders Agreement" represent all of the material provisions of such agreement. Board of Directors Liability Limitation. The Certificate of Incorporation provides that a director of Holdings shall not be personally liable to it or its stockholders for monetary damages to the fullest extent permitted by the Delaware General Corporation Law. In accordance with the Delaware General Corporation Law, the Certificate of Incorporation does not eliminate or limit the liability of a director for acts or omissions that involve intentional misconduct by a director or a knowing violation of law by a director for voting or assenting to an unlawful distribution, or for any transaction from which the director will personally receive a benefit in money, property, or services to which the director is not legally entitled. The Delaware General Corporation Law does not affect the availability of equitable remedies such as an injunction or rescission based upon a director's breach of his duty of care. Any amendment to these provisions of the Delaware General Corporation Law will automatically be incorporated by reference into the Certificate of Incorporation and the Bylaws, without any vote on the part of its stockholders, unless otherwise required. 38 Indemnification Agreements. Simultaneously with the consummation of the acquisition of Winning Ways, Inc., Holdings and each of its directors entered into indemnification agreements. The indemnification agreements provide that Holdings will indemnify the directors against certain liabilities (including settlements) and expenses actually and reasonably incurred by them in connection with any threatened or pending legal action, proceeding or investigation (other than actions brought by or in the right of Holdings) to which any of them is, or is threatened to be, made a party by reason of their status as a director, officer or agent of Holdings, or serving at the request of Holdings in any other capacity for or on behalf of Holdings; provided that (i) such director acted in good faith and in a manner not opposed to the best interest of Holdings, (ii) with respect to any criminal proceedings had no reasonable cause to believe his or her conduct was unlawful, (iii) such director is not finally adjudged to be liable for negligence or misconduct in the performance of his or her duty to Holdings, unless the court views in light of the circumstances the director is nevertheless entitled to indemnification, and (iv) the indemnification does not relate to any liability arising under Section 16(b) of the Exchange Act, or the rules or regulations promulgated thereunder. With respect to any action brought by or in the right of Holdings, directors may also be indemnified to the extent not prohibited by applicable laws or as determined by a court of competent jurisdiction against expenses actually and reasonably incurred by them in connection with such action if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interest of Holdings. Director Compensation. Each director of Holdings receives $20,000 per year for serving as a director of Holdings. In addition, Holdings reimburses directors for their travel and other expenses incurred in connection with attending meetings of the Board of Directors. 39 Item 11 - Executive Compensation The following table sets forth information concerning the aggregate compensation paid and accrued to the Company's executive officers for services rendered to the Company during each of the three most recent fiscal years.

~~YEARS~~Board ~~ENDED~~of ~~------------------------------------------------~~Fiscal ~~JUNE~~Directors ~~29,~~Position ~~2002~~Year ~~JUNE~~Salary ~~29,~~Bonus ~~2001~~Fees ~~JUNE~~(3) ~~30,~~Other ~~2000~~(2) -------- ------ ------- ------ --------- --------- ~~Cash~~Robert ~~flows~~M. ~~from~~Wolff ~~operating~~2003 ~~activities: Net income (loss)........................................................~~ $ (1250,~~801,359)~~416 $~~(2,040,382)~~ -- $ 320,~~999,175~~000 ~~Adjustments~~$ ~~to reconcile net income (loss) to net cash provided by operating activities: Equity in net income of GFSI~~253,810 ~~Inc................................~~Chairman ~~(3,644,362)~~and ~~(2,850,541)~~Chief ~~(8,605,729)~~Executive ~~Distributions~~Officer ~~received~~2002 ~~from GFSI~~195,354 ~~Inc............................ 152,156 178,787~~ -- ~~Amortization of deferred financing costs......................... 26~~20,~~397~~000 26257,~~397~~014 262001 209,~~397~~005 ~~Amortization of discount on long~~-~~term~~- ~~debt....................... 8~~20,~~901,013~~000 7257,~~968,787~~014 ~~7,134,194~~Larry ~~Changes in: Income tax receivable~~D.~~.....................................~~ ~~(3,481,690)~~Graveel ~~(1,889,615)~~2003 ~~892~~350,~~721~~523 ~~Accrued expenses and income taxes payable..................~~ -- ~~(214~~20,~~646)~~000 ~~214~~15,~~646~~513 ~~Deferred~~President ~~income~~2002 ~~taxes......................................