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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 28, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________________ to ______________________
Commission File Number 0-23161
Tropical Sportswear Int'l Corporation
(Exact name of registrant as specified in its charter)
Florida 59-3424305
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
4902 W. Waters Avenue Tampa, FL 33634-1302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (813) 249-4900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
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.
[X] Yes [ ] 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
[X] Yes [ ] No
As of December 17, 2002 there were 11,040,452 shares of Common Stock outstanding. The aggregate market value of the Common Stock
held by non-affiliates of the registrant (assuming for purposes of this calculation, without conceding, that all executive officers
and directors are "affiliates"), based on the last sale price reported on the Nasdaq National Market as of December 17, 2002, was
$62,281,555
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Proxy Statement for the Annual Meeting of Shareholders of Tropical Sportswear Int'l Corporation, to be held
on January 28, 2003 are incorporated by reference in Part III of this Annual Report on Form 10-K.
TROPICAL SPORTSWEAR INT'L CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page No.
Item 1 Business 5
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 4A Executive Officers of the Registrant 18
PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder Matters 19
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk 35
Item 8 Financial Statements and Supplementary Data 35
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 35
PART III
Item 10 Directors and Executive Officers of the Registrant 36
Item 11 Executive Compensation 36
Item 12 Security Ownership of Certain Beneficial Owners and Management 36
Item 13 Certain Relationships and Related Transactions 36
Item 14 Controls and Procedures 36
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K that are not purely historical may be forward- looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including statements regarding our expectations, hopes, beliefs, intentions, or strategies regarding the future.
Forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These
statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or
achievements to be materially different from any future results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
o Our projected sales and earnings growth;
o Cost savings from our consolidation efforts;
o The success of new products;
o Our product mix;
o Our goal to shorten the production cycle;
o Potential acquisitions by us;
o Our future financing plans;
o Increases in sales of our Farah(R)brand through Wal-Mart;
o The benefits of expanding our distribution of Savane(R)through new core replenishment programs;
o Trends affecting our results of operations and financial condition; and
o Our business' growth, operating and financing strategies.
In some cases, you can identify forward-looking statements by terms such as "may", "will", "should", "could," "would," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "projects," "predicts," "potential," and similar expressions intended to
identify forward-looking statements. These statements, which reflect our current views with respect to future events, are based on
assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Among the factors that could cause actual results to differ from the forward-looking statements are:
o General economic conditions, including but not necessarily limited to recession or other cyclical effects impacting customers in
the United States and abroad;
o Disruptions in the business associated with the consolidation of the cutting and administrative functions of our Savane division
from El Paso, Texas to Tampa, Florida;
o Failure to achieve planned cost savings associated with consolidation and reorganization;
o Disruption in the business associated with changes in management;
o Restrictions and limitations placed on us by our debt instruments;
o The financial strength of our customers;
o Regulatory matters affecting us, including quotas and tariffs;
o Removal of trade quotas applicable to countries other than Mexico or the Caribbean Basin beginning in 2005;
o International risks including exchange rate fluctuations, trade disruptions, and political instability of foreign markets that we
produce in or purchase materials from;
o Reduction in the level of consumer spending;
o The availability and price of raw materials and global manufacturing costs and restrictions;
o Continued pricing pressures on our product line;
o The inability to successfully identify, acquire and profitably operate brands, companies and businesses;
o Increases in costs;
o The availability and quality of independent manufacturers;
o Changes in fashion trends and consumer preferences;
o The continued acceptance of our existing and new products by our major customers;
o The continued viability of our major suppliers;
o Delays associated with the timing of shipment and acceptance of the Victorinox(R)apparel line;
o Our ability to continue to use existing and obtain additional licensed trademarks and tradenames, including Bill Blass(R)and Van
Heusen(R);
o Seasonality in our business;
o Business disruptions and costs arising from acts of terrorism or military activities around the globe; and
o Those risks and uncertainties discussed under the heading "Risk Factors".
All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume
no obligation to update any such forward-looking statements. Other factors that could cause actual results to differ from the
forward-looking statements are the factors discussed in Items 1 through 3 and 7 of this report.
PART I
Item 1. Business
General
We are a leading innovator, designer, producer and marketer of high-quality branded and retailer private branded apparel
products that we sell to major retailers in all levels and channels of distribution. Over the last decade, we have developed an
operating blueprint that is designed to consistently and profitably deliver apparel products to our customers faster, better and
cheaper than our competition. Our business model emphasizes core, recurring styles to minimize inventory risk and to maximize return
on investment to our customers by combining affordable, high-quality products, on-time and complete customer order fulfillment, and
comprehensive retail inventory management systems. As part of this approach, we have focused on improving our operating efficiency
and product speed to market beyond the traditional benchmarks associated with the apparel industry. We have used other high
inventory-turnover consumer goods industries to set goals for our operating performance. We believe that this approach has not only
transformed us into a fast-moving consumer goods company but has also established us as a leader in the apparel industry.
Our primary product lines feature casual and dress-casual pants, shorts, denim jeans and woven and knit shirts for men,
women, boys and girls. Our products are marketed under widely recognized international and national brands, including:
Our owned brands: Our licensed brands: Retailer national private brands:
o Savane(R) o Victorinox(R), the o Puritan(R)
o Farah(R) makers of the original o Member's Mark(R)
o Duck Head(R) Swiss Army(TM)Knife o George(TM)
o Flyers(TM) o Bill Blass(R) o Sonoma(R)
o The Original Khaki Co.(R) o Van Heusen(R) o Croft & Barrow(R)
o Bay to Bay(R) o St. John's Bay(R)
o Two Pepper(R) o Charter Club(R)
o Royal Palm(R) o Roundtree & Yorke(R)
o Banana Joe(R) o Geoffrey Beene(R)
o Authentic Chino Casuals(R) o G.H. Bass(R)
o Izod(R)
o White Stag(R)
Our brand strategy provides for the distribution of our products across all major apparel retail channels including
department stores, discounters and mass merchants, wholesale clubs, national chains, specialty stores, catalog retailers, our retail
outlets and the Internet. Our major customers include:
o Wal-Mart o Philips-Van Heusen o Saks
o Sam's Club Retail Outlets o BJ's
o Kohl's o Federated o Mervyn's
o J.C. Penney o Belk o Costco
o Dillard's o May Company
Our seasoned management team has driven robust and profitable growth of our business through internal development, licensing
and strategic acquisitions. Since fiscal 1997, the year prior to our initial public offering, we have acquired and successfully
integrated four major brands - Savane(R), Farah(R), Duck Head(R)and Victorinox(R). These acquisitions have enabled us to significantly
expand our reach and presence to all market segments and levels of retail distribution. The integration of these brands combined
with our organic growth has significantly enhanced our overall growth. From fiscal 1997 through fiscal 2002, we have realized:
o Net sales growth from $152 million to $464 million, or a compound annual growth rate of approximately 25%; and
o EBITDA growth, excluding other charges, over the same period from $18 million to $39 million, or a compound annual growth rate of
approximately 17%.
We were founded in 1927. Our primary executive offices are located at 4902 West Waters Avenue, Tampa, Florida 33634-1302,
and our telephone number is 813-249-4900.
Industry
The apparel industry is large and highly fragmented. According to NPD, a retail industry research firm, the U.S. apparel
industry totaled approximately $166 billion in retail sales in 2001. The total retail market for our core products, which include
bottoms and tops for men, women, boys and girls, was approximately $77 billion in 2001.
We believe that the apparel industry is currently characterized by the following trends:
o Increasing consumer demand for brands and retailer's private brands featuring greater innovation, higher quality, new technology,
better fit, increased comfort and value pricing;
o Increasing consumer demand for convenient, easy to shop and competitively priced apparel retailers;
o Consolidation of major apparel retailers;
o Heightened dependence by major apparel retailers on key vendors that can maximize the retailers' return on investment, improve
customer service and provide vendor managed inventory and category management programs;
o Focus by major apparel retailers on national brands that meet evolving consumer needs; and
o Consolidation by major apparel retailers of their suppliers into core retailer-supplier partnerships.
Competitive Strengths
The success of our business has resulted from several key strengths, which we believe distinguish us from others in our
industry, including the following:
Highly Diversified Portfolio of Brands and Distribution Channels. Our product lines currently feature over 75 brands
including our owned and licensed brands as well as retailer private brands. We believe that the breadth of this portfolio of brands
allows us to penetrate all levels of distribution and mitigates the risk that potential negative trends in any one market segment
will significantly impact our company. In addition, the positioning of our brand portfolio and retailer private brands across a
broad range of price points enables us to maximize penetration of our customer base by providing them with differentiated brand
programs to target consumers across all demographics.
Continuous Innovation. Innovation is a key element of our success. We have a proven record of generating customer and
consumer demand with fresh new products featuring differentiated design and fabrication. We continuously work internally and
collaborate with our suppliers to improve our products. We devote significant resources to researching consumer trends and
preferences, developing new fabrics and product finishes and designing products to meet consumer needs. In addition, our Farah(R)
brand was first to market with 100% cotton, wrinkle-free pants. Also, in fiscal 2000, we introduced the "packable short," a short
that packs within itself. The packable short had strong consumer acceptance, with one of our largest customers reporting sales of
over 100,000 units in a single week.
Superior Product Quality. Our superior product quality is critical to our success given increasing consumer demand for
quality apparel products at compelling values. We apply stringent quality standards throughout our operations, from product design
through the sourcing of our raw materials from the mill and the shipment of customer orders. Our quality control personnel are
on-site at our suppliers' mills and inspect raw materials prior to shipment to our cutting facility. Similarly, our quality control
personnel are on-site at the facilities of our independent assembly contractors to supervise quality throughout the assembly
process. Furthermore, our product content and construction specifications require the use of matched thread throughout the garment,
rigorous attention to seam construction, surge seaming of all pockets, color matching of all components, the generous use of fabric
and graduated rise in our pants which produce a fuller, more comfortable fit. The application of these standards results in a
minimal rate of customer returns for defects.
