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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 April 3, 2004
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). [ ] Yes [X] No
As of May 7, 2004 there were 11,056,717 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 13
Item 3 Quantitative and Qualitative Disclosures about Market Risk 20
Item 4 Controls and Procedures 20
PART II Other Information
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 21
Item 3 Defaults upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Thirteen Thirteen Twenty-seven Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
April 3, March 29, April 3, March 29,
2004 2003 2004 2003
------------------ -------------------- ------------------ -----------------
Net sales $93,823 $ 112,725 $ 171,150 $ 211,766
Cost of goods sold 71,374 89,696 137,290 167,943
------------------ -------------------- ------------------ -----------------
Gross profit 22,449 23,029 33,860 43,823
Selling, general and
administrative
expenses 17,342 20,273 35,255 42,577
Other charges (2,782) - (2,782) 3,752
------------------ -------------------- ------------------ -----------------
Operating income (loss) 7,889 2,756 1,387 (2,506)
Other (income) expense:
Interest expense, net 3,908 2,808 7,346 5,697
Other, net (282) (1,003) (55) (1,094)
------------------ -------------------- ------------------ -----------------
3,626 1,805 7,291 4,603
Income (loss) before income taxes 4,263 951 (5,904) (7,109)
Provision (benefit) for income taxes 294 313 558 (2,729)
------------------ -------------------- ------------------ -----------------
Net income (loss) 3,969 638 (6,462) (4,380)
Foreign currency translations and
other (307) 165 1,060 387
------------------ -------------------- ------------------ -----------------
Comprehensive income (loss) $ 3,662 $ 803 $ (5,402) $ ( 3,993)
================== ==================== ================== =================
Net income (loss) per common share:
Basic $0.36 $0.06 $(0.58) $(0.40)
================== ==================== ================== =================
Diluted $0.36 $0.06 $(0.58) $(0.40)
================== ==================== ================== =================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 3, September 27,
2004 2003
----------------- ------------------
ASSETS (unaudited) (audited)
Current Assets:
Cash and cash equivalents $ 5,957 $ 4,485
Accounts receivable, net 65,470 64,355
Inventories, net 51,701 73,293
Prepaid expenses and other current assets 11,639 11,001
Assets held for sale - 6,597
----------------- ------------------
Total current assets 134,767 159,731
Property and equipment, net 31,881 34,902
Trademarks, net 12,914 12,936
Other assets 6,377 6,710
----------------- ------------------
Total assets $ 185,939 $ 214,279
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 31,161 $ 48,522
Revolving credit line 23,256 25,685
Current portion of long-term debt and capital leases 1,802 1,964
----------------- ------------------
Total current liabilities 56,219 76,171
Long-term debt and capital leases 105,038 107,772
Other non-current liabilities 7,333 7,585
----------------- ------------------
Total liabilities 168,590 191,528
Shareholders' Equity:
Preferred stock - -
Common stock 111 111
Additional paid in capital 88,575 88,575
Retained earnings (deficit) (65,079) (58,617)
Accumulated other comprehensive loss (6,258) (7,318)
----------------- ------------------
Total shareholders' equity 17,349 22,751
----------------- ------------------
Total liabilities and shareholders' equity $ 185,939 $ 214,279
================= ==================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Twenty-seven Twenty-six
Weeks Ended Weeks Ended
April 3, March 29,
2004 2003
------------------- ------------------
OPERATING ACTIVITIES
Net loss $ (6,462) $ (4,380)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,965 3,338
Deferred income taxes and other (30) (801)
Gain on sale of building (3,504) -
Changes in operating assets and liabilities:
Accounts receivable (1,115) (8,987)
Inventories 21,592 (23,519)
Prepaid expenses and other current assets 11,543 (2,251)
Accounts payable and accrued expenses (17,325) (6,121)
------------------ -----------------
Net cash provided by (used in) operating activities 7,664 (42,721)
------------------ -----------------
INVESTING ACTIVITIES
Capital expenditures
(555) (11,559)
Sale of marketable securities - 11,100
Proceeds from sale of property and equipment 428 172
------------------ -----------------
Net cash used in investing activities (127) (287)
------------------ -----------------
Financing activities:
Net changes in other debt and capital leases
(4,518) (629)
Proceeds from revolving credit line borrowings 152,806 55,353
Payments of revolving credit line borrowings (155,235) (34,323)
------------------ -----------------
Net cash (used in) provided by financing activities (6,947) 20,401
------------------ -----------------
Change in currency translation 882 199
Net increase (decrease) in cash and cash equivalents
1,472 (22,408)
Cash and cash equivalents at beginning of period 4,485 28,284
------------------ -----------------
Cash and cash equivalents at end of period $ 5,957 $ 5,876
================== =================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Twenty-seven weeks ended April 3, 2004
(In thousands, except 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 27, 2003. 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 twenty-seven weeks ended April 3, 2004 are not necessarily indicative of
results that may be expected for the entire fiscal year ending October 2, 2004.
