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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 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
(Former name, former address and former fiscal year, if changed since last report.)
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 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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
[X] Yes [ ] No
As of February 5, 2003 there were 11,040,452 shares of the registrant's Common Stock outstanding.
TROPICAL SPORTSWEAR INT'L CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I Financial Information Page No.
--------
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 16
Item 4 Controls and Procedures 16
PART II Other Information
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 17
Item 3 Defaults upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Thirteen Thirteen
Weeks Ended Weeks Ended
December 28, December 29,
2002 2001
----------------- -----------------
Net sales $ 99,041 $ 110,011
Cost of goods sold 78,247 78,378
----------------- -----------------
Gross profit 20,794 31,633
Selling, general and administrative
expenses 22,304 24,098
Other charges 3,752 -
----------------- -----------------
Operating income (loss) (5,262) 7,535
Other (income) expense:
Interest expense, net 2,889 3,552
Other, net (91) (724)
----------------- -----------------
2,798 2,828
Income (loss) before income taxes (8,060) 4,707
Provision (benefit) for income taxes (3,042) 1,749
----------------- -----------------
Net income (loss) (5,018) 2,958
Foreign currency translations and other 222 262
----------------- -----------------
Comprehensive income (loss) $ (4,796) $ 3,220
================= =================
Net income (loss) per common share:
Basic $ (0.45) $0.38
================= =================
Diluted $ (0.45) $0.38
================= =================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 28, September 28,
2002 2002
----------------- ------------------
ASSETS (unaudited) (audited)
Current Assets:
Cash and cash equivalents $ 21,080 $ 28,284
Marketable securities - 11,100
Accounts receivable, net 80,206 91,009
Inventories, net 88,228 74,797
Deferred income taxes 9,659 9,414
Prepaid expenses and other current assets 14,304 13,460
----------------- ------------------
Total current assets 213,477 228,064
Property and equipment, net 53,136 48,473
Intangible assets, including trademarks and goodwill, net 47,311 47,326
Other assets 12,845 12,345
----------------- ------------------
Total assets $ 326,769 $ 336,208
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 56,209 $ 60,599
Current portion of long-term debt and capital leases 1,280 1,251
----------------- ------------------
Total current liabilities 57,489 61,850
Long-term debt and capital leases 108,595 108,922
Deferred income taxes 2,881 2,881
Other non-current liabilities 6,228 6,183
----------------- ------------------
Total liabilities 175,193 179,836
Shareholders' Equity:
Preferred stock - -
Common stock 110 110
Additional paid in capital 88,549 88,549
Accumulated other comprehensive loss (4,900) (5,122)
Retained earnings 67,817 72,835
----------------- ------------------
Total shareholders' equity 151,576 156,372
----------------- ------------------
Total liabilities and shareholders' equity $ 326,769 $ 336,208
================= ==================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Thirteen Thirteen
Weeks Ended Weeks Ended
December 28, December 29,
2002 2001
------------------- ------------------
OPERATING ACTIVITIES
Net Income (loss) $ (5,018) $ 2,958
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,665 2,061
Deferred income taxes and other (180) (184)
Changes in operating assets and liabilities:
Accounts receivable 10,803 433
Inventories (13,431) (3,772)
Prepaid expenses and other current assets (1,220) 2,648
Accounts payable and accrued expenses (5,006) (5,274)
------------------ -----------------
Net cash used in operating activities (12,387) (1,130)
------------------ -----------------
INVESTING ACTIVITIES
Capital expenditures (5,813) (1,671)
Sale of marketable securities 11,100 -
Other, net 43 3
------------------ -----------------
Net cash provided by (used in) investing activities 5,330 (1,668)
------------------ -----------------
Financing activities:
Net change in long-term debt and capital leases (318) 3,511
Proceeds from exercise of stock options - 96
------------------ -----------------
Net cash provided by (used in) financing activities (318) 3,607
------------------ -----------------
Change in currency translation 171 (120)
Net increase (decrease) in cash and cash equivalents (7,204) 689
Cash and cash equivalents at beginning of period 28,284 1,714
------------------ -----------------
Cash and cash equivalents at end of period $ 21,080 $ 2,403
================== =================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 28, 2002 and September 28, 2002
(In thousands, except share and per share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Tropical Sportswear Int'l Corporation
(the "Company") include the accounts of Tropical Sportswear Int'l Corporation and its subsidiaries. These
financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not
include all information and footnotes required by generally accepted accounting principles. The unaudited
condensed consolidated financial statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the year ended September 28, 2002. In
the opinion of management, the unaudited condensed consolidated financial statements contain all necessary
adjustments (which include only normal, recurring adjustments) for a fair presentation of the interim periods
presented. Operating results for the thirteen weeks ended December 28, 2002 are not necessarily indicative of
results that may be expected for the entire fiscal year ending September 27, 2003.