Accelerated Production Process. We have developed and continue to refine an operating blueprint that minimizes the
production cycle and reduces inventory risk. We achieved a 27 day average production cycle for fiscal 2002 for our core
replenishment products, which represents approximately two-thirds of our overall production. We have recently encountered
difficulties in the consolidation of our El Paso operations, particularly related to our cutting operations. This has caused delays
in delivering products to our customers, and negatively impacted our results for our first quarter of fiscal 2003. We anticipate,
however, that these difficulties will be resolved during our second quarter of fiscal 2003.The production cycle begins with the
receipt of raw materials and ends with the receipt of a finished garment into our Fast Track Centers. We achieve greater
efficiencies in the manufacture of our core products by utilizing eight production platforms, or "chassis," each requiring distinct
manufacturing processes that incorporate basic core construction features such as waistbands types. We believe that our "chassis"
production concept, strategic outsourcing of labor-intensive garment assembly and finishing operations to independent manufacturers
in Mexico, the Caribbean Basin and Central America allow us to execute production more efficiently and cost-effectively than our
competitors. This strategy minimizes our personnel and capital investment in the production process and enables us to vary
production levels with changes in customer demand. Our Fast Track Centers are strategically located to reduce the time for product
delivery for us and for our customers. As a result of our effective use of technology and our efficient production process, we
believe that our unit production costs, on-time and complete customer order execution and inventory turns are among the best in the
apparel industry.
Efficient and Low-Cost Operations. We achieve efficient and low-cost operations through utilization of advanced technology,
the integration of our systems and those of our suppliers, consolidation of operational and production processes and the employment
of an experienced, well-trained work force. Our systems include integrated apparel design, materials sourcing, production planning
and logistics, customer order entry, sales demand forecasting and order fulfillment, all of which are integrated with our financial
reporting and human resources systems. Our systems are integrated with our suppliers' production planning processes, enabling us to
adjust the amount and composition of our raw materials. Our use of technology results in higher quality products, lower cost
production and more effective and responsive customer order execution. For example, through our use of advanced computerized
equipment for spreading, marking and cutting fabric, we utilize over 91% of our fabric, which we believe is one of the highest fabric
utilization rates in the apparel industry. To maintain our competitive advantage, we continue to make investments in the latest
technology. In an effort to further streamline our operations, in fiscal 2002, we began consolidating our cutting and administrative
functions in El Paso into our Tampa facilities. We expect to complete the consolidation by March 2003 and to generate annual pre-tax
cost savings of $4.5 million.
Differentiated Customer Service and Support. We maximize customer satisfaction through our customized brand and merchandise
management programs. Our programs help retailers increase their profit margins by outsourcing traditional retailer merchandising
functions and reducing their inventory risk and markdowns. Through these programs, our customers are able to leverage our expertise
in tracking and evaluating consumer trends and preferences and are able to consult with us on all aspects of merchandising including
product design, labeling, sales strategy, point-of-sale advertising and pricing. Additionally, as retailers have increasingly
focused on maximizing their return on investment and inventory turns and partnering with vendors that can assist them achieve those
objectives, we have been able to provide many of our customers with our sophisticated vendor managed inventory program in which we
manage customer inventory levels by stock-keeping unit, or SKU, and replenish inventories automatically based on store level retail
sell-through. As an element of our programs, we monitor product sell-through and assist the customer in managing its floor space and
inventory portfolio by suggesting merchandise mix adjustments based on the point of sale SKU data we collect. We strive to ship
orders over 95% complete within the shipping window specified by the customer. As evidence of our customer service capabilities, we
are the Wal-Mart category manager for all Farah(R)brand men's apparel and accessories. We also provide significant financial support
for several of our brands, including the Savane(R)brand, which include in-store fixtures, co-op and other advertising support. We
believe that these services build brand recognition and customer loyalty as well as support for the brand by the retailer.
Growth Strategies
We are well situated to continue to strengthen our position as a leading innovator, designer, producer and marketer of
high-quality branded and private branded apparel products, both internally and through opportunistic acquisitions, and to further
expand our margins and improve our return on invested capital. The key elements of our growth strategy include the following:
Further Penetrate Existing and New Customers in Current and New Markets. We intend to continue leveraging our diversified
portfolio of brands and merchandising programs to expand our existing customer relationships by introducing new brands, products and
programs, growing existing brands, products and programs and capitalizing on international growth opportunities with existing
customers. Our key customers include many of the top retailers in the world, some of whose apparel businesses are rapidly expanding
in North America and globally. With our established operations in the United Kingdom, Mexico, Canada and the South Pacific, we
believe that we are well-positioned to capitalize on international sales opportunities. Examples of our recent successes include the
important new programs we added under our Savane(R)brand with J.C. Penney, Kohl's and Mervyn's, and our expanding global relationship
with Wal-Mart under the Farah(R)brand. We are actively pursuing additional new customer relationships, including selected mass
merchants, deep discount retailers, vertically integrated private brand retailers, and leading direct marketers.
Continue to Expand Product Categories. We will continue to develop and bring to market innovative products that complement
our existing core product lines. We are currently targeting the introduction of new lines of men's graphic t-shirts and women's,
boys' and girls' sportswear. We have recently introduced a new line of shirts across many of our brands and plan to expand
distribution through all of our retail distribution channels thereby leveraging Duck Head's well-established line of shirts and
merchandising expertise. We also intend to expand the licensing of our owned brands into other categories, such as footwear, hosiery
and other accessories. Additionally, we are focusing on the further development of our denim line and related programs in order to
capitalize on increased consumer demand for denim. We believe that our ability to continue to offer an expanding array of products
will be an important driver of future growth.
Enhanced Productivity and Profitability. We continually explore initiatives to improve productivity and profitability
through continued shortening of the production cycle, consolidating operations, leveraging our infrastructure, utilizing advanced
technology and other cost-savings measures. For example, our continuing focus on shortening the production cycle has resulted in a
reduction from a 39 day production cycle in 1997 to a 27 day average for fiscal 2002. By modeling our business after other
fast-moving consumer goods companies, we work to eliminate as many minutes in the production cycle as possible to enable us to
quickly adjust production to meet changing customer demand and minimize excess inventory and costly closeouts. Additionally, we are
in the process of consolidating our cutting and administrative functions in El Paso into our Tampa facilities. We expect to complete
the consolidation by March 2003 and to generate annual pre-tax cost savings of approximately $4.5 million.
Develop New and Innovative Products. Our focus on innovative design and fabrication features is driven by consumer demand
for freshness and innovation in styling, performance and value. This focus on innovation is an important reason we continue to be a
key vendor to our customers and positions us well to realize continued growth with our customers and attract new customers. While
maintaining our focus on basic recurring styles, we base our designs on a careful and thorough assessment of prevailing consumer
fashion and lifestyle trends to incorporate features into our products that enhanced styling and performance, such as innovative new
cuts, fabrics and finishes. We also work with our customers to offer innovative packaging and displays as a complement to their
point-of-sale advertising.
Pursue Opportunistic Acquisitions of Businesses and Brands. We believe that there is significant opportunity for future
growth through acquisition given the high degree of industry fragmentation and the increasing trend by apparel retailers to focus on
fewer key vendors. The ability to acquire existing brands with established revenues and customer base represents an opportunity to
broaden our brand portfolio with immediate scale, expand product categories, further diversify and penetrate our distribution
channels and leverage our operating platform through increased economies of scale. We also intend to explore additional strategic
licensing opportunities to further enhance our brand portfolio. As a result of our prior successes in acquiring and integrating
acquisitions, we believe that we are well-positioned to capitalize on potential future acquisition opportunities.
Products
Product Overview. We produce core lines of high quality casual and dress-casual pants, shorts, denim jeans and woven and
knit shirts for men, women, boys and girls. The following table sets forth our product sales mix expressed as a percentage of our
net sales for fiscal 2002:
Casual Pants 51%
Dress-Casual Pants 19
Shorts 13
Denim 9
Shirts 4
Women's, Boys', Girls' and Other 4
---------
100%
=========
Our product line focuses on basic, recurring apparel styles with innovative design and fabrication features that address
consumer preferences for styling, performance and value. We base our designs on a careful assessment of prevailing consumer fashion
and lifestyle trends to incorporate features into our products that enhance styling and performance, such as innovative new cuts,
fabrics and finishes. We believe that our focus on core apparel products makes our business less susceptible to fashion obsolescence
and less seasonal in nature than other companies that are dependent on fashion styles. Over 80% of our men's pant products are
derived from eight production platforms, or "chassis," each of which incorporates basic features requiring distinct manufacturing
processes, such as inclusion of an elastic waistband, a jeansband or button-flap pockets. We modify our basic chassis to produce
separate and distinct styles through variations in cut, fabric and finish. This process enables us to achieve production consistency
and efficiencies, while also producing a wide variety of products through distinctions in color and style. In order to continue to
bring newness to the market, we also introduce fashion-oriented products on a limited basis. The key fabrics that we use include
100% cotton and blends utilizing silk, Tencel(R), rayon, wool, Lycra(R)and other micro-denier type fabrics as well as various blends of
these and other fabrics. In addition, we have a core line of woven and knit shirts that are sourced entirely as full packaged
imports from the Far East and the Pacific Rim.
Design and Development. Our marketing team analyzes domestic and international trends in the apparel industry as well as
industries outside of apparel, including the technology, automobile, grocery and home furnishings industries, to determine trends in
styling, color, consumer preferences and lifestyle. Virtually all of our products are designed by our in-house staff utilizing a
computer-aided-design, or CAD system, which enables us to produce computer simulated samples that display how a particular style will
look in a given color and fabric. We can quickly generate samples and alter the simulated samples in response to consumer input.
The use of CAD technology reduces the time and costs associated with producing actual sewn samples prior to customer approval and
allows us to create custom designed products meeting the specific needs of a customer. Our product content and construction
specifications require the use of matched finish thread throughout the garment, surge seaming of all pockets, rigorous attention to
seam construction, color matching of all components and the generous use of fabric and a graduated rise in our pants which produce a
fuller, more comfortable fit and reduce costly customer returns.
Brands
Our product lines currently feature over 75 brands. Our products are marketed under our owned brands, including Savane(R),
Farah(R), Duck Head(R), Flyers(TM), The Original Khaki Co.(R), Bay to Bay(R), Two Pepper(R), Royal Palm(R), Banana Joe(R)and Authentic
Chino Casuals(R), and our licensed national brands, including Victorinox(R), Bill Blass(R), Van Heusen(R)and John Henry(R), and
numerous private brands owned by our key customers.
The following table sets forth net sales by brand category for fiscal 2002:
Retailer Private Brands 35%
Savane(R) 27
Farah(R) 15
Other Owned Brands 11
Licensed Brands 7
Duck Head(R) 5
---------
100%
=========
The diversity of our brand portfolio, which covers price points from our high-end Victorinox(R)products to our customers'
private brands, enables us to maximize penetration of our customers by providing them with differentiated brand programs to target
consumers across all demographics.
