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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 July 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 August 10, 2004 there were 11,062,414 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 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk 21
Item 4 Controls and Procedures 21
PART II Other Information
Item 1 Legal Proceedings 21
Item 2 Changes in Securities 22
Item 3 Defaults upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
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 Forty Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
------------------ -------------------- ------------------ -----------------
Net sales $74,818 $ 96,732 $ 245,968 $ 308,498
Cost of goods sold 58,982 87,706 196,272 255,649
------------------ -------------------- ------------------ -----------------
Gross profit 15,836 9,026 49,696 52,849
Selling, general and
administrative expenses 16,422 20,624 51,677 63,201
Other - 2,361 (2,782) 6,113
------------------ -------------------- ------------------ -----------------
Operating income (loss) (586) (13,959) 801 (16,465)
Other (income) expense:
Interest expense, net 3,503 3,046 10,849 8,743
Loss on extinguishment of debt 1,692 -- 1,692 --
Other, net 48 220 (7) (874)
------------------ -------------------- ------------------ -----------------
5,243 3,266 12,534 7,869
Loss before income taxes (5,829) (17,225) (11,733) (24,334)
Provision (benefit) for income taxes (42) 13,339 516 10,610
------------------ -------------------- ------------------ -----------------
Net loss (5,787) (30,564) (12,249) (34,944)
Foreign currency translation and
other (448) 788 612 1,175
------------------ -------------------- ------------------ -----------------
Comprehensive loss $ (6,235) $(29,776) $ (11,637) $ (33,769)
================== ==================== ================== =================
Net loss per common share:
Basic $(0.52) $(2.77) $(1.11) $(3.16)
================== ==================== ================== =================
Diluted $(0.52) $(2.77) $(1.11) $(3.16)
================== ==================== ================== =================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
July 3, September 27,
2004 2003
----------------- ------------------
ASSETS (unaudited) (audited)
Current Assets:
Cash and cash equivalents $ 7,274 $ 4,485
Accounts receivable, net 45,772 64,355
Inventories, net 44,116 73,293
Prepaid expenses and other current assets 11,403 11,001
Assets held for sale 3,685 6,597
----------------- ------------------
Total current assets 112,250 159,731
Property and equipment, net 25,937 34,902
Trademarks, net 12,903 12,936
Other assets 4,633 6,710
----------------- ------------------
Total assets $ 155,723 $ 214,279
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 28,747 $ 48,522
Revolving credit line 7,704 25,685
Current portion of long-term debt and capital leases 589 1,964
----------------- ------------------
Total current liabilities 37,040 76,171
Long-term debt and capital leases 100,265 107,772
Other non-current liabilities 7,295 7,585
----------------- ------------------
Total liabilities 144,600 191,528
Shareholders' Equity:
Preferred stock - -
Common stock 111 111
Additional paid in capital 88,584 88,575
Retained deficit (70,866) (58,617)
Accumulated other comprehensive loss (6,706) (7,318)
----------------- ------------------
Total shareholders' equity 11,123 22,751
----------------- ------------------
Total liabilities and shareholders' equity $ 155,723 $ 214,279
================= ==================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Forty Thirty-nine
Weeks Ended Weeks Ended
July 3, June 28,
2004 2003
------------------- ------------------
OPERATING ACTIVITIES
Net loss $ (12,249) $ (34,944)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,324 5,001
Deferred income taxes and other 954 9,945
Gain on sale of building (3,504) -
Loss on extinguishment of debt 1,692 -
Changes in operating assets and liabilities:
Accounts receivable 18,583 12,402
Inventories 29,177 (23,942)
Prepaid expenses and other current assets 2,213 2,696
Accounts payable and accrued expenses (19,775) (21,429)
------------------ -----------------
Net cash provided by (used in) operating activities 21,415 (50,271)
------------------ -----------------
INVESTING ACTIVITIES
Capital expenditures
(704) (14,986)
Sale of marketable securities - 11,100
Proceeds from sale of property and equipment 10,706 256
------------------ -----------------
Net cash provided by (used in) investing activities 10,002 (3,630)
------------------ -----------------
Financing activities:
Net changes in other debt and capital leases
(11,123) (1,329)
Proceeds from exercise of stock options 9 5
Proceeds from revolving credit line borrowings 223,465 177,241
Payments of revolving credit line borrowings (241,446) (143,795)
------------------ -----------------
Net cash (used in) provided by financing activities (29,095) 32,122
------------------ -----------------
Effect of exchange rates on cash and cash equivalents 467 2,350
Net increase (decrease) in cash and cash equivalents 2,789 (19,429)
Cash and cash equivalents at beginning of period 4,485 28,284
------------------ -----------------
Cash and cash equivalents at end of period $ 7,274 $ 8,855
================== =================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Forty weeks ended July 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 forty
weeks ended July 3, 2004 are not necessarily indicative of results that may be
expected for the entire fiscal year ending October 2, 2004.