2. INVENTORIES
Inventories consist of the following:
December 28, September 28,
2002 2002
------------------- -------------------
Raw materials $10,829 $ 7,772
Work in process 25,735 18,696
Finished goods 56,228 51,736
Reserve for excess and slow moving inventory (4,564) (3,407)
------------------- -------------------
$88,228 $74,797
=================== ===================
3. DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of the following:
December 28, September 28,
2002 2002
------------------- -------------------
Revolving credit line $ - $ -
Real estate loan 7,000 7,000
Senior subordinated notes 100,000 100,000
Other 2,875 3,173
------------------- -------------------
109,875 110,173
Less current maturities 1,280 1,251
------------------- -------------------
$108,595 $108,922
=================== ===================
4. EARNINGS PER SHARE
Basic and diluted net income (loss) per share are computed as follows:
Thirteen Thirteen
Weeks ended Weeks ended
December 28, December 29,
2002 2001
--------------- ---------------
Numerator for basic and diluted net income
(loss) per share:
Net income (loss) $(5,018) $2,958
Denominator for basic net income (loss)
per share:
Weighted average shares of common
stock outstanding 11,040,452 7,699,491
Effect of dilutive stock options using the treasury
stock method - 116,537
--------------- ---------------
Denominator for diluted net income (loss) per share 11,040,452 7,816,028
=============== ===============
Net income (loss) per common share:
Basic $(0.45) $0.38
=============== ===============
Diluted $(0.45) $0.38
=============== ===============
5. RESTRUCTURING OF SAVANE INTERNATIONAL CORP.
On April 18, 2002, the Company announced a plan to consolidate the administrative, cutting and related functions
of the Savane division in El Paso, Texas into the Tampa, Florida facility. The Company intends to complete all
aspects of this consolidation by March 2003. As part of the consolidation, the Company has vacated its El Paso,
Texas administration building and cutting facility.
As a result of these initiatives (internally referred to as "Project Synergy"), the Company recorded exit
accruals related to this consolidation during fiscal 2002. During the first fiscal quarter of fiscal 2003, the
Company reduced certain of these exit accruals as the consolidation project is nearing completion and better cost
estimates were available. As of December 28, 2002, the Company has approximately $2.7 million accrued, related
to exit costs, which primarily consist of lease terminations ($2.1 million), severance ($0.1 million) and related
expenses ($0.5 million). The activity in the exit accruals related to Project Synergy during the first quarter
of fiscal 2003 was as follows:
Thirteen weeks ended
December 28, 2002
-----------------------
Beginning balance $ 4,295
Reductions (1,085)
Cash payments (547)
-----------------------
Ending balance $ 2,663
=======================
The Company has remaining accrued liabilities related to the 1998 acquisition of Savane International Corp. The
exit costs primarily consist of estimated lease termination costs and related expenses. The activity in the
exit accruals related to this acquisition during the first quarter of fiscal 2003 was as follows:
Thirteen weeks ended
December 28, 2002
-----------------------
Beginning balance $ 2,216
Cash payments (626)
-----------------------
Ending balance $1,590
=======================
6. RECENT ACCOUNTING PRONOUNCEMENTS
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. The adoption of Statement No. 144 has not had a material impact on the
Company's 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. The adoption of Statement No. 145 has not
had a material impact on the Company's 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.