The following chart illustrates the distribution channels through which we sell our primary brands:
Brand Product Categories Distribution Channels
Victorinox(R), the makers of A collection of high-tech High-end department stores
the original Swiss Army(TM) outerwear, shirts, casual and specialty stores
Knife and dress-casual pants,
shorts and jeans
Savane(R) Men's, women's, misses, Finer to moderate department
boys' and girls' casual and stores and specialty stores
dress-casual pants, shorts,
jeans and shirts
Duck Head(R) Men's, women's, misses, Moderate department stores
boys' and girls' casual and and specialty stores
dress-casual pants, shorts
jeans and shirts
Farah(R) Men's, women's, boys' and Exclusively available to
girls' casual and Wal-Mart with minimal
dress-casual pants, jeans distribution in other
and shorts international distribution
channels
Private Brands Men's, women's, boys' and Finer department stores, mass
girls' casual and merchants, discounters and
dress-casual pants, jeans specialty stores
and shorts
The following are brief descriptions of certain of our primary brands:
Victorinox(R), the makers of the original Swiss Army(TM)Knife. We acquired the global license to the Victorinox(R)brand in
October 2000 and introduced our Victorinox(R)product line in fiscal 2001. These innovatively designed products are sold to our
upscale department store customers such as Bloomingdale's, Macy's, Nordstrom and Saks Fifth Avenue and are designed to appeal to the
consumer with an active lifestyle. We are currently evaluating our long-term strategy with this brand.
Savane(R). We acquired the Savane(R)brand as part of our acquisition of Farah in June 1998. Savane(R)historically has been
positioned as a leading brand at better department stores, including Federated, May Company and Dillard's. In April 2002, we
announced important new national programs under the Savane(R)brand with J.C. Penney, Kohl's and Mervyn's. Our Savane(R)branded
clothing is targeted to consumers between 30 and 50 years old who value innovation and quality.
Duck Head(R). We acquired the Duck Head(R)brand in August 2001. Established in 1865, the widely-recognized Duck Head(R)
brand provides us with opportunities to penetrate new distribution channels and to expand our licensing opportunities. Prior to our
acquisition of Duck Head in 2001, the brand was distributed primarily to nine southeastern states. This brand of men's and boys'
casual sportswear is also sold in our retail outlet stores. The brand is designed to appeal to the younger attitude consumer.
Farah(R). We also acquired the Farah(R)brand as part of our acquisition of Farah. This internationally recognized brand is
exclusively distributed to Wal-Mart in the United States and is an important part of Wal-Mart's branded global expansion. We
currently produce casual and dress-casual pants and shorts under this brand and anticipate expanding into women's products and tops
and shirts. This line of clothing is designed to appeal to the value shopper who is between 30 and 50 years old.
Retail Private Brands. In addition to the owned and licensed brands in our product line, we produce products marketed under
retailer private brands to customers including Wal-Mart, Sam's Club, Kohl's, J.C. Penney, Dillard's, Phillips-Van Heusen, Federated,
May Company, Saks, BJ's, Goody's, Bass Pro Shops, Fred Meyer and Galyan's. Some of the better known retailer private brands for
which we produce apparel are Puritan(R), Member's Mark(R), George(TM), Sonoma(R), Croft & Barrow(R), St. John's Bay(R), Charter
Club(R), Roundtree & Yorke(R), Geoffrey Beene(R), G.H. Bass(R), Izod(R) and White Stag(R). Our products sold under retailer private
brands generally produce lower gross margins than branded products, but also require lower selling, general and administrative
expenses. Sales of retailer private brands accounted for approximately 25%, 29% and 35% of net sales during fiscal 2000, 2001 and
2002, respectively.
Other Licensed Brands. An important component of the branded position of our product line feature brands that we license
from third parties. Our other principal licensed brands include Bill Blass(R)and Van Heusen(R). Licensed brands are an important part
of the breadth of our portfolio of brands and our penetration of all retail distribution channels. Sales of products bearing
licensed brands represented approximately 13%, 9% and 7% of net sales for fiscal 2000, 2001 and 2002, respectively.
Customers and Value-Added Services
General. We market our products across all major apparel retail channels including department stores, discounters and mass
merchants, wholesale clubs, national chains, specialty stores, catalog retailers, our retail outlet stores and the Internet. Sales
to our five largest customers represented approximately 51.8%, 58.2% and 55.3% of net sales during fiscal 2000, 2001 and 2002,
respectively. Sales to Wal-Mart accounted for approximately 13.4%, 15.3% and 14.7% during fiscal 2000, 2001 and 2002, respectively.
Sales to Sam's Club, the national's largest chain of wholesale clubs, accounted for approximately 12.6%, 17.6% and 13.4% during
fiscal 2000, 2001 and 2002, respectively. We also sell our products to other major retailers including Kohl's, Dillard's, J.C.
Penney, Phillips-Van Heusen Retail Outlets, Federated, Belk, May Company, Saks, BJ's, Mervyns' and Costco and with our acquisition of
Duck Head, we operate a chain of 16 retail outlet stores.
The following table sets forth net sales trends by distribution channel:
Fiscal 2000 Fiscal 2001 Fiscal 2002
Department Stores 38% 33% 27%
Discounters and Mass Merchants 23 23 23
Wholesale Clubs 18 21 17
National Chains 9 9 14
Outlet & Other 8 8 7
Specialty Stores 4 6 10
Our Retail Outlet Stores -- -- 2
-------------- --------------- --------------
100% 100% 100%
============== =============== ==============
Customer Service and Support. We offer our customers comprehensive brand management programs, which provide:
o Product design, merchandise planning and support;
o Value-added services, such as sales and pricing strategy, point-of-sale advertising, custom labeling and packaging design, just-in-
time electronic order execution, and retail profitability analysis; and
o Access to advanced sales forecasting and inventory management systems and Internet order fulfillment.
We believe that close collaboration with our customers provides our employees the opportunity to better understand the
fashion, fabric and pricing strategies of the customer and leads to the generation of products that are more consistent with customer
expectations. At the same time, we provide the customer the opportunity to benefit from our substantial expertise in designing,
packaging and labeling high quality products, our consumer purchasing data and experience, our merchandise, brand and category
management capabilities and expertise in tracking and evaluating consumer trends and preferences. In addition, we offer each of our
existing and prospective customers a marketing plan tailored to the customer's market niche. Using our marketing data and industry
experience, we are able to create for each customer and each product, a plan that outlines optimum volume and pricing strategies, as
well as sell-through, expected markdowns and profit margins.
Stock Replenishment Program. Accurate and timely order execution is achieved through an electronic data interchange order
entry or EDI, and quick replenishment of core SKUs. Substantially all orders are placed via EDI and orders are executed utilizing
fully integrated inventory management and order fulfillment technology. We strive to ship orders over 95% complete within the
shipping window specified by the customer. Our systems also enable us to track point-of-sale activity by SKU and forecast consumer
demand and seasonal inventory requirements on a real-time continuous basis. We believe that our advanced technology and systems
enhance the value of our products and customer service and provide the platform to support our expanding category management and
vendor-managed inventory programs.
Product Labeling and Packaging. We differentiate our products through customized labeling, point-of-sale packaging and
other brand identification techniques. For most of our customers, we manage the design and production of labeling and packaging
materials. Management regularly analyzes consumer product labeling and packaging and consumer targeting trends evident in other
retailing formats, including the automobile, grocery and home furnishings industries. We primarily ship products directly to our
customers' retail stores in floor-ready form and offer innovative packaging and displays.
Under our national brand programs, including Savane(R), Farah(R) and Duck Head(R), products are labeled at garment assembly
factories. Under our private brand programs, most products are delivered to our Fast Track Centers without customer-specific
labeling and packaging, which is then added to the product only after we receive a customer's confirmed purchase order. This common
finished goods strategy enables us to minimize inventory risk by selling the same product under customer-specific marketing packages
to different retailers in every distribution channel and offers quick-response execution of customer orders without the associated
risk of carrying customer-specific inventories. Under certain circumstances and on a limited basis, we will apply a
customer-specific label to the product during the production process.
Salesforce. Our products are principally sold by our experienced in-house sales and marketing associates located across the
United States and internationally. We also maintain customer focused sales and marketing support teams dedicated to analyzing sales
and marketing data.
Our Retail Outlet Stores. We operate 16 retail outlet stores located in nine states, all of which are leased properties.
These stores, which are located primarily in outlet malls in suburban locations, sell principally Duck Head(R)branded products. We
are in the process of closing certain unprofitable retail outlet stores. We will not expand our retail outlet stores and we are
currently evaluating our long-term strategy with respect to existing stores.
Products and Sourcing
General. We purchase our raw materials, including fabrics, principally from sources in the United States. We currently cut
our fabric at our Tampa facility before offshore assembly and finishing in Mexico and the Caribbean Basin. We believe that the use
of independent assembly contractors to assemble components cut at our facility enables us to provide customers with high quality
goods at significantly lower prices than if we operated our own assembly facilities. We also source approximately one-third of our
products through the use of full-package imports from independent manufacturers located in the Pacific Rim, the Middle East and
Mexico.
Purchasing. We principally purchase raw materials, including fabrics, thread, trim and labeling and packaging materials,
from domestic sources based on quality, pricing and availability. Although we have no long-term agreements with any of our
suppliers, we believe that generally we have the flexibility, if needed, to replace a supplier with minimal disruption to our
business. We generally undertake a quality audit at our major suppliers prior to shipment to assure that quality standards are met
and to avoid unnecessary delays. An additional quality audit is performed upon receipt of all raw materials. We project raw
material requirements through a series of planning sessions, taking into account orders received and future projections by style and
color. This data is then used to purchase the raw material components needed by production time frame in order to meet customers'
requirements.
Cutting. We utilize advanced computerized equipment for spreading, marking and cutting fabric. Our CAD system positions
all component parts of a single garment in close proximity on the same bolt of fabric to ensure color consistency. This process also
enables us to utilize approximately 91% of the fabric. Quality audits in the cutting facility are performed during various stages,
from spreading of fabric through preparation for shipment to independent manufacturers for assembly.