2. STOCK OPTION PLAN ACCOUNTING POLICY AND 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 net income (loss) per share information):
Thirteen Thirteen Forty Thirty-nine
Weeks ended Weeks ended weeks ended weeks ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
--------------- -------------- --------------- ------------
Net loss $ (5,787) $ (30,564) $ (12,249) $(34,944)
Pro forma compensation expense, net (309) (101) (995) (339)
--------------- --------------- --------------- ------------
Pro forma net loss $ (6,096) $ (30,665) $ (13,244) $(35,283)
=============== =============== =============== ============
Net loss per share-basic $(0.52) $( 2.77) $(1.11) $(3.16)
Net loss per share-diluted $(0.52) $ (2.77) $(1.11) $(3.16)
Pro forma net loss per share-basic $(0.55) $ (2.78) $(1.20) $(3.20)
Pro forma net loss per share-diluted $(0.55) $ (2.78) $(1.20) $(3.20)
3. INVENTORIES
Inventories consist of the following:
July 3, September 27,
2004 2003
------------------- -------------------
Raw materials $ 9,936 $ 6,939
Work in process 5,541 6,947
Finished goods 33,337 71,479
Reserve for excess and slow moving inventory (4,698) (12,072)
------------------- -------------------
$44,116 $ 73,293
=================== ===================
4. DEBT AND CAPITAL LEASES
Debt and capital leases consist of the following:
July 3, September 27,
2004 2003
------------------- -------------------
Revolving credit line $7,704 $ 25,685
Real estate loan -- 8,000
Senior subordinated notes 100,000 100,000
Capital leases 854 1,736
------------------- -------------------
108,558 135,421
Less current maturities (8,293) (27,649)
------------------- -------------------
Long-term debt $100,265 $ 107,772
=================== ===================
On June 6, 2003, the Company renewed its revolving credit line (the
"Facility"). The Facility provided 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, and
were secured by substantially all of the Company's domestic assets. The Facility
was scheduled to mature June 2006. The Facility contained significant financial
and operating covenants if availability under the Facility fell below $20
million. These covenants included 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 included prohibitions on the Company's ability to
incur certain additional indebtedness or to pay dividends, and restrictions on
its ability to make capital expenditures.
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.
Additionally, the Amended Facility contained a $10 million availability reserve
base and higher rates of interest than the Facility. The Amended Facility
contained 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 were to begin March 2005. The
fiscal 2004 minimum EBITDA levels were cumulative month amounts which began in
the second quarter of fiscal 2004. The Company was in compliance with the EBITDA
covenants during the term of the Amended Facility.
The cross default provision on the Company's 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 increase the quarterly interest
payments from $200,000 to $250,000 per quarter.