In December 2002, the FASB issued Statement of Financial Accounting Standards Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (Statement No. 148), which is effective for fiscal years
beginning after December 31, 2002. Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition to the fair value method of accounting for stock-based
employee compensation. In addition, Statement No. 148 amends the disclosure provisions of Statement 123 to
require disclosure in the summary of significant accounting policies of the effects of an entity's accounting
policy with respect to stock-based employee compensation on reported net income and earnings per share in annual
and interim financial statements. The adoption of Statement No. 148 has not had a material impact on the
Company's financial position and results of operations.
7. STOCK OPTION PLAN PRO FORMA INFORMATION
As discussed in Note 6, the interim information regarding pro forma net income and earnings per share is required
by Statement No. 123 and Statement No. 148. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The Company's pro forma information is as
follows (in thousands except for net income per share information):
Thirteen Thirteen
Weeks ended Weeks ended
December 28, December 29,
2002 2001
--------------- ---------------
Net income (loss) $(5,018) $2,958
Pro forma compensation expense, net of tax (209) (325)
--------------- ---------------
Pro forma net income (loss) $(5,227) $2,633
=============== ===============
Net income (loss) per share-basic $(0.45) $0.38
Net income (loss per share-diluted $(0.45) $0.38
Pro forma net income (loss)per share-basic $(0.47) $0.34
Pro forma net income (loss) per share-diluted $(0.47) $0.34
No actual stock-based compensation cost was recorded by the Company in the accompanying condensed consolidated
financial statements.
8. SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS
The Company's Senior Subordinated Notes, due 2008 (the "Notes") are jointly and severally guaranteed fully and
unconditionally by the Company's domestic subsidiaries which are 100% owned by Tropical Sportswear Int'l
Corporation (the "Parent"). The Company's wholly-owned foreign subsidiaries are not guarantors with respect to
the Notes and do not have any credit arrangements senior to the Notes except for their local overdraft facilities
and capital lease obligations.
The following is the unaudited supplemental combining condensed statement of operations for the thirteen weeks
ended December 28, 2002 and December 29, 2001, the supplemental combining condensed balance sheet as of December
28, 2002 and September 28, 2002, and the supplemental combining condensed statement of cash flows for the
thirteen weeks ended December 28, 2002, and December 29, 2001. The only intercompany eliminations are the normal
intercompany sales, borrowings and investments in wholly-owned subsidiaries. Separate complete financial
statements of the guarantor subsidiaries are not presented because management believes that they are not material
to investors.
Thirteen Weeks Ended December 28, 2002
-----------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------ -------------
Net sales $ 46,756 $ 39,728 $ 12,835 $ (278) $ 99,041
Gross profit 8,649 7,865 4,354 (74) 20,794
Operating income (loss) (7,109) 995 852 - (5,262)
Interest, income taxes and other, net (2,369) 1,944 181 - (244)
Net income (loss) (4,740) (949) 671 - (5,018)
Thirteen Weeks Ended December 29, 2001
-----------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ------------- --------------
Net sales $ 45,598 $ 51,778 $ 12,811 $ (176) $ 110,011
Gross profit 12,311 15,177 4,145 - 31,633
Operating income 5,064 1,638 833 - 7,535
Interest, income taxes and other, net 2,233 1,554 225 565 4,577
Net income 2,831 84 608 (565) 2,958
As of December 28, 2002
------------------------------------------------------------------------------
Balance Sheet Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 15,073 $ 266 $5,741 $ - $ 21,080
Accounts receivable, net 37,828 33,346 9,032 - 80,206
Inventories 35,659 43,987 8,582 - 88,228
Other current assets 10,434 9,929 3,600 - 23,963
----------- ------------- ------------- ------------- --------------
Total current assets 98,994 87,528 26,955 - 213,477
Property and equipment, net 41,385 9,095 2,656 - 53,136
Investment in subsidiaries and other assets 151,488 51,239 (7,286) (135,285) 60,156
----------- ------------- ------------- ------------- --------------
Total assets $291,867 $147,862 $22,325 $(135,285) $326,769
=========== ============= ============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 42,868 $7,270 $ 6,071 $ - $56,209 -
Current portion of long-term debt and
capital leases 276 966 38 - 1,280
----------- ------------- ------------- ------------- --------------
Total current liabilities 43,144 8,236 6,109 - 57,489
Long-term debt and noncurrent portion of
capital leases 107,574 930 91 - 108,595
Other noncurrent liabilities 1,192 7,886 31 - 9,109
Stockholders' equity 139,957 130,810 16,094 (135,285) 151,576