2. INVENTORIES
Inventories consist of the following:
April 3, September 27,
2004 2003
------------------- -------------------
Raw materials $ 6,586 $ 6,939
Work in process 6,794 6,947
Finished goods 46,098 71,479
Reserve for excess and slow moving inventory (7,777) (12,072)
------------------- -------------------
$ 51,701 $ 73,293
=================== ===================
3. DEBT AND CAPITAL LEASES
Debt and capital leases consist of the following:
April 3, September 27,
2004 2003
------------------- -------------------
Revolving credit line $ 23,256 $ 25,685
Real estate loan 5,690 8,000
Senior subordinated notes 100,000 100,000
Other 1,150 1,736
------------------- -------------------
130,096 135,421
Less current maturities (25,058) (27,649)
------------------- -------------------
Long-term debt $105,038 $ 107,772
=================== ===================
On June 6, 2003, the Company renewed its revolving credit line (the "Facility"). The Facility provides for
borrowings of up to $95.0 million, subject to certain borrowing base limitations. Borrowings under the Facility
bear variable rates of interest based on LIBOR plus an applicable margin (5.6% at April 3, 2004), and are secured
by substantially all of the Company's domestic assets. The Facility matures in June 2006. The Facility contains
significant financial and operating covenants if availability under the Facility falls below $20 million. These
covenants include a consolidated fixed charge ratio of at least .90x and a ratio of consolidated funded debt to
consolidated EBITDA of not more than 5.25x. The Facility also includes prohibitions on the Company's ability to
incur certain additional indebtedness or to pay dividends, and restrictions on its ability to make capital
expenditures.
The Facility contains both a subjective acceleration clause and a requirement to maintain a lock-box arrangement,
whereby remittances from customers reduce borrowings outstanding under the Facility. In accordance with Emerging
Issues Task Force 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement", outstanding borrowings
under the revolving credit line of $23.3 million have been classified as short-term as of April 3, 2004.
On December 15, 2003, the Company paid the semi-annual interest payment of $5.5 million to the holders of its
senior subordinated notes. On December 16, 2003, availability under the Facility fell below $20 million,
triggering financial covenants, which were violated. This caused the Company to be in technical default under
the Facility. On January 12, 2004, the Company amended the Facility (the "Amended Facility") with Fleet
Capital, which among other things reduced aggregate borrowings to $70 million. The default under the Facility
was waived on January 12, 2004 by the terms of the Amended Facility. Although the Amended Facility provides for
borrowings of up to $70 million, the amount that can be borrowed at any given time is based upon a formula that
takes into account, among other things, eligible accounts receivable and inventory, which can result in borrowing
availability of less than the full amount. Additionally, the Amended Facility also contains a $10 million
availability reserve base and higher rates of interest than the Facility. The $10 million availability reserve
base was met as of April 3, 2004 and through the date of this filing. The Amended Facility contains monthly
financial covenants of minimum EBITDA levels, which began February 2004 and a consolidated fixed charge coverage
ratio and consolidated EBIT to consolidated interest expense ratio which begin March 2005. The fiscal 2004
minimum EBITDA levels are cumulative month amounts beginning in the second quarter of fiscal 2004. The minimum
EBITDA threshold for fiscal 2004 ranges from $1.8 million for the two months ending February 29, 2004 to $11.8
million for the nine months ending October 2, 2004. The Company was in compliance with the EBITDA covenants as of
April 3, 2004, and had $13.2 million available for borrowing under the Amended Facility. While the Company
believes its operating plans, if met, will be sufficient to assure compliance with the terms of the Amended
Facility, there can be no assurances that the Company will be in compliance through fiscal 2004.
Borrowings under the Company's Real Estate Loan bear variable rates of interest based on LIBOR plus an applicable
margin (5.9% at April 3, 2004). The Real Estate Loan requires quarterly principal payments of $200,000, which
commenced October 1, 2003, and monthly interest payments. As of April 3, 2004, the Real Estate Loan had a balance
of $5.7 million. The cross default provision on the Real Estate Loan was triggered by the default on the
Facility. This default was waived on January 12, 2004 concurrent with the Amended Facility. On January 12, 2004,
the Real Estate Loan was amended (the "Amended Real Estate Loan") to increase the loan by $2.0 million, to
increase the interest rate, and to require additional quarterly principal payments of $50,000, which commence
April 1, 2004. The $2.0 million of additional borrowings was used to pay down borrowings under the Facility.
4. NET INCOME (LOSS) PER SHARE
Basic and diluted net loss per share are computed as follows:
Thirteen Thirteen Twenty-seven Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
April 3, March 29, April 3, March 29,
2004 2003 2004 2003
--------------- -------------- --------------- --------------
Numerator for basic net income (loss)
per share:
Net income (loss) $3,969 $638 $(6,462) $(4,380)
Denominator for basic net income (loss)
per share:
Weighted average shares of common
stock outstanding 11,055 11,040 11,055 11,040
Effect of dilutive stock options using
the
treasury stock method 5 28 - -
--------------- -------------- --------------- --------------
Denominator for diluted net income
(loss) per share 11,060 11,068 11,055 11,040
=============== ============== =============== ==============
Net income (loss) per common share:
Basic $0.36 $0.06 $(0.58) $(0.40)
=============== ============== =============== ==============
Diluted $0.36 $0.06 $(0.58) $(0.40)
=============== ============== =============== ==============
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 completed the physical
consolidation in the second fiscal quarter ending March 2003. As part of the consolidation, the Company vacated
its El Paso, Texas administration building and terminated the associated lease obligation, and vacated its El
Paso, Texas cutting facility.
As a result of these initiatives (internally referred to as "Project Synergy"), the Company recorded a pre-tax
charge totaling approximately $16.1 million in fiscal 2002 for severance ($3.1 million), relocation (recognized
as incurred) ($2.5 million), lease terminations ($2.8 million), asset write-downs ($5.7 million) and other
related costs ($2.0 million) included in other charges in the accompanying statements of operations. As of April
3, 2004, the Company has approximately $649,000 remaining of the accrual, related to lease termination costs.