Assembly. Component parts are shipped by common carrier to independent assembly contractors, principally in Mexico, the
Caribbean Basin and Central America, for assembly and finishing. There are no formal arrangements regarding the production of
garments between us and any of our independent assembly contractors, but we believe that our relationships with our contractors are
generally good. Using independent assembly contractors allows us to shift our sources of supply depending upon production and
delivery requirements and cost, while at the same time reducing the need for significant capital expenditures, work-in-process
inventory and a large production work force. We arrange for the assembly or production of our products primarily based on orders
received. We inspect prototypes of each product before production runs are commenced. Random in-line quality control checks are
performed during and after assembly before the garments leave the contractor. We currently have a team of full-time production and
quality control personnel on-site in Mexico and the Caribbean Basin.
Finished Goods Sourcing. We utilize over 50 factories in various countries and conduct human rights audits in each of the
factories we use. All garments are produced according to our specifications and product quality is monitored at the factories. With
the acquisition of Duck Head in August 2001, we have expanded our sourcing of complete garment packages for selected product styles.
Import Regulations
Products imported from our source countries are subject to U.S. Customs duties at applicable Normal Trade Relations or
Column 1 duty rates. These tariffs generally range between 10% and 30%, depending upon the nature of the garment (e.g., shirt,
pant), its construction and its chief weight by fiber. A typical duty rate applicable to our imported men's cotton pants is
approximately 17%. In accordance with the Agreement on Textiles and Clothing of the World Trade Organization, the U.S. has entered
into bilateral trade agreements with certain apparel producing countries to limit the quantity of garments that may be imported
annually from each such country. These limits, or quotas, apply to a broad range of garments and are often competitive, particularly
as applied to Asian countries, thus affecting annual sourcing patterns and prices for garments internationally. Effective January 1,
2005, the U.S., with few exceptions, is obligated to remove quotas applicable to garments from all World Trade Organization member
countries, including China and certain other Asian countries. See "Risk Factors - The integration on January 1, 2005, of all textile
and apparel quotas under the World Trade Organization Agreement on Textiles and Clothing could reduce the competitiveness of apparel
assembled in Mexico and the Caribbean Basin under our current business model."
The Caribbean Basin Trade Partnership Act ("CBTPA") became effective on October 2, 2000. CBTPA generally grants duty and
quota-free access for garments cut in the United States or in the Caribbean Basin and assembled in the Caribbean Basin from United
States fabric and U.S. yarn. The CBTPA legislation will be effective through September 30, 2008. Prior to this legislation, most
of the merchandise we sourced from these Caribbean Basin countries was admitted in the U.S. with a substantial tariff reduction under
the so-called "807" program. In essence, reduction in dutiable value was equal to the value of U.S. components incorporated into
these assembled goods plus southbound international freight and insurance. As a result of this legislation, American apparel
companies have increasingly utilized production facilities located in the Caribbean Basin, including the Dominican Republic. We
believe that the Dominican Republic offers certain competitive advantages including favorable pricing and better quality production,
a long-standing and relatively stable production network, and much shorter transportation periods as compared to goods assembled in
the Pacific Rim.
We also import finished goods from Mexico under the North American Free Trade Agreement, commonly known as NAFTA. Under
NAFTA, merchandise that qualifies is accorded reduced or duty-free access and is not subject to any quota.
Human Rights Policy
We have a comprehensive human rights policy. The policy is consistent with the Responsible Apparel Production Principles,
which are endorsed by the American Apparel and Footwear Association and other Caribbean Basin apparel manufacturing associations.
Our policy focuses on working conditions at the independent assembly contractors utilized by us and, among other things, prohibits
under age labor and poor working conditions. Compliance with the policy is mandatory and is closely monitored in the following
ways: (1) our associates or our agents routinely visit each independent contractor plant, (2) our management periodically visits
independent contractor plants and (3) an independent third party agency utilized by many companies in the apparel industry performs
audits periodically and reports the results to us. We will promptly discontinue production with any independent contractor that does
not comply with the policy.
Management Information Systems
We believe that advanced information processing is critical to our business. Our philosophy is to utilize modern technology
where it will enhance our competitive position. Consequently, we continue to upgrade our management information systems in order to
maintain better control of our inventory and to provide management with information that is current and accurate. Our management
information systems provide, among other things, comprehensive order processing, production, accounting and management information
for our marketing, manufacturing, importing and distribution functions. To support our flexible inventory replenishment program, we
have an EDI system through which customer inventories can be tracked and orders automatically placed with us by the retailer. In
addition, our systems were designed to continually add new brand programs and customer information quickly and reliably without
disruption to our existing operations.
Competition
The apparel industry is highly competitive and we compete with numerous apparel manufacturers, including brand name and
private label producers, as well as retailers that have established, or may establish, internal product development and sourcing
capabilities. The principal markets in which we compete are the United States, Europe, Canada, Mexico, Australia and New Zealand.
Many of our competitors and potential competitors have greater financial, manufacturing and distribution resources than we do. We
believe that we compete favorably on the basis of the quality and value of our programs and products and the long-term customer
relationships we have developed. Nevertheless, any increased competition from manufacturers or retailers could result in reductions
in unit sales or prices, or both, which could have a material adverse effect on our business and results of operations.
Personnel
At November 30, 2002, we had 1,450 associates, including 1,232 in the United States, 25 in the Dominican Republic, 64 in
Mexico, 91 in the United Kingdom, 30 in Australia, and eight in New Zealand. Approximately 8% of our employees are members of the
Union of Needletrades Industrial and Textile Employees. The collective bargaining agreement with these employees expires in February
2003. We consider our relations with our employees to be generally good.
We are committed to developing and maintaining a well-trained workforce. We provide or pay for thousands of hours of
continuing education annually for our employees on subjects ranging from computers to foreign languages. We are equally committed to
the well-being of our employees. We offer our full-time employees and their families a comprehensive benefits package that includes
a 401(k) plan with a company matching contribution, a choice of group health insurance plans, disability insurance, term life
insurance (with an option to purchase additional coverage), a choice of dental plans, and a vision plan. We also offer tuition
reimbursement. We maintain a recreation area, health club facilities and a hair salon in Tampa for the use and enjoyment of our
employees and their families. We also enjoy long-standing relationships with certain of our independent assembly contractors in the
Dominican Republic and Mexico and have contributed financial resources to improving conditions for their employees.
Trademarks and Licenses
We hold or have applied for over 750 United States and worldwide trademark registrations covering our various brand names
including Savane(R), Farah(R), Duck Head(R), Flyers(TM), The Original Khaki Co.(R), Authentic Chino Casuals(R), Two Pepper(R), and Bay
to Bay(R). The word marks Savane(R), Farah(R), Duck Head(R), and Bay to Bay(R) are registered with the United States Patent and
Trademark Office. In addition, the word marks Savane(R), Farah(R), Duck Head(R), and Bay to Bay(R) are registered in various countries
worldwide. Pursuant to separate license agreements, we have the exclusive rights to use, (i) the Bill Blass(R)trademark with respect
to men's casual pants, shorts and jeans in the United States and Canada, (ii) the John Henry(R)trademark with respect to men's
bottoms and coats in the United States and Canada, and (iii) the Van Heusen(R) trademark with respect to men's pants, jeans and
shorts in the United States and Canada. The license agreement with respect to the Bill Blass(R)trademark expires in 2005 and is
subject to a renewal option that would extend the expiration date through 2010. The license agreement with respect to the John
Henry(R) trademark expired in December 2002, and we have chosen not to renew it. The license agreement with respect to the Van
Heusen(R) trademark expires in 2004 and is subject to renewal options to be negotiated between the parties. In October 2000, we
entered into a license agreement with Swiss Army Brands, Inc., for the use of the Victorinox(R), makers of the original Swiss Army
Knife(TM), brand. The license agreement has an initial term of five years, with automatic renewal terms and conditions thereafter.
Under this agreement, we have the exclusive worldwide license to design, manufacture and market men's and women's apparel products
under the Victorinox(R) brand. We are currently evaluating our long-term strategy with this brand.
Seasonality
Historically, our business has been seasonal, with higher sales and income in the second and third fiscal quarters. In
addition, certain of our products, such as shorts and corduroy pants, tend to be seasonal in nature. In the event such products
represent a greater percentage of our sales in the future, the seasonality of our sales may be increased.
Backlog
In advance of the month in which units are to ship, we receive "hold for confirmation" orders from customers which are used
to plan production. These orders are not commitments to purchase and are subject to change until they are confirmed. Therefore,
orders that we currently have may not be indicative of future sales. This increases the difficulty in forecasting the demands of our
customers.
Item 2. Properties
Our corporate headquarters are located in Tampa, Florida and are owned by us. We consider both our domestic and
international facilities to be suitable and adequate to meet our current needs and to have sufficient production capacity for current
operations. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors Affecting our
Business and Prospects."). The following table reflects the general location, use and approximate size of our significant real
properties:
Approximate Owned/
Location Use Square Footage Leased (1)
- -------------------------------- ------------------------------------------- ------------------ ------------
Tampa, Florida Corporate offices/Distribution center 305,000 Owned
Tampa, Florida Fabric cutting facility 110,000 Owned
El Paso, Texas Administrative office 51,000 Leased (2)
El Paso, Texas Fabric cutting facility 205,000 Leased (2)
Santa Teresa, New Mexico Distribution center 250,000 Leased
New York, New York Two offices/Showrooms 8,000 Leased
Chihuahua, Mexico Office/Warehouse 73,800 Owned (3)
Auckland, New Zealand Office/Warehouse 9,000 Owned
Sydney, Australia Office/Warehouse 29,000 Leased
Witham, United Kingdom Office/Distribution center 57,000 Leased
_________________________
Our 16 Duck Head retail outlet stores consist of approximately 46,000 square feet of leased property in nine states. These leases
expire at various dates through 2007. We are currently constructing a new 118,000 square foot administration building in Tampa,
Florida which is expected to be completed by March 2003.
(1) See Note 6 of Notes to Consolidated Financial Statements for a discussion of lease terms.
(2) Currently unoccupied and available for sublease.
(3) Currently unoccupied and for sale.
Item 3. Legal Proceedings
We are not a party to any legal proceedings other than various claims and lawsuits arising in the normal course of
business. Our management does not believe that any such claims or lawsuits will have a material adverse effect on our financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4A. Executive Officers of the Registrant
The following table provides the names and ages of our executive officers, and the positions and offices currently held by
each of them:
Name Age Position(s)
Christopher B. Munday 38 Chief Executive Officer, President and Director
N. Larry McPherson 39 Executive Vice President, Chief Financial Officer and Treasurer
Richard J. Domino 54 Executive Vice President, President, Private Brand Division
Michael R. Mitchell 49 Executive Vice President, President, Branded Division
Gregory L. Williams 49 Executive Vice President, General Counsel and Director
Christopher B. Munday was appointed President of our company in July 2001 and Chief Executive Officer in November 2002, and
has served as a Director since November 2001. He joined our company as Managing Director of our European Division in June of 1999.