----------- ------------- ------------- ------------- --------------
Total liabilities and
stockholders' equity $291,867 $147,862 $22,325 $(135,285) $326,769
=========== ============= ============= ============= ==============
As of September 28, 2002
------------------------------------------------------------------------------
Balance Sheet Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 24,274 $ 167 3,843 $ - $ 28,284
Marketable securities 11,100 - - - 11,100
Accounts receivable, net 44,317 36,045 10,647 - 91,009
Inventories 34,867 31,050 8,880 - 74,797
Other current assets 10,494 9,234 3,146 - 22,874
----------- ------------- ------------- ------------- --------------
Total current assets 125,052 76,496 26,516 - 228,064
Property and equipment, net 37,152 8,759 2,562 - 48,473
Investment in subsidiaries and other assets 135,189 68,557 (6,638) (137,437) 59,671
----------- ------------- ------------- ------------- --------------
Total assets $297,393 $153,812 $22,440 $(137,437) $336,208
=========== ============= ============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $43,265 $12,394 $ 5,161 $(221) $ 60,599
Current portion of long-term debt and
capital leases 274 948 29 - 1,251
----------- ------------- ------------- ------------- --------------
Total current liabilities 43,539 13,342 5,190 (221) 61,850
Long-term debt and noncurrent portion of
capital leases 107,643 1,178 101 - 108,922
Other noncurrent liabilities 1,170 7,864 30 - 9,064
Stockholders' equity 145,041 131,428 17,119 (137,216) 156,372
----------- ------------- ------------- ------------- --------------
Total liabilities and
stockholders' equity $297,393 $153,812 $22,440 $(137,437) $336,208
=========== ============= ============= ============= ==============
Thirteen Weeks Ended December 28, 2002
------------------------------------------------------------------------------
Statement of Cash Flows Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- -------------
Net cash provided by (used in) operating
activities $ (14,961) $ 866 1,708 $ - $ (12,387)
Net cash provided by (used in) investing
activities 5,842 (432) (80) - 5,330
Net cash provided by (used in) financing
activities (82) (335) 99 - (318)
Other - - 171 - 171
Net increase (decrease) in cash (9,201) 99 1,898 - (7,204)
Cash and cash equivalents, beginning of 24,274 167 3,843 - 28,284
Cash and cash equivalents, end of period 15,073 266 5,741 - 21,080
Thirteen Weeks Ended December 29, 2001
------------------------------------------------------------------------------
Statement of Cash Flows Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- -------------
Net cash provided by (used in) operating
activities $ (3,206) $ 1,409 $ 667 $ - $ (1,130)
Net cash used in investing activities (821) (812) (35) - (1,668)
Net cash provided by (used in) financing
activities 4,117 (287) (223) - 3,607
Other - (120) - - (120)
Net increase (decrease) in cash 90 190 409 - 689
Cash, beginning of period 190 249 1,275 - 1,714
Cash, end of period 280 439 1,684 - 2,403
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the Company's results of operations is based upon our unaudited
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of 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 facts believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ materially from these estimates under
different assumptions or conditions. 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. We have identified the policies below as critical to our business operations and the
understanding of our results of operations.
Critical Accounting Policies
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 did not provide 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 is 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 realizable 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.
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.
Contingencies - The Company accrues 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 position 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 imports and
exports, which are subject to change as events evolve and as additional information becomes available during the
administrative and litigation process.
Results of Operations
On April 18, 2002 we announced a plan to consolidate the administrative, cutting and related functions of the
Savane division in El Paso, Texas into the Tampa, Florida facility. We intend to complete all aspects of this
consolidation by March 2003. As part of the consolidation, we vacated our El Paso, Texas administration building
and cutting facility. We have experienced delays and difficulties in consolidating our El Paso, Texas cutting
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. In addition, during the first quarter of fiscal 2003, we
recorded sales allowances of approximately $4.3 million related to delivery issues associated with these
initiatives (internally referred to as "Project Synergy"). These difficulties could impact our second fiscal
quarter of fiscal 2003, as we may incur additional allowances associated with delivery issues.