On June 17, 2004, the Company entered into a new Loan and Security
Agreement (the "New Facility") with The CIT Group ("CIT") as Agent, and Fleet
Capital continuing to participate as a syndicated lender. The New Facility
provides for borrowings of up to $60 million, and matures October 31, 2006. The
New Facility provides for increased borrowing availability and reduced rates of
interest. 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 of the New Facility. The New Facility also contains a $6
million availability reserve base. The Company is only subject to financial
covenants when availability is below 20% of the New Facility. If availability
falls below 20%, the Company has ten business days to bring availability back up
above the 20% threshold. If availability does not increase above the 20%
threshold within ten business days, the financial covenants include a quarterly
minimum EBITDA level beginning with the third quarter of fiscal 2004, and a
quarterly fixed charge coverage ratio beginning with the second quarter of
fiscal 2005. The New 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 Company's outstanding balance on its Amended Real Estate loan of $5.7
million was assumed by CIT and is a fixed asset portion of the New Facility. The
fixed asset portion of the New Facility will be reduced by $400,000 beginning on
September 1, 2004 and on the first day of each third month thereafter.
The New 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 New 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 New Facility are classified as short-term. Outstanding
borrowings under the Company's previous Amended Facility were also classified as
short-term.
Borrowings under the New Facility bear variable rates of interest based on
LIBOR plus an applicable margin (4.3% at July 3, 2004). The outstanding balance
on the New Facility was $7.7 million at July 3, 2004 and availability was $24.8
million (after the $6.0 million reserve base).
While the Company believes its operating plans, if met, will be sufficient
to assure compliance with the terms of the New Facility, there can be no
assurances that the Company will be in compliance through fiscal 2004.
5. ASSETS HELD FOR SALE
In June 2004, the Company announced its plans to market for sale its
cutting facility located in Tampa, Florida. Proceeds from the sale of this
building, when sold, will be used to pay down borrowings under the New Facility.
These assets have been classified as Assets held for sale on the consolidated
balance sheet.
6. NET INCOME (LOSS) PER SHARE
Basic and diluted net loss per share are computed as follows:
Thirteen Thirteen Forty Thirty-nine
Weeks ended Weeks ended Weeks ended Weeks ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
--------------- -------------- --------------- ---------------
Numerator for basic net loss per share:
Net loss $(5,787) $(30,564) $(12,249) $(34,944)
Denominator for basic net loss per
share:
Weighted average shares of common
stock outstanding 11,057 11,047 11,056 11,043
Effect of dilutive stock options using
the
treasury stock method - - - -
--------------- -------------- --------------- ---------------
Denominator for diluted net loss per
share 11,057 11,047 11,056 11,043
=============== ============== =============== ===============
Net loss per common share:
Basic $(0.52) $(2.77) $(1.11) $(3.16)
=============== ============== =============== ===============
Diluted $(0.52) $(2.77) $(1.11) $(3.16)
=============== ============== =============== ===============
During fiscal 2004, 6,030 stock options have been exercised.
7. 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 July 3, 2004, the Company
has approximately $498,000 remaining of the accrual, related to lease
termination costs. The activity in the exit accruals related to Project Synergy
during the forty weeks ended July 3, 2004 and the thirty-nine weeks ended June
28, 2003 were as follows:
Forty weeks ended Thirty-nine weeks
ended
July 3, 2004 June 28, 2003
----------------------- -----------------------
Beginning balance $ 2,739 $ 4,295
Reductions - (1,550)
Cash payments (2,241) (988)
----------------------- -----------------------
Ending balance $ 498 $ 1,757
======================= =======================
The Company has no remaining accrued liabilities related to the 1998
acquisition of Savane International Corp. The activity in the exit accruals
related to this acquisition during the forty weeks ended July 3, 2004 and the
thirty-nine weeks ended June 28, 2003 were as follows:
Forty weeks ended Thirty-nine weeks ended
July 3, 2004 June 28, 2003
----------------------- ------------------------
Beginning balance $ 437 $ 2,216
Cash payments (437) (1,499)
----------------------- ------------------------
Ending balance $ - $ 717
======================= ========================
8. 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 Forty Thirty-nine
Weeks ended Weeks ended Weeks ended Weeks ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
----------- ------------- ---------------- ---------------
Service Cost $ 8 $ 10 $ 23 $ 29
Interest Cost 153 143 459 430
Expected Return on Plan Assets (123) (127) (370) (381)
Amortization of Unrecognized Transition
Obligation (Asset) -- 2 -- 6
Amortization of Prior Service Cost -- -- -- --
Amortization of Loss (Gain) 96 72 289 215
----------- ------------- ---------------- ---------------
Net Periodic Benefit Cost $ 134 $ 100 $ 401 $ 299
=========== ============= ================ ===============
The Company anticipates contributing approximately $606,000 to fund its
defined benefit plan during fiscal 2004.