Prior to joining our company, Mr. Munday was Managing Director of Tela Ltd., a branded tissue company, which was acquired by
Kimberly-Clark Corporation in 1999. Mr. Munday has extensive sales, marketing and operations experience having held numerous senior
positions in Scott Paper Company and Kimberly-Clark Corporation. Mr. Munday has a diploma in marketing, a B.A. Honors degree in
business and an M.B.A. Mr. Munday has served as a member of a school board, a member of the Institute of Sales and Marketing and is
currently a member of the Institute of Directors.
N. Larry McPherson has served as our Executive Vice President and our Treasurer since December 1997. He has also served as
our Chief Financial Officer since May 2002. Previously, Mr. McPherson was an audit Senior Manager at Ernst & Young LLP. He has a
Masters of Business Administration from the University of South Florida and is a CPA in the State of Florida.
Richard J. Domino joined our company in 1988 and has served as our Executive Vice President and President of our Branded
Division since November 1994. Mr. Domino served as Senior Vice President of Sales and Marketing from January 1994 to October 1994
and Vice President of Sales from December 1989 to December 1993. He has over 25 years experience in apparel-related sales and
marketing.
Michael R. Mitchell serves as our Executive Vice President and President of our Branded Division. He has served as
President of Savane since March 1994, and was appointed President of Victorinox in September 2001. Prior to then, Mr. Mitchell was
employed by Savane from 1981 in various sales and marketing capacities. He also served on the Savane Board of Directors from March
1994 until June 1998.
Gregory L. Williams serves as Executive Vice President, General Counsel and Corporate Secretary. He joined our company in
July 1999 as Executive Vice President and General Counsel. In July 2002, Mr. Williams was appointed by the Board of Directors to
replace Mr. Michael Kagan as a director and also replaced Mr. Kagan as Secretary of our company. Prior to joining our company, Mr.
Williams practiced commercial law in Tampa, Florida for 18 years. Mr. Williams served as local counsel to our company for three
years prior to joining our company as an employee. Mr. Williams has been a member of the Florida Bar since 1981 and is admitted to
the practice before the Supreme Court of the United States, various lower federal courts, the Supreme Court of Florida and the lower
state courts.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock began trading on the Nasdaq National Market under the symbol "TSIC" on October 28, 1997. The initial
public offering price of our common stock was $12.00 per share. At December 17, 2002, there were approximately 80 record holders of
our common stock, and we estimate that there were approximately 1,500 beneficial holders on the same date. The following table sets
forth the quarterly high and low sale prices per share of our common stock as reported by the Nasdaq National Market for the last two
fiscal years.
Fiscal Year Ended
September 29, 2001 High Low
First Quarter $19.50 $12.50
Second Quarter $19.50 $13.75
Third Quarter $21.10 $16.80
Fourth Quarter $21.60 $14.00
Fiscal Year Ended
September 28, 2002 High Low
First Quarter $19.66 $15.50
Second Quarter $24.47 $18.55
Third Quarter $29.55 $21.00
Fourth Quarter $24.25 $14.25
The transfer agent and registrar for our Common Stock is Computershare Investor Services, LLC, Dallas, Texas.
We have not declared or paid any cash dividends on our common stock since 1989. We currently anticipate that all of our
earnings will be retained for the continued development and expansion of our business and do not anticipate declaring or paying any
cash dividends in the foreseeable future. Moreover, our various existing debt facilities contain covenants expressly prohibiting the
payment of any cash dividends.
Item 6. Selected Financial Data
The following selected financial data (in thousands, except share and per share data) are derived from our audited
consolidated financial statements for each of the five fiscal years in the period ended September 28, 2002. You should read the
following consolidated financial information together with our consolidated financial statements and the related notes in Item 15 of
this report, and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 of this report.
Fiscal Year Ended
----------------- --------------- ---------------- ------------ -------------
September 28, September 29, September 30, October 2, October 3,
Statements of Income Data: 2002 2001 2000 1999 1998
------------------------------------------ ----------------- --------------- ---------------- ------------ -------------
Net sales................................. $463,877 $436,436 $472,985 $420,691 $263,976
Gross profit.............................. 128,407 124,556 137,522 117,922 68,889
Selling, general and administrative
expenses............................. 97,157 88,509 88,719 80,511 43,204
Other charges............................. 16,130 2,774 1,006 3,999 -
Operating income.......................... 15,120 33,273 47,797 33,412 25,685
Interest expense, net..................... 12,955 15,261 17,351 18,586 6,866
Other, net................................ (1,002) 989 1,251 973 1,036
Income before income taxes................ 3,167 17,023 29,195 13,853 17,283
Income before extraordinary item 1,909 10,430 17,503 8,251 10,802
............
Extraordinary item........................ 412 800 - - -
Net income................................ 2,321 11,230 17,503 8,251 10,802
Income per common share before
extraordinary item-diluted................ $ 0.22 $ 1.34 $ 2.27 $ 1.05 $ 1.43
Extraordinary item........................ 0.04 0.11 - - -
Net income per common share-diluted...... $ 0.26 $ 1.45 $ 2.27 $ 1.05 $ 1.43
Weighted average number of shares
used in the calculation - diluted (1) 8,857,000 7,771,000 7,725,000 7,838,000 7,550,000
As of Fiscal Year Ended
----------------- --------------- ---------------- ------------ -------------
September 28, September 29, September 30, October 2, October 3,
Balance Sheet Data: 2002 2001 2000 1999 1998
------------------------------------------ ----------------- --------------- ---------------- ------------ -------------
Working capital........................... $166,214 $130,905 $111,627 $120,041 $107,397
Total assets.............................. 336,208 309,230 294,528 289,322 297,476
Long-term debt and obligations
under capital leases................. 110,173 151,314 145,541 170,894 171,494
Shareholders' equity...................... 156,372 86,267 75,834 59,823 50,964
_______________
(1) Computed on the basis described in Notes to Consolidated Financial Statements. Rounded to the nearest thousand.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
We manage the production of a majority of our products utilizing our facility in Tampa, Florida and through independent
assembly contractors located primarily in Mexico, the Caribbean Basin and Central America. We also source finished goods from
independent suppliers. For goods assembled by independent manufacturers, we purchase and inventory all of our raw materials and cut
our fabric in our Tampa cutting facility based on expected customer orders. We ship cut fabric parts and other product components
via common carrier to the independent manufacturers, who assemble components into finished garments (except for labeling and
packaging in the case of private brand products) and perform certain finishing processes. We have no material contractual
arrangements with our independent manufacturers and pay them based on a specified unit price for actual first-quality units
produced. Accordingly, a substantial portion of our production labor and overhead is variable. We ship assembled goods from Mexico,
the Caribbean Basin and Central America to our Tampa, Florida and Santa Teresa, New Mexico distribution centers via common carrier.
Upon receipt of a customer order confirmation, we ship the product directly to customers or, in the case of private brand products,
attach designated labels and point-of-sale packaging and then ship the product to our customers.
Our results of operations for fiscal 2001 and 2002 were adversely impacted by negative economic trends including increasing
unemployment, declines in the U.S. equity markets and decreased consumer confidence. During these periods, apparel retailers sought
to increase consumer demand and reduce inventories with aggressive price discounting, particularly in the department store channel.
In addition, certain producers made brands available to mass merchants and discounters that normally were distributed through
department and specialty stores. Although our margins did decline during this period, we maintained our strategy not to sacrifice
product quality, customer service and profitable results.
Additionally, sales of our Savane(R)brand have declined significantly since the beginning of fiscal 2000 due to declines in
the department store channel where the Savane(R)product is generally sold. We have expanded our distribution of the Savane(R)brand
through major new core replenishment programs with J.C. Penney, Kohl's and Mervyn's. These programs, which began shipping in fiscal
2002, are expected to reverse the pattern of Savane's recent declines.
Savane Consolidation
On April 17, 2002, we announced a plan to consolidate the administrative, cutting and related functions of our Savane
division in El Paso, Texas into our Tampa, Florida facility. We intend to complete all aspects of this consolidation by March 2003.
As part of the consolidation, we have vacated our El Paso, Texas administration building and cutting facility. We are currently
constructing additional administrative offices in Tampa, Florida, and the current Tampa, Florida cutting facility has sufficient
capacity to accommodate the consolidated cutting operation. We will continue to operate our distribution center in the El Paso,
Texas area. We have recently encountered difficulties in the consolidation of our El Paso operations, particularly related to our
cutting operations. This has caused delays in delivering products to our customers, and negatively impacted our results for our
first quarter of fiscal 2003. We anticipate, however, that these difficulties will be resolved during our second quarter of fiscal
2003.
We also announced the reorganization of our South Pacific division, including discontinuing production in factories in Fiji
that are partially owned by us. Production for our South Pacific division will be sourced globally through lower cost, full packaged
imports.
As a result of these initiatives (internally referred to as "Project Synergy"), we recorded a pre-tax charge totaling
approximately $16.1 million in fiscal 2002 for severance ($3.1 million), relocation ($2.5 million), lease terminations ($2.8
million), asset write-downs ($5.7 million) and other related costs ($2.0 million). We expect an additional $2.0 million of costs
associated with Project Synergy to be incurred in fiscal 2003. As of September 28, 2002, we have approximately $4.3 million of
expenses accrued, related to exit costs, which primarily consist of lease terminations, severance and related expenses. Except for
the lease termination costs, these costs are expected to be paid during fiscal 2003. Once completed, the impact of these initiatives
is expected to generate annual pre-tax cost savings of approximately $4.5 million beginning in fiscal 2003. We believe that Project
Synergy will improve our ability to service our customers through one centralized location.
The following discussion and analysis of our results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our
consolidated financial statements in conformity with generally accepted accounting principles requires that we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. These estimates and assumptions are based on historical and other factors believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of asset and liabilities that
are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions
or conditions. We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating
results and financial position, and we apply those accounting policies in a consistent manner.
Critical Accounting Policies
Contingencies - We accrue for contingent obligations, including estimated legal costs, when the obligations are probable and
the amount is reasonably estimable. As facts concerning contingencies become known, we reassess our estimates and make appropriate
adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal and other
regulatory matters such as import and export tariffs, which are subject to change as events evolve and as additional information
becomes available during the administrative and litigation process.
Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out
method. We evaluate our inventory by style, color and size to determine excess or slow moving product based on projected sales. We
record provisions for markdowns and losses on excess and slow-moving inventory to the extent the cost of inventory exceeds estimated
net realizable value. If actual market conditions or competitive pressures change, the level of inventory reserves would change.
Reserve for Allowances and Doubtful Accounts - Accounts receivable consists of amounts due from our customers from our
normal business activities. We maintain a reserve for allowances and doubtful accounts, which is based on historical collection and
deduction write-off experience, and an estimate of potential sales returns. Estimates for sales returns include provision for order
shortages, purchase order variances and other customer discrepancies. For fiscal 2002, we have not provided a reserve for credit
losses as substantially all of our receivables were assigned under factoring agreements, without recourse, except for credit losses
on the first 0.10% of amounts factored. During fiscal 2003, we intend to discontinue factoring of our receivables, but expect to
maintain credit insurance for those accounts which we deem necessary. We will continue to assess the adequacy of our reserves based
on qualitative and quantitative measures.
Long-Lived Assets - We estimate the depreciable lives of our property, plant and equipment and review them for impairment
when events or circumstances indicate that their carrying amounts may be impaired. Most of our property, plant and equipment are
used in our cutting and distribution processes. We periodically evaluate the carrying value of assets which are held for sale to
determine if, based on market conditions, the values of these assets should be adjusted. Although we believe we have appropriately
recorded our assets held for sale at their estimated fair value, net of estimated disposal costs, the actual sale of these assets
could result in gains or losses which could differ from our estimated amounts. To assess the recoverability of goodwill and other
intangible assets, we make assumptions regarding estimated future cash flows and other factors to determine whether the carrying
values are recoverable from operations. If these assumptions or estimates change, we may be required to record impairment charges to
reduce the value of these assets.
As discussed in the Notes to the Financial Statements, we adopted Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("Statement No. 142") on September 30, 2001. Statement No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them. Goodwill and other indefinite lived intangible assets
are tested for impairment. The provisions of Statement No. 142 require the completion of a transitional impairment test within six
months of adoption, with any impairment identified treated as a cumulative effect of a change in accounting principle. Also,
Statement No. 142 requires an annual impairment test. In accordance with the provision of Statement No. 142, we performed the
transitional and annual impairment tests during fiscal 2002. The results of these tests indicate that goodwill and other indefinite
lived intangible assets are not impaired, as the fair value of these assets exceed their carrying value.
Valuation Allowances for Deferred Tax Assets - Valuation allowances are recorded to reduce deferred tax assets if, based on
the weight of the evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The evidence
considered in making that determination includes, offsetting deferred tax liabilities, future taxable income, as well as prudent tax
planning strategies. We have recorded deferred income tax assets related to state net operating loss carryforwards, foreign net
operating loss carryforwards, foreign tax credit carryforwards and certain other accruals. We have recorded valuation allowances to
reduce the deferred tax assets relating to these operating loss carryforwards and accruals based on an evaluation of the benefits
expected to be realized. If we determine that we would be able to realize more of our net deferred tax assets than we currently
expect, we would reduce the valuation allowance, which would have the effect of increasing income in the period that we make the
determination. Conversely, if we determine that we will not be able to realize all or part of our net deferred tax assets in the
future, we will increase the valuation allowance, which would have the effect of reducing income in the period that we make the
determination.
The following discussion of our results of operations and financial condition should be read in conjunction with our
consolidated financial statements and notes thereto contained in Item 14 of this report.
Results of Operations
The following table sets forth, for the periods indicated, selected items in our consolidated statements of operations
expressed as a percentage of net sales:
Fiscal Year Ended
---------------------------------------------------------
September 28, September 29, September 30,
2002 2001 2000
Net sales.............................. 100.0% 100.0% 100.0%
Cost of goods sold..................... 72.3 71.5 70.9
----- ----- -----
Gross profit........................... 27.7 28.5 29.1
Selling, general and
administrative expenses............ 20.9 20.3 18.8
Other charges.......................... 3.5 0.6 0.2
----- ----- -----
Operating income....................... 3.3 7.6 10.1
Interest expense, net.................. 2.8 3.5 3.7
Other expense, net..................... (0.2) 0.2 0.2
----- ----- -----
Income before income taxes............. 0.7 3.9 6.2
Provision for income taxes............. 0.3 1.5 2.5
Income before extraordinary item....... 0.4 2.4 3.7
----- ----- -----
Extraordinary item..................... 0.1 0.2
----- ----- -----
Net income............................. 0.5% 2.6% 3.7%
===== ===== =====
Fiscal 2002 Compared to Fiscal 2001
Net Sales. Net sales for fiscal 2002 increased to $463.9 million from $436.4 million for fiscal 2001. This increase was
primarily due to an 18% increase in units sold, a small portion of which related to sales of Duck Head(R)branded product, which was
acquired in August 2001. This increase was offset by a decrease in average selling prices. The decrease in average selling prices
was due to our experiencing pricing pressure due to the weak retail conditions. Additionally, the average selling price was impacted
by a change in mix of product sales as the higher average selling priced Savane(R)products experienced declines in unit volume as the
department store channel that Savane was positioned in suffered declines in sales. We have expanded our distribution of the Savane(R)
brand through major new core replenishment programs with retailers. The new expanded distribution is expected to offset some of
Savane's recent adverse trends in the declining moderate department store retail sector where Savane has traditionally been
positioned. These programs, which began shipping in fiscal, are expected to reverse the pattern of Savane's recent declines. We also
anticipate that fiscal 2003 first quarter net sales will be negatively impacted by difficulties encountered in the consolidation of
our El Paso operations, particularly related to our cutting operations.
Gross Profit. Gross profit increased to $128.4 million, or 27.7% of net sales, for fiscal 2002, from $124.6 million, or
28.5% of net sales, for fiscal 2001. The decrease in gross margin was primarily due to continued competitive pricing pressure and a
higher mix of lower margin styles.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $97.2 million, or
20.9% of net sales, for fiscal 2002, from $88.5 million, or 20.3% of net sales, for fiscal 2001. The increase in operating expense
as a percentage of net sales was primarily due to the higher relative operating expenses associated with the Duck Head(R)and
Victorinox(R)branded components of the business. We are currently evaluating our long-term strategy with the Victorinox(R) brand and
with our retail outlet stores.
Other Charges. Other charges of $16.1 million in fiscal 2002 relate to Project Synergy and include reserves for severance,
lease terminations, asset write-downs and other related costs. Other charges of $2.8 million in fiscal 2001 relate to severance,
in-process research and development acquired in connection with the Victorinox(R)license, costs related to closure of a sewing plant
in Chihuahua, Mexico, and costs related to the unsuccessful pursuit of an acquisition.
Interest Expense, net. Interest expense decreased to $13.0 million for fiscal 2002 from $15.3 million for fiscal 2001. The
decrease was primarily due to lower average interest rates and to a reduction of outstanding borrowings under our revolving credit
line during our fourth quarter.
Other, net. During fiscal 2002, we recorded other income of $1.0 million as compared with other expense of $989,000 for
fiscal 2001. The change consisted primarily of lower amortization expense and higher royalty income offset in part by higher factor
fees. In accordance with Statement No. 142, we discontinued the amortization of our intangible assets effective September 30, 2001.
Income Taxes. Our effective income tax rate for fiscal 2002 was 39.7% compared with 38.7% for fiscal 2001. The overall
increase was due to changes in permanent items related to deferred tax asset valuation allowances and to other transactions related
to certain of our foreign entities. This increase was offset in part by the elimination of non-deductible goodwill amortization.
Extraordinary Item. We recorded an extraordinary gain in fiscal 2002 of $412,000 related to the final purchase accounting
adjustments associated with our acquisition of Duck Head in August 2001.
Net Income. As a result of the above factors, including the charges related to Project Synergy, we had net income of $2.3
million for fiscal 2002, or 0.5% of net sales, compared with $11.2 million, or 2.6% of net sales for fiscal 2001.
Fiscal 2001 Compared to Fiscal 2000
Net Sales. Net sales for fiscal 2001 decreased to $436.4 million as compared to $473.0 million for fiscal 2000. The
decrease was primarily due to lower average selling prices caused by the weak retail environment.
Gross Profit. Gross profit decreased to $124.6 million, or 28.5% of net sales, for fiscal 2001, from $137.5 million, or
29.1% of net sales for fiscal 2000. The reduction in the gross margin was primarily due to a reduction in average selling prices
without a comparable reduction in the average cost per unit.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $88.5 million, or
20.3% of net sales, for fiscal 2001, from $88.7 million, or 18.8% of net sales, for fiscal 2000. The increase in operating expenses
as a percentage of net sales was primarily due to lower sales volume, coupled with incremental expenses associated with the start-up
of the Victorinox(R)apparel line.
Other Charges. During fiscal 2001, we recorded pre-tax charges of approximately $596,000 for severance related to a 160
associate workforce reduction, $848,000 related to design and development costs that was acquired in connection with the Victorinox(R)
license, and $900,000 related to the closure of our sewing plant in Chihuahua, Mexico. We also incurred pre-tax costs of
approximately $430,000 related to the pursuit of certain assets of Bugle Boy Industries, Inc. During fiscal 2000, we recorded a
pre-tax charge of $1.0 million related to severance for the former Chief Executive Officer of Savane.
Interest Expense, net. Interest expense decreased to $15.3 million for fiscal 2001 from $17.4 million for fiscal 2000. The
decrease was primarily due to lower average outstanding borrowings under our credit facility, and to a lesser extent, to lower
interest rates.
Income Taxes. Our effective tax rate for fiscal 2001 was 38.7% as compared with 40.0% for fiscal 2000. The decrease in the
effective rate is primarily the result of tax planning strategies that we implemented, which serve to reduce taxable income in
various states within which we operate.
Extraordinary Item. We recorded an extraordinary gain of $800,000 related to the excess of the preliminary fair value of
Duck Head's net assets acquired over the price we paid. The preliminary fair value estimates were subject to change, and subsequent
changes were reflected as additional extraordinary gain in fiscal 2002.
Net Income. As a result of the above factors, net income for fiscal 2001 was $11.2 million, or 2.6% of net sales, as
compared with $17.5 million, or 3.7% of net sales for fiscal 2000.
Liquidity and Capital Resources
Our primary capital requirements are funding our growth in operations and capital expenditures. We have historically
financed our growth in sales and the resulting increase in inventory and receivables through a combination of operating cash flow and
borrowings under our revolving credit line. Consistent with industry practice, we are often required to post letters of credit when
placing an order with certain international manufacturers.