On January 20, 2003, we announced an agreement with Swiss Army Brands, Inc. ("SABI"), whereby SABI will assume
the operations of our Victorinox(R)apparel division within the next 90 days. We are working closely together with
SABI to effect a seamless transition. On January 20, 2003, we also announced our intention to exit our Duck
Head(R)retail outlet business as leases expire. We currently operate sixteen outlet stores and expect that by the
end of calendar 2003, no more than eight will be in operation. We believe that exiting these two businesses will
free up valuable resources that can be devoted to our core business. As a result of exiting these businesses, we
expect that our revenues will be reduced, but that our profitability will increase.
The following table sets forth, for the periods indicated, selected items in the Company's consolidated
statements of income expressed as a percentage of net sales:
Thirteen Thirteen
Weeks ended Weeks ended
December 28, December 29,
2002 2001
-------------- ---------------
Net sales 100.0% 100.0%
Cost of goods sold 79.0 71.2
-------------- ---------------
Gross profit 21.0 28.8
Selling, general and administrative 22.5 21.9
expenses
Other charges 3.8 --
-------------- ---------------
Operating income (loss) (5.3) 6.9
Interest expense, net (2.9) (3.2)
Other, net 0.1 0.6
-------------- ---------------
Income (loss) before income taxes (8.1) 4.3
Provision (benefit) for income taxes (3.0) 1.6
-------------- ---------------
Net income (5.1)% 2.7%
============== ===============
Thirteen weeks ended December 28, 2002 compared to the thirteen weeks ended December 29, 2001
Net Sales. Net sales decreased to $99.0 million for the first quarter of fiscal 2003 from $110.0
million in the comparable prior year quarter. The decrease was due to a decrease in units sold and a decrease in
the average price per unit. Net sales for the first quarter of fiscal 2003 were also impacted by sales
allowances of approximately $4.3 million related to delivery issues associated with Project Synergy, which were
recorded as a reduction of net sales.
Gross Profit. Gross profit decreased to $20.8 million, or 21.0% of net sales for the first quarter of
fiscal 2003 from $31.6 million, or 28.8% of net sales for the comparable prior year quarter. The decrease in
gross profit as a percentage of net sales was due to a reduction in average selling prices as a result of the
highly competitive retail environment, a mix of lower margin sales, and increased sales allowances.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to
$22.3 million, or 22.5% of net sales for the first quarter of fiscal 2003, from $24.1 million, or 21.9% of net
sales, for the comparable prior year quarter. The decrease in operating expenses was due to the decrease in net
sales and to cost savings initiatives.
Other Charges. Other charges of $3.8 million was comprised of a $5.7 million charge related to a
separation agreement with our former chief executive officer, offset in part by a $1.9 million reduction of
estimated costs for Project Synergy as the consolidation project is nearing completion and better cost estimates
were available.
Interest Expense. Interest expense decreased to $2.9 million for the first quarter of fiscal 2003, from
$3.6 million for the comparable prior year quarter. The decrease was primarily due to lower average outstanding
borrowings.
Other, net. During the first quarter of fiscal 2003, we recorded other income of $91,000 as compared
with other income of $724,000 for the first quarter of fiscal 2002. The decrease was primarily due to a decrease
in royalty income.
Income Taxes. The Company's effective income tax rate for the first quarter of fiscal 2003 was 37.7%
compared to 37.1% in the comparable prior year quarter.
Net Income (Loss). As a result of the above factors, we incurred a net loss of $5.0 million for the
first quarter of fiscal 2003 compared to net income of $2.9 million in the comparable prior year quarter.
Liquidity and Capital Resources
Our revolving credit line (the "Facility") provides for borrowings of up to $110 million, subject to certain
borrowing base limitations. Borrowings under the Facility bear variable rates of interest and are secured by
substantially all of the Company's domestic assets. As of December 28, 2002, the Company had no outstanding
borrowings under the Facility. The Facility matures in June 2003. We believe we will be able to extend the
Facility or obtain similar financing on comparable terms on or before the maturity date.