~~350,727 -- --20,000 --4,718 ~~-------------~~Chief ~~------------~~Operating ~~------------~~Officer ~~Net~~2001 ~~cash provided by operating activities........... 152~~311,~~155~~931 ~~1,178,787 3,661,404~~ --~~-----------~~ ~~------------~~20,000 ~~------------ Cash flows from financing activities: Capital contribution to GFSI~~6,352 ~~Inc~~J.~~..................................~~ --Craig Peterson (1~~,000,000~~) (32003 260,~~600~~519 10,000) ~~Redemption of preferred stock....................................... (799~~20,~~616)~~000 ~~(173~~14,~~987)~~657 ~~(59,703)~~Senior ~~Proceeds~~Vice ~~from~~President ~~sale~~and of2002 ~~stock......................................... 652~~250,~~378~~666 -- --20,000 ~~Treasury~~4,043 ~~stock~~Chief ~~purchase.............................................~~Financial ~~(4,250)~~Officer ~~(4,800)~~2001 (187,~~701)~~500 --~~-----------~~ ~~------------~~10,000 --~~----------~~ ~~Net~~Michael ~~cash used in financing activities~~H.~~.............~~ ~~(151,488)~~Gary ~~(1,178,787)~~2003 (3325,~~661,404)~~519 --~~-----------~~ ~~------------~~20,000 ~~------------~~14,760 ~~Net~~Executive ~~increase~~Vice inPresident ~~cash.....................................................~~2002 ~~667~~325,669 -- ~~-- ------------- ------------ ------------ Cash~~20,000 ~~beginning of period................................................ 14~~9,~~682~~531 ~~14,682~~2001 14288,~~682~~654 --~~-----------~~ ~~------------~~10,000 ~~------------ Cash~~10,152 ~~end~~Jim ofMalseed ~~period......................................................~~(4) $2003 15190,~~349~~515 ~~$ 14~~58,~~682~~639 $-- 1417,~~682~~103 ~~=============~~President ~~============~~CCP ~~============~~2002 ~~Supplemental~~180,726 ~~schedule~~36,616 ~~of non~~-~~cash~~- ~~financing activities: Accrual of preferred stock dividends................................ $ 407~~11,~~417~~125 $2001 ~~412~~59,~~299~~712 $-- ~~421,353~~-- ~~============= ============ ===========~~3,865

(1) During fiscal 2002 and fiscal 2003, the Company granted J. Craig Peterson options to purchase a combined total of 50 shares of Holdings' Class A Common Stock and 88.7 shares of Holdings' Class A Preferred Stock. The options vest over a period of two years and were generally granted with an exercise price equal to the formula value at the date of grant. Management believes the formula value reasonably approximates fair value. As a portion of these grants, options for 10 Class A Common shares and 17.7 shares of the Class A Preferred Stock were awarded to Mr. Peterson at prices lower than the formula values and, accordingly, the Company recorded $16,780 and $14,630 in compensation expense during fiscal 2003 and 2002, respectively. (2) Other compensation for Robert M. Wolff includes $250,000 per annum paid under the Wolff Non-competition Agreement which is described more fully in Item 13. Other compensation for Mr. Wolff and the remaining officers also includes Company contributions to the qualified 401(k) plan and vehicle reimbursement allowances. (3) Mr. Wolff, Mr. Graveel, Mr. Peterson and Mr. Gary each received compensation as members of the Board of Directors of GFSI Holdings, Inc. (4) During fiscal 2003, the Company granted Jim Malseed options to purchase 15 shares of Holdings' Class A Common Stock and 26.6 shares of Holdings' Class A Preferred Stock. The options vest over periods of two to five years. One of the options was granted with an exercise price lower than the formula value and, accordingly, the Company recorded $32,410 in compensation expense during fiscal 2003. 40 Incentive Compensation Plan The Company adopted an incentive compensation plan (the "Incentive Plan"), for senior executives during the fiscal 1998. The Incentive Plan provides for annual cash bonuses payable based on a percentage of EBIT (as defined in the Incentive Plan) if certain EBIT targets are met. No compensation was paid under the incentive compensation plan during fiscal 2001, fiscal 2002 and fiscal 2003. Item 12 - Security Ownership and Certain Beneficial Owners and Management The Company has common stock and three series of preferred stock issued and outstanding (the "Preferred Shares"). The table below sets forth certain information regarding beneficial ownership of the common stock of Holdings and the Preferred Shares held by (i) each of its directors and executive officers who own shares of common stock of Holdings, (ii) all directors and executive officers of Holdings as a group and (iii) each person known by Holdings to own beneficially more than 5% of its common stock and/or Preferred Shares. The Company believes that each individual or entity named has sole investment and voting power with respect to shares of common stock of Holdings as beneficially owned by them, except as otherwise noted.