In June 2002, we completed a public offering of 3.0 million shares of common stock. We received net proceeds of
approximately $63.2 million, of which approximately $32.0 million was used to repay all outstanding borrowings under our revolving
credit line (the "Facility"), to pay down a portion of our real estate loan, and to repay certain capital lease obligations. The
remaining $31.2 million is being used for the payment of the cash portion of the Project Synergy charges, the construction of a new
administration facility in Tampa, Florida and for working capital and general corporate purposes, including acquisitions.
The Facility provides for borrowings of up to $110 million, subject to certain borrowing base limitations. Borrowings under
the Facility bear interest at variable rates and are secured by substantially all of our domestic assets. As of September 28, 2002,
there were no outstanding balances on the Facility. The Facility matures in June 2003. We cannot be assured that we will be able to
obtain replacement financing at that time or that any available replacement financing will be on terms acceptable to us.
On May 28, 1999, we entered into a real estate loan ("Real Estate Loan") agreement secured by our distribution center,
cutting facility, and administrative offices in Tampa, Florida. The Real Estate Loan was used to refinance $9.5 million outstanding
on our previous real estate loan and to finance up to $6.0 million of the costs related to an expansion of our Tampa, Florida
distribution facility. In March 2000, the Real Estate Loan was converted to a secured term loan. Principal and interest payments
were paid monthly on the refinanced amount through June 2002. On June 26, 2002, the terms of the Real Estate Loan were amended and
the loan now requires the payment of monthly interest only, with the remaining outstanding principal of $7.0 million due on or before
May 15, 2008.
Borrowings under the Real Estate Loan bear interest at a rate of 30-day LIBOR plus an applicable margin (4.0% at September
28, 2002). Under the terms of an interest-rate swap agreement associated with the Real Estate Loan, effectively $7.0 million of
borrowings under the Real Estate Loan bear interest at a fixed base rate plus an applicable margin (8.6% at September 28, 2002). As
of September 28, 2002, the combined effective interest rate on the Real Estate Loan was approximately 7.9%.
We have $100 million of senior subordinated notes (the "Notes") outstanding that were issued through a private placement.
Under the terms of the indenture governing the Notes, we are paying semi-annual interest at the rate of 11% through June 2008, at
which time the entire principal amount is due. The net proceeds from the Notes were used to repay a portion of the borrowings
outstanding under a bridge loan that was used to finance the purchase of Savane in June 1998.
Our credit agreements contain significant financial and operating covenants, including prohibitions on our ability to incur
certain additional indebtedness or to pay dividends, and restrictions on our ability to make capital expenditures. Our Facility and
Real Estate Loan also require that we maintain certain financial ratios, including a consolidated fixed charge ratio of at least
1.25x, a ratio of consolidated senior indebtedness to consolidated EBITDA of not more than 2.5x and a ratio of consolidated funded
debt to consolidated EBITDA of not more than 5.5x. We are currently in compliance with all covenants under our credit agreements.
Our credit agreements also contain customary events of default, including nonpayment of principal or interest, violation of
covenants, inaccuracy of representations and warranties, cross-defaults to other indebtedness, bankruptcy and other insolvency
events, material judgments, certain ERISA events and certain changes of control at our company. The occurrence of a default, an
event of default or a material adverse effect on our company could result in our inability to obtain further borrowings under our
Facility and could also result in the acceleration of our obligations under any or all of our credit agreements, each of which could
materially and adversely affect our business.
During fiscal 2002, pursuant to two separate factoring agreements, we factored substantially all our accounts receivable.
The factoring agreements provided that the factor pay us an amount equal to the gross amount of our accounts receivable from
customers, reduced by certain offsets, including, among other things, discounts, returns and a commission payable by us to the
factor. In fiscal 2002, the commission averaged 0.23% of the gross amount factored. The factor subjected all sales to its credit
review process and assumed 99.9% of the credit risk for amounts factored pursuant to the factoring agreements. Funds were
transferred to reduce outstanding borrowings under the Facility once payment was received from the factor. The factor paid us the
receivable amount upon the earlier of (1) receipt by the factor of payment from our customer or (ii) 120 days past the due date for
such payments. During fiscal 2003, we intend to discontinue factoring of our receivables, but expect to maintain credit insurance for
those accounts which we deem necessary. We will continue to assess the adequacy of our reserves based on qualitative and quantitative
measures.
As a result of the acquisition of Duck Head in August 2001, certain consolidation and cost savings activities have
transpired that will continue to impact our capital resources. Specifically, we have chosen to exit certain leased facilities. The
payment of lease termination costs will use cash. As of September 28, 2002, we had exit related accruals of $213,000. We plan to
complete our exit plans by December 2002.
We have historically financed our capital expenditures through a combination of operating cash flow and long-term
borrowings. Capital expenditures were $11.0 million for fiscal 2002 and primarily related to the construction of an administration
building in Tampa, Florida, which is expected to be completed during the second quarter ended March 2003, and the upgrade or
replacement of various other equipment and computer systems including hardware and software.
During fiscal 2003, we anticipate capital expenditures will be approximately $20 million. Significant capital projects
include the completion of the administration building in Tampa, Florida, and the upgrade or replacement of various other equipment
and computer systems including hardware and software.
During fiscal 2002, we generated $17.8 million of cash from operations. This was primarily the result of net income of $2.3
million (which included non-cash expenses of $8.0 million), a decrease in inventories of $1.9 million, a decrease in prepaid expenses
and other current assets of $6.5 million (which included net cash proceeds of approximately $6.7 million from the sale of the former
Duck Head headquarters and distribution center), and an increase in accounts payable of $4.9 million, offset in part by an increase
in accounts receivable of $5.2 million, and a decrease in accrued expenses and other of $0.6 million.
In connection with Project Synergy, we expect to utilize a total of approximately $14.0 million in cash, related to payments
for employee separations, employee relocation, moving costs and costs to terminate certain operating leases. Except for the lease
termination costs, these costs are expected to be paid during fiscal 2003.
During fiscal 2002, we generated $27.6 million of cash from financing activities, principally related to net proceeds of
$63.2 million from the public offering of 3.0 million shares of common stock in June 2002. Net proceeds from the offering were
utilized to repay certain borrowings noted above.
On September 28, 2002 and September 29, 2001, we had working capital of $166.2 million and $130.9 million, respectively.
The increase in working capital was primarily due to a $37.7 million increase in cash and marketable securities, a $1.7 million net
increase in inventory, a $4.1 million net increase in accounts receivable, and a $1.4 million net decrease in accounts payable and
accrued expenses, offset by a $10.8 million net decrease in prepaid expenses and other current assets. The decrease in prepaid
expenses and other current assets was primarily related to sale of the former Duck Head headquarters and distribution center. We
expect that our working capital needs will continue to fluctuate based on seasonal changes in sales, accounts receivable and trade
accounts payable.
On November 19, 2002, we announced that William W. Compton had agreed to resign as Chief Executive Officer, Chairman and a
member of the Board of Directors. In connection with Mr. Compton's resignation, we entered into a Separation Agreement, General
Release of All Claims and Covenant Not to Sue with Mr. Compton. Pursuant to this Separation Agreement, we paid Mr. Compton severance
of approximately $4.6 million in cash and property in November 2002. We also accrued other related expenses of approximately $1.1
million in connection with Mr. Compton's resignation.
We believe that our existing working capital, borrowings available under our Facility and internally generated funds provide
sufficient resources to support current business activities. To the extent that we seek to accelerate our growth plans, we may need
to raise additional capital either through the issuance of equity or debt securities or additional credit facilities. In addition,
the factors discussed under "Risk Factors Affecting Our Business and Prospects" could significantly impact our liquidity.
Impact of Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB"), issued Statement of Financial Accounting Standard No. 141,
"Business Combinations" (Statement No. 141). Statement No. 141 prohibits the use of the pooling-of-interests method for business
combinations completed after June 30, 2001, and requires the recognition of intangible assets separately from goodwill. The
acquisition of Duck Head in August 2001 was accounted for in accordance with Statement No. 141. On September 30, 2001, we adopted
Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (Statement No. 142). Statement No. 142
includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. Goodwill and
other indefinite lived intangible assets are tested for impairment. The provisions of Statement No. 142 required the completion of a
transitional impairment test within six months of adoption, with any impairment identified as a cumulative effect of a change in
accounting principle. Also, Statement No. 142 requires an annual impairment test. In accordance with the provision of Statement No.
142, we performed these transitional and annual impairment tests during fiscal 2002. The results of these tests indicate that our
goodwill and other indefinite lived intangible assets are not impaired, as the fair value of these assets exceed their carrying
value. Any impairment related to test performed after the transitional impairment test would be recorded as a component of operating
income.
In October 2001, the FASB issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (Statement No. 144), which is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. Statement No. 144 supersedes Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and
provides a single accounting model for long-lived assets to be disposed of. We do not expect the adoption of Statement No. 144 to
have a material impact on our financial position and results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standard No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (Statement No. 145), which is effective for fiscal years
beginning after May 15, 2002. This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," as well as an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements," as debt extinguishments are no longer classified as extraordinary items unless they meet the requirements in
Accounting Principles Board Opinion No. 30 of being unusual and infrequently occurring. This Statement also amends other existing
authoritative pronouncements to make various technical corrections. We do not expect the adoption of Statement No. 145 to have a
material impact our financial position and results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities" (Statement No. 146), which is effective for exit or disposal activities that are initiated after December 31,
2002. Statement No. 146 nullifies Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3). Statement No. 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and
eliminates the definition and requirements of recognition of exit costs in EITF 94-3. The adoption of Statement No. 146 will affect
the timing of recognition of costs associated with any future restructuring activities.
Inflation
The impact of inflation on our operating results has been moderate in recent years, reflecting generally lower rates of
inflation in the economy and relative stability in our cost of sales. While inflation has not had, and we do not expect that it will
have, a material impact upon operating results, there is no assurance that our business will not be materially adversely affected by
inflation in the future.
Risk Factors Affecting Our Business and Prospects
Our financial success is linked to the success of our customers.
Our financial success is directly related to the success of our customers and the willingness of our customers, in
particular our major customers, to continue buying our products. Sales to our five largest customers represented approximately 51.8%,
58.2% and 55.3% of net sales during fiscal 2000, 2001 and 2002, respectively. Sales to Wal-Mart accounted for approximately 13.4%,
15.3% and 14.7% of net sales during fiscal 2000, 2001, and 2002, respectively. Sales to Sam's Club accounted for approximately
12.6%, 17.6% and 13.4% of net sales during fiscal 2000, 2001 and 2002, respectively.