The activity in the exit accruals related to Project Synergy during the twenty-seven weeks ended April 3, 2004
were as follows:
Twenty-seven Twenty-six
Weeks Ended Weeks Ended
April 3, 2004 March 29, 2003
----------------------- -----------------------
Beginning balance $ 2,739 $ 4,295
Reductions - (1,550)
Cash payments (2,090) (783)
----------------------- -----------------------
Ending balance $ 649 $ 1,962
======================= =======================
The Company has remaining accrued liabilities related to the 1998 acquisition of Savane International Corp. The
exit costs consist of lease termination costs. The activity in the exit accruals related to this acquisition
during the twenty-seven weeks ended April 3, 2004 were as follows:
Twenty-seven Twenty-six
Weeks Ended Weeks Ended
April 3, 2004 March 29, 2003
----------------------- ------------------------
Beginning balance $ 437 $ 2,216
Cash payments (391) (1,107)
----------------------- ------------------------
Ending balance $ 46 $ 1,109
======================= ========================
6. STOCK OPTION PLAN PRO FORMA INFORMATION
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement 123, "Accounting for Stock Based
Compensation," (Statement No. 123) requires the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options
equal the market price of the underlying stock on the date of grant, no compensation expense is recognized.
For purposes of Statement No. 123, as amended by FASB Statement No. 148 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 income (net) loss per share information):
Thirteen Thirteen Twenty-seven Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
April 3, March 29, April 3, March 29,
2004 2003 2004 2003
--------------- -------------- --------------- -------------
Net income (loss) $3,969 $638 $(6,462) $(4,380)
Pro forma compensation expense, net
of tax (315) (148) (641) (1,417)
--------------- -------------- --------------- --------------
Pro forma net income (loss) $ 3,654 $490 $(7,103) $(5,797)
=============== ============== =============== ==============
Net income (loss) per share-basic $0.36 $ 0.06 $(0.58) $(0.40)
Net income (loss) per share-diluted $0.36 $ 0.06 $(0.58) $(0.40)
Pro forma net income (loss) per
share-basic $0.33 $ 0.04 $(0.64) $(0.53)
Pro forma net income (loss) per
share-diluted $0.33 $ 0.04 $(0.64) $(0.53)
7. DEFINED BENEFIT PLAN
Under the Company's defined benefit plan, which covers certain Savane distribution center associates, the basic
monthly pension payable to a participant upon normal retirement equals the product of the participant's monthly
benefit rate times the number of years of credited service. Assets of the defined benefit plan are invested
primarily in U.S. government obligations, corporate bonds, and equity securities.
The Company's policy is to fund accrued pension cost when such costs are deductible for tax purposes. Net
periodic pension cost, included the following components:
Thirteen Thirteen Twenty-seven Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
April 3, March 29, April 3, March 29,
2004 2003 2004 2003
----------- ------------- ---------------- ---------------
Service Cost $ 8 $ 10 $ 31 $ 38
Interest Cost 153 143 613 573
Expected Return on Plan Assets (123) (127) (494) (508)
Amortization of Unrecognized Transition
Obligation (Asset) - 2 - 8
Amortization of Prior Service Cost - - - -
Amortization of Loss (Gain) 96 72 385 287
----------- ------------- ---------------- ---------------
Net Periodic Benefit Cost $ 134 $ 100 $ 535 $ 398
=========== ============= ================ ===============
The Company anticipates contributing approximately $700,000 to fund its defined benefit plan during fiscal 2004.
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 April 3, 2004 and the thirteen weeks ended March 29, 2003, the supplemental combining condensed balance
sheet as of April 3, 2004 and September 27, 2003, and the supplemental combining condensed statement of cash
flows for the twenty-seven weeks ended April 3, 2004, and the twenty-six weeks ended March 29, 2003. 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 April 3, 2004
------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ --------------
Net sales $ 42,183 $ 39,125 $ 12,668 $ (153) $ 93,823
Gross profit 8,968 8,421 5,132 (72) 22,449
Operating income 2,798 3,909 1,182 - 7,889
Interest, income taxes and other, net 1,573 1,338 1,009 - 3,920
Net income 1,225 2,571 173 - 3,969
Thirteen Weeks Ended March 29, 2003
------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ -------------
Net sales $ 53,751 $ 47,035 $ 12,258 $ (319) $112,725
Gross profit 11,107 8,135 3,861 (74) 23,029
Operating income 1,185 1,027 544 - 2,756
Interest, income taxes and other, net 1,084 979 55 - 2,118
Net income 101 48 489 - 638
Twenty-seven Weeks Ended April 3, 2004
-------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------- ---------------
Net sales $ 73,387 $ 72,078 $ 26,008 $ (323) $171,150
Gross profit 14,531 9,898 9,598 (167) 33,860
Operating income (loss) (916) 739 1,564 - 1,387
Interest, income taxes and other, net 2,658 4,056 1,135 - 7,849
Net income (loss) (3,574) (3,317) 429 - (6,462)
Twenty-six Weeks Ended March 29, 2003
-------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------- ---------------
Net sales $100,507 $ 86,762 $ 25,094 $ (597) $211,766
Gross profit 19,757 15,999 8,215 (148) 43,823
Operating income (loss) (5,924) 2,020 1,398 - (2,506)
Interest, income taxes and other, net (1,284) 2,921 237 - 1,874
Net income (loss) (4,640) (901) 1,161 - (4,380)
As of April 3, 2004
------------------------------------------------------------------------------
Balance Sheet Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 596 $ 313 $ 5,048 $ - $ 5,957
Accounts receivable, net 43,028 14,703 7,739 - 65,470
Inventories 25,178 18,123 8,400 - 51,701
Other current assets 1,988 4,914 4,737 - 11,639
----------- ------------- ------------- ------------- --------------
Total current assets 70,790 38,053 25,924 - 134,767
Property and equipment, net 25,613 4,256 2,012 - 31,881
Investment in subsidiaries and other assets 134,164 26,961 (10,802) (131,032) 19,291
----------- ------------- ------------- ------------- --------------