~~NAME~~Amount ~~AGE~~of ~~POSITION~~Beneficial ~~WITH~~Ownership(1) ~~COMPANY~~--------------------------------- Common Shares Preferred Shares ------------- ----------------- Number of Percentage Number of Percentage Executive Officers and Directors: Shares Owned Shares Owned -------------------------------- ------ ---------- --------- ---------- Robert M. Wolff 67(2)(3) ~~Chief~~60.0 ~~Executive~~3.4% ~~Officer~~106.4 3.4% Larry D. Graveel (2)(4) 225.0 12.7 399.1 12.7 Michael H. Gary (2)(5) 225.0 12.7 399.1 12.7 J. Craig Peterson (2)(6) 95.0 5.5 168.5 5.5 John W. Jordan II (7)(8) 78.3 4.4 54.6 1.7 David W. Zalaznick (7) 78.3 4.4 54.6 1.7 A. Richard Caputo, Jr. (7) 50.0 2.8 2.9 0.1 All directors and ~~Chairman~~executive officers as a group (7 persons) 791.6 45.0 1,185.3 37.1 Other Principal Stockholders: ---------------------------- JZ Equity Partners PLC (9) 500.0 28.3 1,445.4 46.2 Leucadia Investors, Inc. (10) 125.0 7.1 82.1 2.6 (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 after September 1, 2003 are deemed outstanding for the purpose of calculating the ~~Board~~number and percentage owned by such person, but not deemed outstanding for the purpose of ~~Directors~~calculating ~~Larry~~the Dpercentage owned by each other person listed. ~~Graveel~~As 53of ~~President~~September 1, ~~Chief~~2003, ~~Operating~~there ~~Officer~~were 1,765 shares of common stock of Holdings issued and ~~Director~~outstanding. J(2) The address of each of Messrs. ~~Craig~~Wolff, Peterson, 50Graveel ~~Senior~~and ~~Vice~~Gary ~~President~~is c/o GFSI, ~~Chief~~Inc., ~~Financial~~9700 ~~Officer~~Commerce ~~and~~Parkway, ~~Director~~Lenexa, Kansas 66219. (3) All shares are held by the Robert M. Wolff Trust, of which Mr. Wolff is a trustee. (4) All shares are held by the Larry D. Graveel Revocable Trust, of which Mr. Graveel is a trustee. 41 (5) 205 shares are held by Michael H. Gary 50Revocable ~~Senior~~Trust, ~~Vice~~of ~~President~~which Mr. Gary is a trustee. The remaining 20 shares are held in trust for family members of Mr. Gary. (6) 25 shares are held by a financial institution as trustee for Mr. Peterson, ~~Sales~~25 ~~Administration~~shares are held by the J. Craig Peterson and ~~Director~~Linda AZ. ~~Richard~~Peterson Revocable Trust of which Mr. Peterson is Trustee and 50 shares issuable upon exercise of stock options. (7) The address of each of Messrs. Jordan, Zalaznick and Caputo is c/o The Jordan Company, Jr767 Fifth Avenue, New York, NY 10153. 36(8) ~~Director~~All shares are held by the John W. Jordan II 54Revocable ~~Director~~Trust, ~~David~~of Wwhich Mr. Jordan is trustee. (9) The principal address of JZ Equity Partners PLC is c/o Jordan/Zalaznick 48Capital ~~Director~~Company, 767 Fifth Avenue, New York, NY 10153. (10) The principal address of Leucadia Investors, Inc. is 315 Park Avenue South, New York, NY 10010.