In June 2002, the Company completed a public offering of 3.0 million shares of common stock. The Company
received net proceeds of approximately $63.2 million, of which approximately $32.0 million was used to repay all
outstanding borrowings under the Facility, to pay down a portion of the Company's 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.
Capital expenditures totaled $5.8 million for the thirteen weeks ended December 28, 2002 and are expected to
approximate $17.0 to $20.0 million for the entire fiscal year. The expenditures expected for the remainder of the
fiscal year primarily relate to the construction of an administration building in Tampa, Florida, which is
expected to be completed during the quarter ended March 2003, and the upgrade or replacement of various other
equipment and computer systems including hardware and software. We are currently exploring the opportunity for
the leasing of unused space in the new administration building.
During the thirteen weeks ended December 28, 2002, we used $12.4 million of cash in our operations. This was
primarily the result of net loss of $5.0 million (which included non-cash expenses of $1.5 million), a decrease in
inventories of $13.4 million, a decrease in prepaid expenses and other current assets of $1.3 million, and a
decrease in accounts payable and accrued expenses of $5.0 million, offset in part by an increase in accounts
receivable of $10.8 million.
We believe that our existing working capital, borrowings available under our Facility and internally generated
funds provide sufficient resources to support current business activities.
Seasonality
Our business has been generally seasonal, with higher sales and income in the second and third fiscal quarters.
Also, some of our products, such as shorts and corduroy pants, tend to be seasonal in nature. If these types of
seasonal products represent a greater percentage of our sales in the future, the seasonality of our sales may be
increased. This could alter the differences in sales and income levels in the second and third fiscal quarters
from the first and fourth fiscal quarters.
Factors Affecting the Company's Business and Prospects
This report contains forward-looking statements subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. Management cautions that these statements represent projections and estimates of
future performance and involve certain risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain factors including, without
limitation: difficulties in achieving continued operating efficiencies; our inability to achieve projected
revenue and earnings in fiscal 2003; disruptions in the business associated with the consolidation of the cutting
and administrative functions of the Savane division from El Paso, Texas to Tampa, Florida; loss of programs or
customers as a result of product delivery problems in the fiscal second quarter; failure to achieve the planned
cost savings associated with the consolidation and reorganization; failure of our customers to accept our
post-consolidation integrated production and selling of products; disruptions in the business associated with
changes in management; negative effects from the termination of the Victorinox(R)license agreement and the
transition of this business to Swiss Army Brands, Inc.; negative effects resulting from our decision to exit out
of our Duck Head(R)retail outlet business; restrictions and limitations placed on us by our debt instruments;
general economic conditions, including but not necessarily limited to, recession or other cyclical effects
impacting our customers in the United States or abroad, changes in interest rates or currency exchange rates;
potential changes in demand in the retail market; reduction in the level of the consumer spending; the
availability and price of raw materials and global manufacturing costs and restrictions; increases in costs; the
continued acceptance of our existing and new products by our major customers; the financial strength of our major
customers; our inability to continue to use certain licensed trademarks and tradenames, including Bill Blass(R)and
Van Heusen(R); business disruptions and costs arising from acts of terrorism or other military activities around
the globe; and other risk factors listed from time to time in our SEC reports, filings and announcements,
including our Annual Report on Form 10-K. In addition, the estimated financial results for any period do not
necessarily indicate the results that may be expected for any future period, and we undertake no obligation to
update them.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our market risk is primarily limited to fluctuations in interest rates as it pertains to our borrowings under the
Facility and the Real Estate Loan. There have been no material changes to the Item 7A disclosure made in our
Annual Report on Form 10-K for the fiscal year ended September 28, 2002.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended) as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation
Date, our disclosure controls and procedures provide reasonable assurance that they are alerted
on a timely basis to material information relating to Tropical Sportswear Int'l Corporation
(including its consolidated subsidiaries) required to be included in our reports filed or
submitted under the Securities Exchange Act of 1934, as amended.