Total assets $ 230,567 $ 69,270 $ 17,134 $(131,032) $ 185,939
=========== ============= ============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 22,656 $ 1,572 $ 6,933 $ - $ 31,161
Current portion of revolving credit line,
long-term debt and capital leases 24,501 541 16 - 25,058
----------- ------------- ------------- ------------- --------------
Total current liabilities 47,157 2,113 6,949 - 56,219
Long-term debt and noncurrent portion of
capital leases 104,959 - 79 - 105,038
Other noncurrent liabilities (18) 7,233 118 - 7,333
Stockholders' equity 78,469 59,924 9,988 (131,032) 17,349
----------- ------------- ------------- ------------- --------------
Total liabilities and stockholders'
equity $ 230,567 $69,270 $ 17,134 $(131,032) $ 185,939
=========== ============= ============= ============= ==============
As of September 27, 2003
------------------------------------------------------------------------------
Balance Sheet Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 218 $ 440 $ 3,827 $ - $ 4,485
Accounts receivable, net 33,740 22,174 8,441 - 64,355
Inventories 31,945 30,818 10,530 - 73,293
Other current assets 9,703 4,903 2,992 - 17,598
----------- ------------- ------------- ------------- --------------
Total current assets 75,606 58,335 25,790 - 159,731
Property and equipment, net 27,627 5,318 1,957 - 34,902
Investment in subsidiaries and other assets 157,597 6,706 (14,071) (130,586) 19,646
----------- ------------- ------------- ------------- --------------
Total assets $ 260,830 $70,359 $13,676 $(130,586) $ 214,279
=========== ============= ============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 38,036 $ 5,480 $ 5,006 - $ 48,522
Current portion of revolving credit line,
long-term debt and capital leases 26,738 892 19 - 27,649
----------- ------------- ------------- ------------- --------------
Total current liabilities 64,774 6,372 5,025 - 76,171
Long-term debt and noncurrent portion of
capital 107,590 87 95 - 107,772
leases
Other noncurrent liabilities 510 6,968 107 - 7,585
Stockholders' equity 87,956 56,932 8,449 (130,586) 22,751
----------- ------------- ------------- ------------- --------------
Total liabilities and stockholders'
equity $ 260,830 $70,359 $ 13,676 $(130,586) $ 214,279
=========== ============= ============= ============= ==============
Twenty-seven Weeks Ended April 3, 2004
------------------------------------------------------------------------------
Statement of Cash Flows Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- -------------
Net cash provided by operating activities $ 6,836 $ 151 $ 2,377 $ (1,700) $ 7,664
Net cash provided by (used in) investing
activities (160) 158 (125) - (127)
Net cash used in financing activities (6,482) (436) (29) - (6,947)
Other 184 - (1,002) 1,700 882
Net increase (decrease) in cash and cash
equivalents 378 (127) 1,221 - 1,472
Cash and cash equivalents, beginning of
period 218 440 3,827 - 4,485
Cash and cash equivalents, end of period 596 313 5,048 - 5,957
Twenty-six Weeks Ended March 29, 2003
------------------------------------------------------------------------------
Statement of Cash Flows Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- -------------
Net cash provided by (used in) operating $(45,251) $ 1,006 $ 1,524 $ - $(42,721)
Net cash provided by (used in) investing
activities 486 (624) (149) - (287)
Net cash provided by (used in) financing
activities 20,881 (465) (15) - 20,401
Other - - 199 - 199
Net increase (decrease) in cash and cash
equivalents (23,884) (83) 1,559 - (22,408)
Cash and cash equivalents, beginning of
period 24,274 167 3,843 - 28,284
Cash and cash equivalents, end of period 390 84 5,402 - 5,876
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 will 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 discontinued factoring of our receivables, but maintained
credit insurance for those accounts which we deemed necessary. Effective the first quarter of fiscal 2004, we
now maintain credit insurance for all eligible customer accounts. This credit insurance includes a deductible of
$100,000 per year. 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 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 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 - We accrue for contingent obligations 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 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 our
Savane division in El Paso, Texas into our Tampa, Florida facility. This initiative was internally referred to
as Project Synergy. We completed the physical consolidation in the second fiscal quarter ended March 29, 2003.
As part of the consolidation, we vacated our El Paso, Texas administration building and cutting facility. We
experienced delays and difficulties in consolidating our El Paso, Texas cutting functions into our Tampa, Florida
facilities that resulted in delays in delivering products to our customers and lost sales during fiscal 2003.
During the second half of fiscal 2003, our inventories grew, requiring us to sell higher than normal levels of
excess inventories at closeout prices, which reduced our average selling price and our gross margins. Higher
than normal levels of sales returns and allowances also contributed to reduced gross margins. We still have
excess inventory which we expect to sell at discounted prices during fiscal 2004. Gross margins for the second
quarter of fiscal 2004 were positively impacted by a reduction in sales allowances compared to the prior year,
which occurred due to our shipping difficulties.
In May 2003, we transitioned our Victorinox(R)apparel division to Swiss Army Brands, Inc. In connection with the
transition of our Victorinox(R) apparel division to Swiss Army Brands, Inc. ("Swiss Army"), Swiss Army is currently
disputing certain aspects of the transition agreement and have not paid us approximately $4.8 million, which we
believe is due to us under the transition agreement. On June 3, 2003, we filed a declaratory judgment action
against Swiss Army, seeking judicial interpretation of the agreement. We and Swiss Army agreed to mediation in
an attempt to resolve the issue, which resulted in an impasse. There can be no assurance that all or any part of
the $4.8 million will be collected in its entirety.