42 Item 13 - Certain Relationships and Related Transactions Wolff Employment Agreement. In connection with the acquisition of Winning Ways, Inc. in 1997, 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. During fiscal 2002, the Company entered into a Supplemental Employment Agreement with Robert M. Wolff (the "Wolff Supplemental Agreement") which extended the term of his tenure as an executive of the Company for an additional ten years at a base salary of $120,000 per annum. The Wolff Supplemental Agreement generally follows the same terms and provides for employee benefits similar to the Wolff Employment Agreement. Wolff Noncompetition Agreement. In connection with the acquisition of Winning Ways in 1997, Holdings entered into a Noncompetition Agreement with Robert M. Wolff (the "Wolff Noncompetition Agreement"). Pursuant to the Wolff Noncompetition Agreement, Mr. Wolff will not, directly or indirectly, (i) (a) engage in or have any active interest in any sportswear or activewear business comparable to that of the Company or (b) sell to, supply, provide goods or services to, purchase from or conduct business in any form with the Company or Holdings for a ten-year period ending on the tenth anniversary of the Acquisition, (ii) disclose at any time other than to the Company or Holdings any Confidential Information (as defined in the Wolff Noncompetition Agreement) and (iii) engage in any business with the Company or Holdings through an affiliate for as long as Mr. Wolff or any member of his family is the beneficial owner of Holdings' capital stock. In exchange for his covenant not to compete, Holdings will pay Mr. Wolff $250,000 per annum for a period of ten years. In the event that the Wolff Noncompetition Agreement is terminated for Cause (as defined in the Wolff Noncompetition Agreement), Holdings will no longer be obligated to make any payment to Mr. Wolff, but Mr. Wolff will remain obligated to comply with the covenants set forth in the Wolff Noncompetition Agreement until its expiration on the tenth anniversary of the acquisition. Indemnification Agreements. In connection with the acquisition of Winning Ways in 1997, the Company and each of its directors entered into indemnification agreements. The indemnification agreements provide that the Company will indemnify the directors against certain liabilities (including settlements) and expenses actually and reasonably incurred by them in connection with any threatened or pending legal action, proceeding or investigation (other than actions brought by or in the right of the Company) to which any of them is, or is threatened to be, made a party by reason of their status as a director, officer or agent of the Company, or serving at the request of the Company in any other capacity for or on behalf of the Company; provided that (i) such director acted in good faith and in a manner not opposed to the best interest of the Company, (ii) with respect to any criminal proceedings had no reasonable cause to believe his or her conduct was unlawful, (iii) such director is not finally adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Company, unless the court views in light of the circumstances the director is nevertheless entitled to indemnification, and (iv) the indemnification does not relate to any liability arising under Section 16(b) of the Exchange Act, or the rules or regulations promulgated thereunder. With respect to any action brought by or in the right of the Company, directors may also be indemnified to the extent not prohibited by applicable laws or as determined by a court of competent jurisdiction against expenses actually and reasonably incurred by them in connection with such action if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interest of the Company. 43 Shaw Employment Agreement. In April 2001, the Company entered into an Employment Agreement with Robert G. Shaw (the "Shaw Employment Agreement"). Pursuant to the Shaw Employment Agreement, Mr. Shaw will serve as Vice President of the company until February 27, 2007. In exchange for his services, the Company is to compensate Mr. Shaw with a base salary equal to $60,000, which base salary is subject to annual increases at the discretion of the Board of Directors and to provide him with certain employee benefits as set forth in the Shaw Employment Agreement. As a condition of the Shaw Employment agreement, Mr. Shaw was required to sell to Holdings all the shares of common stock and preferred stock of Holdings then held by him and his family and affiliates. Shaw Noncompetition Agreement. In connection with the Shaw Employment Agreement, in April 2001 Holdings and Mr. Shaw entered into a Noncompetition Agreement (the "Shaw Noncompetition Agreement"). Pursuant to the Shaw Noncompetition Agreement, Mr. Shaw will not, directly or indirectly, (i) engage in or have any interest in any business that (a) produces or markets decorated activewear and is competitive with or similar to that of the Company of Holdings or (b) sells to, supplies, provides goods or services to, purchases from, or does business with the Company or Holdings, (ii) in any capacity, (a) divert from the Company or Holdings any business with which he has contact while employed by the Company or Holdings, (b) induce any salesperson, supplier, vendor or other person transacting business with the Company or Holdings or (c) induce or cause any employee of the Company or Holdings to leave the employ of the company or Holdings, or (iii) disclose at any time any confidential