9. 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 July 3, 2004 and the thirteen weeks
ended June 28, 2003, the supplemental combining condensed balance sheet as of
July 3, 2004 and September 27, 2003, and the supplemental combining condensed
statement of cash flows for the forty weeks ended July 3, 2004, and the
thirty-nine weeks ended June 28, 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 July 3, 2004
------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ --------------
Net sales $43,666 $21,175 $ 10,131 $ (154) $ 74,818
Gross profit 8,493 3,613 3,840 (110) 15,836
Operating income (loss) (168) (728) 310 - (586)
Interest, income taxes and other, net 3,261 2,062 (122) - 5,201
Equity in income (loss) of subsidiaries (2,358) - - 2,358 -
Net income (loss) (5,787) (2,790) 432 2,358 (5,787)
Thirteen Weeks Ended June 28, 2003
------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ -------------
Net sales $50,634 $ 35,275 $ 11,679 $ (856) $ 96,732
Gross profit 6,971 (1,159) 3,317 (103) 9,026
Operating loss (2,629) (11,053) (277) - (13,959)
Interest, income taxes and other, net 12,410 4,003 192 - 16,605
Equity in income (loss) of subsidiaries (15,525) - - 15,525 -
Net loss (30,564) (15,056) (469) 15,525 (30,564)
Forty Weeks Ended July 3, 2004
-------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------- ---------------
Net sales $117,052 $ 93,254 $ 36,139 $ (477) $ 245,968
Gross profit 23,023 13,512 13,438 (277) 49,696
Operating income (loss) (1,085) 11 1,875 - 801
Interest, income taxes and other, net 5,919 6,119 1,012 - 13,050
Equity in income (loss) of subsidiaries (5,245) - - 5,245 -
Net income (loss) (12,249) (6,108) 863 5,245 (12,249)
Thirty-nine Weeks Ended June 28, 2003
-------------------------------------------------------------------------------
Statement of Operations Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------- ---------------
Net sales $ 151,141 $ 122,038 $ 36,772 $ (1,453) $ 308,498
Gross profit 26,728 14,841 11,531 (251) 52,849
Operating income (loss) (8,553) (9,032) 1,120 - (16,465)
Interest, income taxes and other, net 11,126 6,925 428 - 18,479
Equity in income (loss) of subsidiaries (15,265) - - 15,265 -
Net income (loss) (34,944) (15,957) 692 15,265 (34,944)
As of July 3, 2004
------------------------------------------------------------------------------
Balance Shee Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 155 $ 745 $ 6,374 $ - $ 7,274
Accounts receivable, net 26,235 14,133 5,404 - 45,772
Inventories 22,914 13,191 8,011 - 44,116
Other current assets 5,631 4,828 4,629 - 15,088
----------- ------------- ------------- ------------- --------------
Total current assets 54,935 32,897 24,418 - 112,250
Property and equipment, net 20,314 3,759 1,864 - 25,937
Investment in subsidiaries and
other assets 65,542 17,946 (9,987) (55,965) 17,536
----------- ------------- ------------- ------------- --------------
Total assets $ 140,791 $ 54,602 $ 16,295 $(55,965) $ 155,723
=========== ============= ============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities $ 21,565 $ 957 $ 6,225 $ - $ 28,747
Revolving credit line and
current portion of capital
leases 7,961 316 16 - 8,293
----------- ------------- ------------- ------------- --------------
Total current liabilities 29,526 1,273 6,241 - 37,040
Long-term debt and noncurrent
portion of capital leases 100,196 - 69 - 100,265
Other noncurrent liabilities (54) 7,245 104 - 7,295
Stockholders' equity 11,123 46,084 9,881 (55,965) 11,123
----------- ------------- ------------- ------------- --------------
Total liabilities and
stockholders' equity $ 140,791 $ 54,602 $ 16,295 $ (55,965) $ 155,723
=========== ============= ============= ============= ==============
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 92,392 6,706 (14,071) (65,381) 19,646
----------- ------------- ------------- ------------- --------------
Total assets $ 195,625 $70,359 $13,676 $ (65,381) $ 214,279
=========== ============= ============= ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities $ 38,036 $ 5,480 $ 5,006 - $ 48,522