In June 2003, we sold our Duck Head(R)trademarks to Goody's Family Clothing, Inc. ("Goody's") for $4.0 million in
cash. Under the purchase agreement, we continued to sell Duck Head(R)branded products through the end of fiscal
2003. Goody's also assumed all licenses associated with the Duck Head(R)trademarks. In connection with the sale,
we recorded a net gain of $3.7 million, which was net of expenses related to the sale and reduction of certain of
the remaining assets, including inventory. In connection with the sale of our Duck Head(R) trademarks, all of our
Duck Head(R)retail outlet stores were closed in September 2003. The cash used in connection with the closure of
the retail outlet stores was approximately $0.7 million. The Duck Head(R)and Victorinox(R)businesses represented
less than 5% of our total fiscal 2003 net sales. We believe that exiting these businesses frees up valuable
resources that can be devoted to our core business.
During fiscal 2003, we completed the transition of the majority of our Mexico production to the Dominican
Republic. We reduced selling, general and administrative expenses by approximately $12 million during fiscal
2003, which was primarily due to successful cost cutting measures resulting from the consolidation of our El
Paso, Texas operations to Tampa, Florida and to other discretionary spending reductions. Significant areas of
cost reduction included salaries, co-op advertising and tradeshow costs.
During fiscal 2004, we set certain plans in motion to further reduce overhead. A reduction in personnel from
November to January is expected to lower employee-related costs by approximately $6.4 million over fiscal 2003
amounts. The full effect of this reduction should occur during the third quarter of this fiscal year. In
addition, during the second quarter of fiscal 2004, we completed the transfer of our Tampa, Florida cutting
operations to contractors in the Dominican Republic and Honduras.
In January 2004, we engaged Alvarez & Marsal LLC, a global turn-around and restructuring firm with experience in
the textile and apparel industries, as advisors to management and our board of directors. Alvarez & Marsal is
assisting us in the evaluation of our current business plan and in the identification of cost reductions and
operations improvement opportunities. This engagement satisfies a requirement that was part of our Amended
Facility with Fleet Capital that was executed in January 2004.
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 Twenty-seven Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
April 3, March 29, April 3, March 29,
2004 2003 2004 2003
-------------- --------------- ---------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.1 79.6 80.2 79.3
-------------- --------------- ---------------- --------------
Gross profit 23.9 20.4 19.8 20.7
Selling, general and administrative 18.5 18.0 20.6 20.1
expenses
Other (3.0) - (1.6) 1.8
-------------- --------------- ---------------- --------------
Operating income (loss) 8.4 2.4 0.8 (1.2)
Interest expense, net 4.2 2.5 4.2 2.7
Other, net (0.3) (0.9) - (0.5)
-------------- --------------- ---------------- --------------
Income (loss) before income taxes 4.5 0.8 (3.4) (3.4)
Provision (benefit) for income taxes 0.3 0.3 0.4 (1.3)
-------------- --------------- ---------------- --------------
Net income (loss) 4.2% 0.5% (3.8)% (2.1)%
============== =============== ================ ==============
Thirteen weeks ended April 3, 2004 compared to the thirteen weeks ended March 29, 2003
Net Sales. Net sales decreased to $93.8 million for the second quarter of fiscal 2004 from $112.7
million in the comparable prior year quarter. The decrease was primarily due to a 2% decrease in average selling
prices and a 15% decrease in units shipped, offset in part by a 79% decrease in sales returns and allowances. The
average selling price was impacted by an increase in sales of discounted excess inventory, and a change in the
product mix as the higher average selling priced Savane(R)products experienced declines in unit volume. Due to
higher levels of inventory, which resulted from production difficulties associated with Project Synergy during
fiscal 2003, we continued to sell excess inventory at discounted prices during the first half of fiscal 2004. We
expect fiscal 2004 sales of Savane(R)and private label products to be below fiscal 2003 levels.
Gross Profit. Gross profit decreased to $22.4 million, or 23.9% of net sales for the second quarter of
fiscal 2004 from $23.0 million, or 20.4% of net sales for the comparable prior year quarter. The increase in the
gross margin was partially due to a reduction in sales returns and allowances from last year, which were reduced
due to the reduction of shipping difficulties related to Project Synergy. In addition, as excess inventory was
sold, we have partially reduced inventory reserves during fiscal 2004. To the extent that excess inventory
continues to be sold in fiscal 2004, gross margins could impact fiscal 2004 results.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to
$17.3 million, or 18.5% of net sales for the second quarter of fiscal 2004, from $20.3 million, or 18.0% of net
sales, for the comparable prior year quarter. The decrease in operating expenses was primarily due to cost
cutting measures resulting from the consolidation of our El Paso, Texas operations to Tampa, Florida and to other
discretionary spending reductions. Significant areas of cost reduction included salaries, co-op advertising and
costs related to the Company's lease payments for its corporate aircraft which were terminated during the first
quarter of fiscal 2004. As discussed in Liquidity and Capital Resources, we anticipate incurring additional
advertising to support the Savane(R)brand in fiscal 2004.
Other. Other income in the second quarter of fiscal 2004 is composed of a $3.5 million gain on the sale
of the Company's unoccupied administration building, offset in part by $722,000 of costs related to the phase out
of the Tampa, Florida cutting operations which consists primarily of asset write-downs and losses on the sale of
machinery and equipment.
Interest Expense. Interest expense increased to $3.9 million for the second quarter of fiscal 2004,
from $2.8 million for the comparable prior year quarter. The increase was primarily due to higher average
outstanding borrowings under the Company's revolving credit line.