information (as defined in the Shaw Noncompetition Agreement) other than to the Company or Holdings. The Jordan Company. In connection with the acquisition of Winning Ways, Inc. in 1997, GFSI Holdings entered into an agreement (the "TJC Agreement") with The Jordan Company Management Corporation, an affiliate of The Jordan Company. Messrs. Jordan, Zalaznick and Caputo, directors of GFSI, are also managing directors of The Jordan Company and Messrs. Jordan and Zalaznick are the principals of The Jordan Company Management Corporation. Under the TJC Agreement, GFSI Holdings retained The Jordan Company Management Corporation 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, GFSI Holdings will pay The Jordan Company Management Corporation an annual consulting fee payable on a quarterly basis equal to the higher of (a) $500,000 or (b) 1.5% of earnings before interest, taxes and amortization, provided that in years three through five of the TJC Agreement, the annual fee does not exceed $750,000 and thereafter the annual fee dies not exceed $1 million. In addition, the TJC Agreement provides for payment to The Jordan Company Management Corporation of (i) an investment banking and sponsorship fee of up to 2% of the purchase price of certain acquisitions of sales involving GFSI Holdings or GFSI and (ii) a financial consulting fee of up to 1% of any debt, equity or other financing arranged by GFSI Holdings or GFSI with the assistance of The Jordan Company Management Corporation. Both such fees are subject to Board of Directors approval. Tax Sharing Agreement. On February 27, 1997, GFSI and GFSI Holdings entered into a 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 GFSI Holdings on an annual basis an amount equal to the amount of the tax liability of GFSI Holdings apportioned to GFSI and each of its consolidated subsidiaries, which, in each case, is apportioned in accordance with the ratio that GFSI Holdings' consolidated federal income attributable to GFSI or any of its consolidated subsidiaries bears to GFSI Holdings' consolidated federal income. For the years ended June 28, 2003, June 29, 2002 and June 29, 2001 payments (refunds) under this agreement aggregated approximately ($147,000), ($2,391,000) and $359,000, respectively. No payments have been made for the six months ended December 28, 2002 under the tax sharing agreement. Future Transactions. The Company has adopted a policy 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 us than could be obtained from unaffiliated third parties. 44 PART IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents filed as part of this report: (1) Financial Statements Reference is made to the Index to Consolidated Financial Statements appearing in Item 8, which Index is incorporated herein by reference. (2) Financial Statement Schedule All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are not applicable and therefore have been omitted, or the information has been included in the consolidated financial statements and supplementary data or is considered immaterial. (3) Exhibits A list of the exhibits included as part of this Form 10-K is set forth below. EXHIBIT INDEX

~~BOARD~~Exhibit OFNumber ~~FISCAL~~Description ~~DIRECTORS~~Page ~~POSITION~~1 ~~YEAR~~Purchase ~~SALARY~~Agreements, ~~BONUS~~dated ~~FEES~~February (27, 1997, by and among GFSI, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. * 2.1 Agreement for Purchase and Sale of Stock, dated January 24, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. * 2.2 Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated February 27, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. * 2.3 Stock Purchase Agreement, dated as of April 20, 2001, by and among Sara Lee Corporation, Champion Products, Inc. and GFSI, Inc. *** 2.4 First Amendment to Stock Purchase Agreement, dated June 25, 2001, by and among Sara Lee Corporation, Champion Products, Inc, and GFSI, Inc. **** 3.1 Certificate of Incorporation of GFSI, Inc. * 3.2 Bylaws of GFSI, Inc. * 4.1 Indenture, dated February 27, 1997, between GFSI, Inc. and Fleet National Bank, as Trustee * 4.2 Global Series A Senior Subordinated Note. * 4.3 Form of Global Series B Senior Subordinated Note. * 4.4 Registration Rights Agreement, dated February 27, 1997, by and among GFSI, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. * 4.5 Subscription and Stockholders Agreement, dated February 27, 1997, by and among GFSI, Inc. and the investors listed thereto. * 4.6 Deferred Limited Interest Guaranty, dated February 27, 1997 by GFSI, Inc. to MCIT PLC. * 4.7 Indenture, dated September 17, 1997, between GFSI Holdings, Inc. and State Street Bank ** and Trust Company, as Trustee. 45 Exhibit Number Description Page 4.8 Global Series A Senior Discount Note. ** 4.9 Form Global Series B Senior Discount Note. ** 4.10 Registration Rights Agreement, dated September 17, 1997, by and among GFSI Holdings, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation. ** 4.11 Indenture, dated as of December 31, 2002 between GFSI, Inc. and State Street Bank and Trust Company. @ 4.12 9 5/8 % Series A Senior Subordinated Note due 2007. @ 10.1(a) ~~OTHER~~Credit Agreement, dated February 27, 1997, by and among GFSI, Inc., the lenders listed thereto and The First National Bank of Chicago, as Agent. * 10.1(b) 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. ** 10.2 Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National Bank of Chicago, as Agent. * 10.3 Trademark Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National