(b) Changes in Internal Controls
Since the Evaluation Date, there have not been any changes in our internal controls or other
factors that could significantly affect such controls.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits to this report on Form 10-Q are listed on the Exhibit Index, which immediately
follows the signature page hereto.
(b) Reports on Form 8-K
On November 18, 2002, we filed a Form 8-K disclosing the resignation of William W. Compton from
his positions as Chairman of the Board of Directors, Chief Executive Officer and member of the
Board, and the election of Michael Kagan as Chairman of the Board and Christopher Munday as Chief
Executive Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
TROPICAL SPORTSWEAR INT'L CORPORATION
-------------------------------------
(Registrant)
/s/ N. Larry McPherson
-------------------------------------------------
N. Larry McPherson
Executive Vice President,
Chief Financial Officer, and Treasurer
(in the dual capacity of duly authorized
officer and principal accounting officer)
February 5, 2003
Certification of Chief Executive Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher B. Munday, Chief Executive Officer of Tropical Sportswear Int'l Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tropical Sportswear Int'l Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statement made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations
and cash flows of registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of the
date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date");
and
c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and that the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there
were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: February 5, 2003
By: /s/ Christopher B. Munday
-------------------------
Christopher B. Munday
President and Chief Executive Officer
Certification of Chief Financial Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, N. Larry McPherson, Chief Financial Officer of Tropical Sportswear Int'l Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tropical Sportswear Int'l Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statement made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations
and cash flows of registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of the
date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date");
and
c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrant's auditors and that the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 5, 2003
By: /s/ N. Larry McPherson
----------------------
N. Larry McPherson
Chief Financial Officer
Index to Exhibits
Exhibit
Number Description
- ------ -----------
*3.1 Amended and Restated Articles of Incorporation of Tropical Sportswear Int'l Corporation (filed
as Exhibit 3.1 to Tropical Sportswear Int'l Corporation's Form 10-Q filed May 14, 2002).
*3.2 Amended and Restated By-Laws of Tropical Sportswear Int'l Corporation (filed as Exhibit 3.2 to
Tropical Sportswear Int'l Corporation's Form 10-Q filed August 12, 2002).
*4.1 Specimen Certificate for the Common Stock of Tropical Sportswear Int'l Corporation (filed as
Exhibit 4.1 to Amendment No. 1 to Tropical Sportswear Int'l Corporation's Registration
Statement on Form S-1 filed October 2, 1997).
*4.2 Shareholders' Agreement dated as of September 29, 1997 among Tropical Sportswear Int'l
Corporation, William W. Compton, the Compton Family Limited Partnership, Michael Kagan, the
Kagan Family Limited Partnership, Shakale Internacional, S.A. and Accel, S.A. de C.V. (filed as
Exhibit 4.2 to Amendment No. 1 to Tropical Sportswear Int'l Corporation's Registration
Statement on Form S-1 filed October 2, 1997).
*4.3 Indenture dated as of June 24, 1998 among Tropical Sportswear Int'l Corporation, the Subsidiary
Guarantors named therein, and SunTrust Bank, Atlanta, as trustee (filed as Exhibit 4.4 to
Tropical Sportswear Int'l Corporation's Registration Statement on Form S-4 filed August 20,
1998).
*4.4 Shareholder Protection Rights Agreement, dated as of November 13, 1998, between Tropical
Sportswear Int'l Corporation and Firstar Bank Milwaukee, N.A. (which includes as Exhibit B
thereto the Form of Right Certificate) (filed as Exhibit 99.1 of Tropical Sportswear Int'l
Corporation's current report on Form 8-K dated November 13, 1998).
*4.5 Supplemental Indenture No. 1 dated as of August 23, 2000 among Tropical Sportswear Int'l
Corporation, each of the New Subsidiary Guarantors named therein, and SunTrust Bank, Atlanta,
as trustee (filed as Exhibit 4.5 to Tropical Sportswear Int'l Corporation's Annual Report on
Form 10-K filed December 19, 2000).
10.1 Twelfth Amendment to Loan and Security Agreement with Fleet Capital Corporation dated December
19, 2002 (filed herewith).
10.2 Amendment to Loan with Bank of America, N.A. dated December 19, 2002 (filed herewith).
* Incorporated by reference.