Income Taxes. We currently have net deferred tax assets primarily comprised of temporary timing
differences of future deductible expenses and net operating losses available to offset future taxable income in
the United States. We provided a valuation allowance against these assets during fiscal 2003. The use of these
deferred tax assets to offset taxable profits in future years would result in a reduction in our effective tax
rate in these years.
Net Income. As a result of the above factors, we had net income of $4.0 million for the second quarter
of fiscal 2004 compared to net income of $638,000 in the comparable prior year quarter.
Twenty-seven weeks ended April 3, 2004 compared to the twenty- six weeks ended March 29, 2003
Net Sales. Net sales decreased to $171.2 million for the twenty-seven weeks ended April 3, 2004 from
$211.8 million in the comparable prior year period. The decrease was primarily due to a 3% decrease in average
selling prices and a 16% decrease in units shipped, offset in part by a 75% decrease in sales returns in
allowances. The average selling price was impacted by an increase in sales of discounted excess inventory, and a
change in the product mix as the higher average selling priced Savane(R)products experienced declines in unit
volume. Due to higher levels of inventory, which resulted from production difficulties associated with Project
Synergy during fiscal 2003, we continued to sell excess inventory at discounted prices during the first half of
fiscal 2004. Additionally, the twenty-six weeks ended March 29, 2003 contains approximately $11 million of sales
related to discontinued businesses. We expect fiscal 2004 sales of Savane(R)and private label products to be
below fiscal 2003.
Gross Profit. Gross profit decreased to $33.9 million, or 19.8% of net sales, for the twenty-seven
weeks ended March 29, 2003, from $43.8 million, or 20.7% of net sales, for the comparable prior year period. The
reduction in the gross margin was primarily due to a decrease in units shipped and lower average selling prices,
offset in part, by a reduction in sales returns and allowances from last year. Additionally the Company's higher
margin branded sales were a smaller component of overall sales. In addition, as excess inventory is sold, we
have partially reduced inventory reserves during fiscal 2004. To the extent that excess inventory continues to
be sold in fiscal 2004, gross margins could impact fiscal 2004 results.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to
$35.3 million, or 20.6% of net sales, for the twenty-seven weeks ended April 13, 2004, from $42.6 million, or
20.1% of net sales, for the comparable prior year period. The decrease in operating expenses was primarily due to
successful cost cutting measures resulting from the consolidation of our El Paso, Texas operations to Tampa,
Florida. In addition, there were decreases in compensation, advertising and to other discretionary spending.
Other. Other income in the twenty-seven weeks ended April 3, 2004 is composed of a $3.5 million gain on
the sale of the Company's unoccupied administration building, offset in part by $722,000 of costs related to the
phase out of the Tampa, Florida cutting operations which consists primarily of asset write-downs and losses on the
sale of machinery and equipment. Other charges of $3.8 million recorded in fiscal 2003 were composed of a $5.3
million charge related to a separation agreement with the Company's former chief executive officer, offset in part
by a $1.5 million reduction of estimated costs related to the consolidation and reorganization of the Company's
Savane(R)division.
Interest Expense. Interest expense increased to $7.3 million for the twenty-seven weeks ended April 3,
2004, from $5.7 million for the comparable prior year period. The increase was primarily due to higher average
outstanding borrowings.
Income Taxes. We currently have net deferred tax assets primarily comprised of temporary timing
differences of future deductible expenses and net operating losses available to offset future taxable income in
the United States. We provided a valuation allowance against these assets during fiscal 2003. The use of these
deferred tax assets to offset taxable profits in future years would result in a reduction in our effective tax
rate in these years.
Net Income (Loss). As a result of the above factors, we incurred a net loss of $6.5 million for the
twenty-seven weeks ended April 3, 2004, compared with a net loss of $4.4 million for the twenty-six weeks ended
March 29, 2003.
Liquidity and Capital Resources
On June 6, 2003, we renewed our revolving credit line (the "Facility"). The Facility provides for borrowings of
up to $95.0 million, subject to certain borrowing base limitations. Borrowings under the Facility bear variable
rates of interest based on LIBOR plus an applicable margin (5.6% at April 3, 2004), and are secured by
substantially all of our domestic assets. The Facility matures in June 2006. The Facility contained significant
financial and operating covenants if availability under the Facility falls below $20 million. These covenants
include a consolidated fixed charge ratio of at least .90x and a ratio of consolidated funded debt to
consolidated EBITDA of not more than 5.25x. The Facility also includes prohibitions on our ability to incur
certain additional indebtedness or to pay dividends, and restrictions on our ability to make capital
expenditures.
The Facility contains both a subjective acceleration clause and a requirement to maintain a lock-box arrangement,
whereby remittances from customers reduce borrowings outstanding under the Facility. In accordance with Emerging
Issues Task Force 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement", outstanding borrowings
under the Facility of $23.3 million have been classified as short-term as of April 3, 2004.