Bank of Chicago, as Agent. * 10.4 Mortgage, Security Agreement, Financing Statement and Assignment of Rents and Leases, dated February 27, 1997, by GFSI, Inc. in favor of The First National Bank of Chicago. * 10.5 (a) ~~--------~~Restricted ~~------~~Account ~~---------~~Agreement, ~~-----~~dated ~~----------~~February ~~---------~~27, 1997, between GFSI, Inc. and Boatmen's National Bank. * 10.5 (b) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Hillcrest Bank. * 10.6 Tax Sharing Agreement, dated February 27, 1997, between GFSI, Inc. and GFSI Holdings, Inc. * 10.7 Management Consulting Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and TJC Management Corporation. * 10.8 Employment Agreement, dated February 27, 1997, between GFSI, Inc. and Robert M. Wolff. ~~2002~~* $10.9 ~~195~~Noncompetition Agreement,~~354~~ --dated $February 2027,~~000~~ ~~$257~~1997,~~014~~ ~~Chairman~~between GFSI Holdings, Inc. and ~~Chief~~Robert ~~Executive~~M. ~~Officer~~Wolff. ~~2001~~* ~~209~~10.10 Form of Indemnification Agreement,~~005~~ --dated 20February 27,~~000~~ ~~257~~1997,~~014~~ ~~2000~~between ~~144~~GFSI Holdings. Inc. and its director and executive officers. * 10.11 Promissory Note,~~837~~ --dated 20August 12,~~000~~ ~~257~~1996,~~014~~ ~~Larry~~between DWinning Ways, Inc. ~~Graveel~~and ~~2002~~Impact ~~350~~Design,~~727~~ --Inc. 20* 10.12 Promissory Note,~~000~~ 4dated August 12,~~718~~ ~~President~~1996, ~~2001~~between ~~311~~Winning Ways,~~931~~ --Inc. 20and Kansas Custom Embroidery. * 10.13 Form of Promissory Note,~~000~~ 6dated February 27,~~352~~ ~~Chief~~1997, ~~Operating~~between ~~Officer~~GFSI ~~2000~~Holdings, ~~190~~Inc. and the Management Investors. * 10.14 License Agreement,~~000~~ 35dated April 1,~~000~~ 201994,~~000~~ by and between Winning Ways, Inc. and Softwear Athletics, Inc. * 10.15 License Agreement,~~533~~ Jdated October 27, 1998, by and between GFSI, Inc. ~~Craig~~and ~~Peterson~~Bonmax (Co., Ltd. * 10.16 License Agreement, dated January 1), ~~2002~~1999, ~~250~~by and between GFSI,~~666~~ Inc. and Gear For Sports Ltd. * 10.17 CEBA Loan Agreement, dated April 28, 1998, by and among the Iowa Department of Economic Development, the City of Bedford and GFSI, Inc. * 46 Exhibit Number Description Page 10.18 Employment Agreement, dated as of April 1, 2001, by and between the Company and Robert G. Shaw. **** 10.19 Non--competition Agreement, dated as of April 1, 2001, by and between the Company and Robert G. Shaw. **** 10.20 License Agreement,~~000~~ 4dated as of June 25,~~043~~ ~~Senior~~2001, ~~Vice~~by ~~President~~and among Sara Lee Corporation, CC Products Acquisition, Inc., CC Products, Inc. and the Company. **** 10.21 Supply Agreement, dated as of June 25, 2001, 87by and among Sara Lee Corporation,~~500~~ --CC Products Acquisition, Inc., CC Products, Inc. and the Company. **** 10.22 Fall 2001 Merchandise Agreement,~~000~~ --dated ~~Chief~~as ~~Financial~~of ~~Officer~~June ~~2000~~25, --2001, --by --and --among ~~Michael~~Sara HLee Corporation, CC Products Acquisition, Inc., ~~Gary~~CC Products, Inc. and the Company. **** 10.23 Credit Agreement dated March 28, 2002, ~~325~~among the financial institutions named therein as the Lenders,~~669~~ --and 20Bank of America,~~000~~ 9N.A. as the Agent and GFSI,~~531~~ ~~Senior~~Inc. ~~Vice~~as ~~President~~the ~~2001~~Borrower. ~~288~~@ 10.24 Supplemental Employment Agreement,~~654~~ --dated March 31, 2002 between GFSI, Inc. and @@ Robert M. Wolff. 10.25 Exchange Agreement,~~000~~ dated as of December 31, 2002, between GFSI, Inc. and Jefferies Company, Inc. @@@ 10.26 Consent and Amendment,~~152~~ ~~2000~~dated ~~200~~as of December 31,~~000~~ 402002,~~000~~ --to 9the Credit Agreement,~~633~~ ~~Jim~~dated ~~Malseed~~as of March 28, 2002. ~~180~~@@ 10.27 Second Consent and Amendment,~~726~~ 15dated August 12,~~500~~ 2003, to the Credit Agreement, dated as of March 28, 2002. 21.1 Subsidiaries of GFSI Holdings, Inc. 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer * Incorporated by reference to the exhibits filed with the Registration Statement on Form S-4 of GFSI, Inc. filed with the Securities and Exchange Commission on July 22, 1997 (Commission File No. 333-24189) 11and all supplements thereto. ** Incorporated by reference to the exhibits filed with the Registration Statement on Form S-4 of GFSI Holdings,~~125~~ ~~Vice~~Inc. ~~President/General~~filed ~~Manager~~with ~~CCP~~the ~~2001~~Securities 59and Exchange Commission on December 17,~~712~~ 1997 (Commission file No. 333-38951) and all supplements thereto. *** Incorporated by reference to the exhibits filed with Quarterly Report on Form 10-Q of GFSI, Inc. filed with the Securities and Exchange Commission on May 14, 2001 (Commission File No. 333-24189). **** Incorporated by reference to the exhibits filed on Form 10-K 3of GFSI,~~865~~ ~~2000~~Inc. filed with the Securities and Exchange Commission on September 27, 2001 (Commission File No. 333-38951). @ Incorporated by reference to the exhibits filed on Form 10-Q of GFSI, Inc., filed with the Securities and Exchange Commission on May 10, 2002 (Commission File No. 333-24189). @@ Incorporated by reference to the exhibits filed on Form 10-K of GFSI, Inc., filed with the Securities and Exchange Commission on September 25, 2002 (Commission File No. 333-24189). @@@ Incorporated by reference to the exhibits filed on Form 10-Q of GFSI, Inc., filed with the Securities and Exchange Commission on February 6, 2003 (Commission File No. 333-24189). (b) Reports on Form 8-K. None.