We do not have long-term contracts with any of our customers. Sales to our customers are generally on an order-by-order
basis and are subject to rights of cancellation and rescheduling by the customer or by us. Accordingly, the number of unfilled
orders at any given time is not indicative of the number that will eventually be shipped. If we cannot timely fill our customers'
orders, our relationships with our customers may suffer, and this could have a material adverse effect on us, especially if the
relationship is with a major customer. Furthermore, if any of our major customers experiences a significant downturn in business, or
fails to remain committed to our programs or brands, then these customers may reduce or discontinue purchases from us, which would
have a material adverse effect on our business, results of operations and financial condition. Many of our customers are affiliates
of other customers and therefore any impact to our relationship with one customer may impact our relationship with other customers.
The apparel industry is heavily influenced by general economic cycles.
Apparel is a cyclical industry that is heavily dependent upon the overall level of consumer spending. Purchases of apparel
and related goods tend to be highly correlated with cycles in the disposable income of consumers. As a result, any substantial
deterioration in general economic conditions, increase in interest rates or any other events or uncertainties that discourage
consumers from spending could have a significant effect on our sales and profitability. Overall market sales declined in 2000 and
2001 and this trend continued in 2002. This decline has been due in part to declining prices. The calendar year 2001 witnessed a
significant reduction in consumer spending in the retail sector due in part to the recession in the United States and the terrorist
attacks on September 11, 2001. Such conditions may continue or may reoccur. In addition, moderate department stores have
experienced declining sales recently, as consumers' buying habits have changed. This has negatively affected, and may continue to
negatively affect, our sales, particularly our Savane(R)branded programs.
Our business could suffer as a result of consolidations, restructuring and other ownership changes in the retail industry.
Various apparel retailers, including department stores, some of which are or have been our customers, have in recent years
experienced financial problems. Many have been subject to bankruptcy, restructuring, or liquidation, while others have consolidated
ownership and centralized buying decisions. This increases our risk of extending credit to these retailers, and may lead us to
reduce or discontinue business with such customers, or to assume more credit risk relating to their accounts receivable. Any one of
these actions could have a material adverse effect on our business, results of operations and financial condition.
We compete with manufacturers and retailers in the highly competitive apparel industry.
We compete with many domestic and international apparel manufacturers, including brand name and private brand producers and
retailers (including our own customers and vertically integrated specialty stores) who have, or may have, the internal capability to
develop their products and source their products from independent manufacturers. Our products are also in competition with many
designer and non-designer product lines. Our products compete primarily on the basis of price, quality, brand recognition and our
ability to satisfy customer orders in a timely manner. Our failure to satisfy any one of these factors could cause our customers to
purchase products from our competitors. Intense competition in the apparel industry has over the past several years resulted in and
may in the future result in significant discounting and lower gross margins. The price deflation is attributable to increased
competition, increased product sourcing to lower cost countries, growth of the mass merchant channel of distribution and increased
value-consciousness on the part of consumers. This downward pressure on prices may limit our ability to maintain or improve gross
margins. Because of our high debt level, we may also be less able to respond effectively to these developments than our competitors
who have less financial leverage. Many of our competitors and potential competitors have greater financial, manufacturing and
distribution resources than we do. If manufacturers or retailers increase their competition with us, or if our current competitors
become more successful in competing with us, we could experience material adverse effects on our business, results of operations and
financial condition.
The integration, on January 1, 2005, of all textile and apparel quota under the World Trade Organization Agreement on Textiles and
Clothing could reduce the competitiveness of apparel assembled in Mexico and the Caribbean Basin under our current business model.
In accordance with the Agreement on Textiles and Clothing of the World Trade Organization, or WTO, the United States has
entered into bilateral trade agreements with a number of other countries, including China. These agreements limit the amount and
type of goods that may be imported annually from these countries. As a result of trade preference programs with Mexico and the
Caribbean Basin, where we produce and source a majority of our goods, we currently enjoy a competitive advantage over those companies
who import goods from countries that are subject to these quotas. Effective January 1, 2005, the United States, with few exceptions,
is obligated to remove quotas applicable to goods from all WTO member countries, including China. The removal of these quotas will
result in an increase in the amount of goods imported annually from these countries, including China, thereby increasing our
competition and potentially having a material adverse effect on our business, results of operations and financial condition.
We have experienced and may continue to experience delays or other difficulties in consolidating our El Paso, Texas cutting and
administration functions into our Tampa, Florida facilities.
We have experienced delays and difficulties in consolidating our El Paso, Texas cutting and administrative functions into
our Tampa, Florida facilities that have resulted in delays in delivering products to our customers and lost sales in our first
quarter of fiscal 2003. We may continue to experience unanticipated conditions, contingencies, delays and expenses in connection
with the consolidation that would negatively affect our business and results of operations. As a result, we may not achieve our
projected cost savings as soon as anticipated or in the amount anticipated or our costs may be more than anticipated. Additionally,
any problems that we may have delivering products to our customers could damage our relationship with these customers and result in
further lost sales or require us to discount our products to these customers to protect our business relationships.
Fluctuations in the price, availability and quality of the fabrics or other raw materials we use could increase our cost of sales and
reduce our ability to meet our customers' demands.
The principal fabrics used in our apparel consist of cotton, wool, synthetic and blended fabrics. The price we pay for
these fabrics is mostly dependent on the market prices for the raw materials used to produce them, namely cotton, wool, rayon and
polyester. Depending on a number of factors, including crop yields and weather patterns, the market price of these raw materials may
fluctuate significantly. Some of our suppliers are experiencing financial difficulties. This increases the risk that we will be
unable to obtain raw materials at the price or quality or with the ease that we have historically obtained them. Moreover, only a
limited number of suppliers are available to supply the fabrics at the level of quality we require. If we have to procure fabrics
from sources other than our current suppliers, the quality of the fabric may be significantly different from that obtained from our
current suppliers which could result in lost sales. Fluctuations in the price, availability and quality of the fabrics or raw
materials could increase our cost of sales and reduce our ability to meet our customers' demands. We have not entered into
transactions to mitigate or hedge risk relating to fluctuation in price. We cannot assure you that we will be able to pass along to
our customers all, or any portion of, any increases in the prices paid for the fabrics used in the manufacture of our products.
We depend upon independent manufacturers in the production of our apparel.
We use independent manufacturers to assemble or produce our products, including the sourcing of full-package imports. We
depend on these manufacturers' ability to finance the assembly or production of goods ordered and to maintain manufacturing
capacity. We do not exert direct control over these independent manufacturers, however, so we may be unable to obtain timely
delivery of acceptable products. In addition, we do not have long-term contracts with any of these independent manufacturers and any
of these manufacturers may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge
us. As a result, we cannot be assured of an uninterrupted supply of acceptable quality products from our independent manufacturers.
If there is an interruption, we may not be able to substitute suitable alternative manufacturers because such substitutes may not be
available, or they may not be able to provide us with products or services of a comparable quality, at an acceptable price or on a
timely basis.
We require our independent manufacturers to meet our standards for working conditions, environmental protection and other
matters before we are willing to place business with them. As such, we may not be able to obtain the lowest cost production. In
addition, any failure by our independent manufacturers to adhere to labor or other laws, or any divergence of any independent
manufacturer's labor practices from those generally considered ethical in the United States and the potential negative publicity
relating to any of these events could materially harm our business and reputation.
Our ability to successfully conduct assembly and production operations in facilities in foreign countries depends on many factors
beyond our control.
Currently, more than 75% of our products are assembled or produced by independent manufacturers in the Dominican Republic,
Mexico and Central America. The remainder of our products are produced or assembled in other foreign countries. It is possible that
we will experience difficulties with these independent manufacturers, including reduced production capacity, failure to meet
production deadlines or increases in manufacturing costs. Also, using foreign manufacturers requires us to order products further in
advance to account for transportation time. If we overestimate customer demand, we may have to hold goods in inventory, and we may
be unable to sell these goods at the same margins as we have in the past. On the other hand, if we underestimate customer demand, we
may not be able to fill orders in time.
Other problems we may encounter by using foreign manufacturers include, but are not limited to work stoppages;
transportation delays and interruptions; delays and interruptions from natural disasters; political instability; involvement in wars
or other similar conflicts such as terrorist attacks; economic disruptions; expropriation; nationalization; imposition of tariffs;
imposition of import and export controls; and changes in government policies.
We are also exposed to foreign currency risk. In the past, most of our contracts to have goods assembled or produced in
foreign countries were negotiated in U.S. dollars. If the value of the U.S. dollar decreases, then the price that we pay for our
products could increase, and it is possible that we would not be able to pass this increase on to our customers.
Our success depends upon our ability to recruit qualified personnel and to retain senior management.
Our continued success is dependent on retaining our senior management as well as attracting and retaining qualified
management, administrative and operating personnel. If we lose any members of our senior management, or if we do not recruit and
retain other qualified personnel, then our business, results of operations and financial condition could be materially adversely
affected. In November 2002, William W. Compton, one of our founders and our Chief Executive Officer and Chairman of the Board
resigned. There can be no assurance that current management can continue to manage our business successfully without Mr. Compton or
that Mr. Compton's departure will not cause disruptions in or otherwise negatively affect our business, customer or supplier
relationships or results of operations.
We have a substantial amount of debt and interest payment requirements that will require successful future operating performance and
financial results and that impose important limitations on us.
We have substantial outstanding indebtedness and are highly leveraged. The degree to which we are leveraged will have
important consequences, including the following:
o a substantial portion of our cash flow from operations will be dedicated to the payment of principal and interest on our debt;
o our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes
may be impaired;
o our leverage may increase our vulnerability to economic downturns and limit our ability to withstand competitive pressures;
o our ability to capitalize on significant business opportunities may be limited; and
o our leverage may place us at a competitive disadvantage in relation to less leveraged competitors.
Our ability to meet our debt service obligations will depend on our future operating performance and financial results,
which will be subject in part to factors beyond our control. Although we believe that our cash flow will be adequate to meet our
interest payments, there can be no assurance that we will generate cash flow in the future sufficient to cover our fixed charges and
principal payments. If we are unable to generate cash flow in the future sufficient to cover our fixed charges and principal
payments and are unable to borrow funds from existing credit facilities or from other sources,