On December 15, 2003, we paid the semi-annual interest payment of $5.5 million to the holders of our senior
subordinated notes. On December 16, 2003, availability under our Facility fell below $20 million, triggering
financial covenants which we violated. This caused us to be in technical default under the Facility. On January
12, 2004, we amended the Facility (the "Amended Facility") with Fleet Capital, which among other things reduced
aggregate borrowings to $70 million. The default under the Facility was waived on January 12, 2004 by the terms
of the Amended Facility. Although our Amended Facility provides for borrowings of up to $70 million, the amount
that can be borrowed at any given time is based upon a formula that takes into account, among other things, our
eligible accounts receivable and inventory, which can result in borrowing availability of less than the full
amount. Additionally, the Amended Facility contains a $10 million availability reserve base and higher rates of
interest than the Facility. The $10.0 million availability reserve base was met as of April 3, 2004 and through
the date of this filing. The Amended Facility also contains monthly financial covenants of minimum EBITDA levels
which began February 2004, and a consolidated fixed charge coverage ratio and consolidated EBIT to consolidated
interest expense ratio which begin March 2005. The fiscal 2004 minimum EBITDA levels are cumulative month
amounts beginning in the second quarter of fiscal 2004. The minimum EBITDA threshold for fiscal 2004 ranges from
$1.8 million for the two months ending February 29, 2004 to $11.8 million for the nine months ending October 2,
2004. We were in compliance with the EBITDA covenants as of April 3, 2004, and had $13.2 million available for
borrowing under the Amended Facility. While we believe our operating plans, if met, will be sufficient to assure
compliance with the terms of the Amended Facility, there can be no assurances that we will be in compliance
through fiscal 2004.
Borrowings under our Real Estate Loan bear variable rates of interest based on LIBOR plus an applicable margin
(5.9% at April 3, 2004). The Real Estate Loan requires quarterly principal payments of $200,000, which commenced
October 1, 2003, and monthly interest payments. As of April 3, 2004, the Real Estate Loan had a balance of $5.7
million. The cross default provision on the Real Estate Loan was triggered by the default on the Facility. This
default was waived on January 12, 2004 concurrent with the Amended Facility. On January 12, 2004, the Real Estate
Loan was amended (the "Amended Real Estate Loan") to increase the loan by $2.0 million, to increase the interest
rate, and to require additional quarterly principal payments of $50,000, which commence April 1, 2004. The $2.0
million of additional borrowings was used to pay down borrowings under the Facility.
In addition to the financial covenants iscussed above, our Amended Facility and our Amended Real Estate Loan also
contain customary events of default, including nonpayment of principal or interest, violation of covenants,
inaccuracy of representations and warranties, cross-defaults or other indebtedness, bankruptcy and other
insolvency events, material judgments, certain ERISA events, a material adverse change, and certain changes of
control at our company. The occurrence of an event of default or a material adverse effect on our company could
result in our inability to obtain further borrowings under our Amended 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.
Our estimate of capital needs is subject to a number of risks and uncertainties that could result in additional
capital needs that have not been anticipated. An important source of capital is our ability to generate positive
cash flow from operations. This is dependent upon our ability to increase revenues, to generate adequate gross
profit from those sales, to reduce excess inventories and to control costs and expenses. Another important source
of capital is our ability to borrow under the Amended Facility. We have historically violated certain covenants
in our borrowing agreements, and to this point, we have been able to obtain waivers from our lenders allowing us
continued access to this source of capital. However, there can be no assurances that we will be able to obtain
waivers from our lenders should a violation occur in the future. If our actual revenues are less than we expect
or operating or capital costs are more than we expect, our financial condition and liquidity may be materially
adversely affected. We may need to raise additional capital either through the issuance of debt or equity
securities or additional credit facilities, and there can be no assurances that we would be able to access the
credit or capital markets for additional capital.
During fiscal 2003, we completed construction of an administration building in Tampa, Florida. On March 29, 2004
we sold this building for net cash proceeds of approximately $9.2 million. Approximately $3.7 million was used to
pay down borrowings under our Amended Real Estate Loan, and approximately $5.5 million was used to pay down
borrowings under our Amended Facility.
As a result of our decision to terminate the leases on our corporate aircraft, we paid approximately $4.1 million
of cash during the first quarter of fiscal 2004. In connection with the severance of certain executive
management, we paid approximately $5.1 million of cash during the first quarter of fiscal 2004. In connection
with the termination for the lease on our El Paso, Texas administration building, we paid approximately $2.2
million of cash during the first quarter of fiscal 2004. We received approximately $1.1 million in the first
quarter of fiscal 2004 from the sale of a parcel of land in El Paso, Texas. Each of these transactions were
accrued in fiscal 2003, therefore the Company did not record income (expense) related to these items during fiscal
2004.
We anticipate using cash in fiscal 2004 for advertising programs to support our Savane(R)brand. Although the
amounts have not yet been quantified, these programs may include local or national advertising campaigns, point of
sale items, new labeling and packaging designs, and the use of in store merchandise coordinators. We believe the
use of these funds are necessary to support and promote sales of our Savane(R) brand.
Capital expenditures totaled $0.5 million for the twenty-seven weeks ended April 3, 2004 and are expected to
approximate $1.5 million for the entire fiscal year. The expenditures expected for the remainder of the fiscal
year primarily relate to the upgrade or replacement of various other equipment and computer systems including
hardware and software.
During the twenty-seven weeks ended April 3, 2004, we generated $7.7 million of cash from our operations. This
was primarily the result of a decrease in inventory of $21.6 million and a decrease in prepaid expenses and other
current assets of $11.5 million, offset in part by a decrease in accounts payable and accrued expenses of $17.3
million, an increase in accounts receivable of $1.1 million, and a net loss of $6.5 million.
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.
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, potential negative effects from the continued sell off of excess inventory at discounted prices;
potential negative effects resulting from fluctuating inventory levels; difficulties in achieving operating
efficiencies; loss of programs or customers as a result of product delivery problems; disruption in the business
associated with changes in management; potential negative effects from the termination of the Victorinox(R)license
agreement and the transition of this business to Swiss Army Brands, Inc.; restrictions and limitations placed on
us by our debt instruments; potential negative effects of loan agreement covenant violations, should any occur;
potential negative effects of transitioning our cutting operations from Tampa, Florida to the Dominican Republic
and Honduras; potential negative effects from reducing personnel and not realizing the estimated cost savings;
expectations and beliefs with respect to the brand strategy, research, repositioning and creative development for
the Savane(R)brand that may not be achieved; potential negative effects from terminating certain executive
officers and entering into separation agreements with them; expectations and beliefs with respect to the
turn-around efforts that may not be achieved; potential negative effects of possible class action lawsuits;
potential negative effects of possible shareholder derivative demands; 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; customer or consumer rejection or non acceptance of major
product initiatives; 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); continued pricing pressures on our product line; 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
Amended Facility and the Amended 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 27, 2003.