47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 24, 2003. GFSI HOLDINGS, INC. By: /s/ ROBERT M. WOLF ----------------------------- Robert M. Wolff Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on September 24, 2003. Signatures Title ---------- ------ /s/ LARRY D. GRAVEEL President, Chief Operating Officer ------------------------- and a Director LARRY D. GRAVEEL /s/ J. CRAIG PETERSON Senior Vice President, Chief Financial Officer ------------------------- and a Director (Principal Financial J. CRAIG PETERSON and Accounting Officer) /s/ MICHAEL H. GARY Executive Vice President and a Director ------------------------- MICHAEL H. GARY /s/ RICHARD CAPUTO, JR. Director ------------------------- RICHARD CAPUTO, JR. /s/ JOHN W. JORDAN II Director ------------------------- JOHN W. JORDAN II /s/ DAVID W. ZALAZNICK Director ------------------------- DAVID W. ZALAZNICK /s/ ROBERT M. WOLFF Director, Chairman and Chief Executive Officer ------------------------- ROBERT M. WOLFF 48

AMOUNT OF BENEFICIAL OWNERSHIP(1) -------------------------- NUMBER OF PERCENTAGE SHARES OWNED ------ ---------- Executive Officers and Directors: Robert M. Wolff (2)(3)............................................ 60.0 3.3% Larry D. Graveel (2)(4)........................................... 225.0 12.4 Michael H. Gary (2)(5)............................................ 225.0 12.4 J. Craig Peterson (2)(6).......................................... 75.0 4.1 John W. Jordan II (7)(8).......................................... 78.3125 4.3 David W. Zalaznick (7)............................................ 78.3125 4.3 A. Richard Caputo, Jr. (7)........................................ 50.0 2.7 All directors and executive officers as a group (7 persons)....... 791.625 42.9 OTHER PRINCIPAL STOCKHOLDERS: JZ Equity Partners PLC (9)........................................ 500.0 27.5 Leucadia Investors, Inc. (10)..................................... 125.0 6.9

Exhibit Number Description Page 1 Purchase Agreements, dated February 27, 1997, by and among GFSI, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. * 2.1 Agreement for Purchase and Sale of Stock, dated January 24, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. * 2.2 Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated February 27, 1997, among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. * 2.3 Stock Purchase Agreement, dated as of April 20, 2001, by and among Sara Lee Corporation, Champion Products, Inc. and GFSI, Inc. *** 2.4 First Amendment to Stock Purchase Agreement, dated June 25, 2001, by and among Sara Lee Corporation, Champion Products, Inc, and GFSI, Inc. **** 3.1 Certificate of Incorporation of GFSI, Inc. * 3.2 Bylaws of GFSI, Inc. * 4.1 Indenture, dated February 27, 1997, between GFSI, Inc. and Fleet National Bank, as Trustee * 4.2 Global Series A Senior Subordinated Note * 4.3 Form of Global Series B Senior Subordinated Note * 4.4 Registration Rights Agreement, dated February 27, 1997, by and among GFSI, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. * 4.5 Subscription and Stockholders Agreement, dated February 27, 1997, by and among GFSI, Inc. and the investors listed thereto * 4.6 Deferred Limited Interest Guaranty, dated February 27, 1997 by GFSI, Inc. to MCIT PLC * 4.7 Indenture, dated September 17, 1997, between GFSI Holdings, Inc. and State Street Bank ** and Trust Company, as Trustee. 43 Exhibit Number Description Page 4.8 Global Series A Senior Discount Note. ** 4.9 Form Global Series B Senior Discount Note. ** 4.10 Registration Rights Agreement, dated September 17, 1997, by and among GFSI Holdings, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation. ** 10.1(a) Credit Agreement, dated February 27, 1997, by and among GFSI, Inc., the lenders listed thereto and The First National Bank of Chicago, as Agent. * 10.1 (b) 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. ** 10.2 Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National Bank of Chicago, as Agent. * 10.3 Trademark Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National Bank of Chicago, as Agent. * 10.4 Mortgage, Security Agreement, Financing Statement and Assignment of Rents and Leases, dated February 27, 1997, by GFSI, Inc. in favor of The First National Bank of Chicago. * 10.5 (a) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Boatmen's