Item 4. Controls and Procedures
We carried out an evaluation under the supervision and with the participation of our management including the
Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective
for recording, processing, summarizing and reporting the information we are required to disclose in the reports
we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules,
regulations and forms. Our management necessarily applied its judgment in assessing the costs and benefits of
such controls and procedures, which by their nature can provide only reasonable assurance regarding management's
control objectives.
There has been no change in our internal control over financial reporting during out last quarter, identified in
connection with the evaluation referred to above, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Two lawsuits seeking class action status were filed on September 16, 2003 and October 2, 2003, in the U.S.
District Court for the Middle District of Florida, Tampa Division, on behalf of all persons who purchased or
otherwise acquired the securities of our company during the period from April 17, 2002 through January 20, 2003
(the "Class Period"). The lawsuits name our company and certain current and former officers and directors of our
company as defendants. The lawsuits make a number of allegations against the defendants, including allegations
that during the Class Period, the defendants materially misled the investing public by publicly issuing false and
misleading statements and omitting to disclose material facts concerning our company's operations and performance
and the retail market for its goods. On December 15, 2003, the two cases were consolidated whereby one of the
cases was administratively closed. On March 1, 2004, a consolidated amended complaint was filed adding
additional current company directors as defendants. We are reviewing these lawsuits with our attorneys and
intend to vigorously defend them. Because these cases are in the early stages of litigation, we are unable to
form a reasonable estimate of potential loss, if any, and have not established any reserves related to these
cases.
On October 30, 2003, a purported shareholder sent us a shareholder derivative demand pursuant to Florida Statute
Section 607.07401 demanding, among other things, that we institute litigation against current and former officers
and directors Michael Kagan, Eloy Vallina-Laguera and William Compton. The demand contends that we should
attempt to recover from these officers and directors their proceeds of certain stock sales in July 2002. The
Company is taking appropriate action in response to the demand.
Other than the items noted above, we are not a party to any other 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 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
At the Annual Meeting of Shareholders of the Company held on, February 19, 2004, the following matters were
brought before and voted upon by the shareholders:
1. A proposal to elect two Directors in Class III to serve until the 2007 Annual Meeting of the
Shareholders of the Company:
For Withhold Authority
--- ------------------
Benito F. Bucay 9,372,421 272,902
(term to expire in 2007)
Charles J. Smith 9,371,597 273,726
(term to expire in 2007)
2. A proposal to ratify the selection of Ernst & Young LLP as the Company's independent certified public
accountants for the fiscal year ending October 2, 2004.
For Against Abstain Non-Votes
--- ------- ------- ---------
9,575,106 64,277 5,940 -
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 January 21, 2004, we filed a Form 8-K which contained a press release announcing the hiring of
BOLT as our new brand marketing and communications agency.
On February 2, 2004, we filed a Form 8-K which contained a press release announcing that the
Board of Directors elected Ms. Leslie J. Gillock as Chairperson of the Board of Directors.
On February 3, 2004, we filed a Form 8-K which contained a press release announcing the results
of our first fiscal quarter ending January 3, 2004.
On March 8, 2004, we filed a Form 8-K which contained a press release announcing that a
distribution center in Mexico, which was not owned by us, was destroyed by fire along with $1.4
million of our finished goods inventory.
On March 29, 2004, we filed a Form 8-K which contained a press release announcing the sale of an
administration building in Tampa, Florida.
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/ Robin Cohan
----------------------------------------
Robin Cohan
Executive Vice President,
Chief Financial Officer, and Treasurer
(in the dual capacity of duly authorized
officer and principal accounting officer)
May 12, 2004
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-K filed January 3, 2004).
*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 Amended and Restated Loan and Security Agreement with Fleet Capital Corporation dated June 6,
2003 (filed as Exhibit 10.1 of Tropical Sportswear Int'l Corporation's Form 10-Q filed August
8, 2003).
*10.2 Amendment No. 1 to Amended and Restated Loan and Security Agreement with Fleet Capital
Corporation dated September 9, 2003 (filed as Exhibit 10.38 of Tropical Sportswear Int'l
Corporation's Form 10-K filed January 13, 2004).
*10.3 Amended and Restated Loan and Security Agreement with Fleet Capital Corporation dated September
9, 2003 (filed as Exhibit 10.39 of Tropical Sportswear Int'l Corporation's Form 10-K filed
January 13, 2004).
*10.4 Second Amended and Restated Loan and Security Agreement with Fleet Capital Corporation dated
January 12, 2004 (filed as Exhibit 10.40 of Tropical Sportswear Int'l Corporation's Form 10-K
filed January 13, 2004).
*10.5 First Amendment to Amended and Restated Loan and Security Agreement with Fleet Capital
Corporation dated January 12, 2004 (filed as Exhibit 10.41 of Tropical Sportswear Int'l
Corporation's Form 10-K filed January 13, 2004).
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-15(e)
and 15d-15(e) as adopted pursuant to section 302 of the Sarbanes-Oxley act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e)
and 15d-15(e) as adopted pursuant to section 302 of the Sarbanes-Oxley act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002.
* Incorporated by reference.