National Bank. * 10.5 (b) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Hillcrest Bank. * 10.6 Tax Sharing Agreement, dated February 27, 1997, between GFSI, Inc. and GFSI Holdings, Inc. * 10.7 Management Consulting Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and TJC Management Corporation. * 10.8 Employment Agreement, dated February 27, 1997, between GFSI, Inc. and Robert M. Wolff. * 10.9 Noncompetition Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and Robert M. Wolff. * 10.10 Form of Indemnification Agreement, dated February 27, 1997, between GFSI Holdings. Inc. and its director and executive officers. * 10.11 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Impact Design, Inc. * 10.12 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Kansas Custom Embroidery. * 10.13 Form of Promissory Note, dated February 27, 1997, between GFSI Holdings, Inc. and the Management Investors. * 10.14 License Agreement, dated April 1, 1994, by and between Winning Ways, Inc. and Softwear Athletics, Inc. * 10.15 License Agreement, dated October 27, 1998, by and between GFSI, Inc. and Bonmax Co., Ltd. * 10.16 License Agreement, dated January 1, 1999, by and between GFSI, Inc. and Gear For Sports Ltd * 10.17 CEBA Loan Agreement, dated April 28, 1998, by and among the Iowa Department of Economic Development, the City of Bedford and GFSI, Inc. * 10.18 Employment Agreement, dated as of April 1, 2001, by and between the Company and Robert G. Shaw. **** 44 Exhibit Number Description Page 10.19 Non-competition Agreement, dated as of April 1, 2001, by and between the Company and Robert G. Shaw. **** 10.20 License Agreement, dated as of June 25, 2001, by and among Sara Lee Corporation, CC Products Acquisition, Inc., CC Products, Inc. and the Company. **** 10.21 Supply Agreement, dated as of June 25, 2001, by and among Sara Lee Corporation, CC Products Acquisition, Inc., CC Products, Inc. and the Company. **** 10.22 Fall 2001 Merchandise Agreement, dated as of June 25, 2001, by and among Sara Lee Corporation, CC Products Acquisition, Inc., CC Products, Inc. and the Company. **** 10.23 Credit Agreement dated March 29, 2002, among the financial institutions named therein as the Lenders, and Bank of America, N.A. as the Agent and GFSI, Inc. as the Borrower. @ 10.24 Supplemental Employment Agreement, dated March 31, 2002 between GFSI, Inc. and Robert M. Wolff. 25 Statement of Eligibility of Trustee * * Incorporated by reference to the exhibits filed with the Registration Statement on Form S-4 of GFSI filed with the Securities and Exchange Commission on July 22, 1997 (Commission File No. 333-24189) and all supplements thereto. ** Incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-4 of GFSI Holdings, Inc. filed with the Securities and Exchange Commission of December 17, 1997 (Commission file No. 333-38951) and all supplements thereto. *** Incorporated by reference to Exhibit 2.3 of the Quarterly Report on Form 10-Q of the Company filed with the Securities and Exchange Commission on May 14, 2001 (Commission File No. 333-24189). **** Incorporated by reference to the exhibits filed on Form 10-K of the Company filed with the Securities and Exchange Commission on September 27, 2001 (Commission File No. 333-38951). @ Incorporated by reference to the exhibits filed on Form 10-Q of GFSI, Inc., filed with the Securities and Exchange Commission on May 10, 2002 (Commission File No. 333-24189).

SIGNATURES TITLE ----------- ------ /S/ LARRY D. GRAVEEL President, Chief Operating Officer ------------------------------------------ and a Director LARRY D. GRAVEEL /S/ J. CRAIG PETERSON Senior Vice President, Chief Financial Officer and a Director -------------------------------------------- J. CRAIG PETERSON (Principal Financial and Accounting Officer) /S/ MICHAEL H. GARY Senior Vice President and a Director -------------------------------------------- MICHAEL H. GARY /S/ RICHARD CAPUTO, JR. Director ----------------------------------------- RICHARD CAPUTO, JR. /S/ JOHN W. JORDAN II Director -------------------------------------------- JOHN W. JORDAN II /S/ DAVID W. ZALAZNICK Director --------------------------------------- DAVID W. ZALAZNICK /S/ ROBERT M. WOLFF Director ------------------------------------------ ROBERT M. WOLFF

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