Revolving credit line and
current portion of 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 leases 107,590 87 95 - 107,772
Other noncurrent liabilities 510 6,968 107 - 7,585
Stockholders' equity 22,751 56,932 8,449 (65,381) 22,751
----------- ------------- ------------- ------------- --------------
Total liabilities and
stockholders' equity $ 195,625 $70,359 $ 13,676 $ (65,381) $214,279
=========== ============= ============= ============= ==============
Forty Weeks Ended July 3, 2004
-----------------------------------------------------------------------------
Statement of Cash Flows Parent Guarantor Non-Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------- ------------- -------------- -------------
Net cash provided by (used in)
operating activities $ 19,147 $ (267) $ 4,235 $ (1,700) $ 21,415
Net cash provided by (used in)
investing activities 8,915 1,234 (147) - 10,002
Net cash used in financing
activities (28,401) (662) (32) - (29,095)
Other 276 - (1,509) 1,700 467
Net increase (decrease) in cash
and cash equivalents (63) 305 2,547 - 2,789
Cash and cash equivalents,
beginning of period 218 440 3,827 - 4,485
Cash and cash equivalents,
end of period 155 745 6,374 - 7,274
Thirty-nine Weeks Ended June 28, 2003
-----------------------------------------------------------------------------
Statement of Cash Flows Parent Guarantor Non- Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------- ------------- -------------- -------------
Net cash provided by (used in)
operating activities $(54,033) $ 1,368 $ 2,394 $ - $ (50,271)
Net cash used in investing
activities (2,829) (568) (233) - (3,630)
Net cash provided by (used in)
financing activities 32,885 (758) (5) - 32,122
Other 94 921 1,335 - 2,350
Net increase (decrease) in cash
and cash equivalents (23,883) 963 3,491 - (19,429)
Cash and cash equivalents, beginning
of period 24,274 167 3,843 - 28,284
Cash and cash equivalents, end
of period 391 1,130 7,334 - 8,855
10. 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 the Company during the period from April 17, 2002
through January 20, 2003 (the "Class Period"). The lawsuits name the Company and
certain current and former officers and directors of the 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 the 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. The Company is reviewing these lawsuits
with its attorneys and intend to vigorously defend them. Because these cases are
in the early stages of litigation, the Company is 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 to the Company a
shareholder derivative demand pursuant to Florida Statute Section 607.07401
demanding, among other things, that the Company institute litigation against
current and former officers and directors Michael Kagan, Eloy Vallina-Laguera
and William Compton. The demand contends that the Company 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, the Company is not a party to any other
legal proceedings other than various claims and lawsuits arising in the normal
course of business. Management does not believe that any such claims or lawsuits
will have a material adverse effect on its financial condition.
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 continued to sell excess inventory
at discounted prices during fiscal 2004. Gross margins for the third 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 freed up valuable resources that
are being 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
fiscal 2004 employee-related costs. 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 has
assisted us in evaluating our business plan and identifying cost reductions and
operational improvements.
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 Forty Thirty-nine
Weeks ended Weeks ended Weeks ended Weeks ended
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
-------------- --------------- ---------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 78.8 90.7 79.8 82.9
-------------- --------------- ---------------- --------------
Gross profit 21.2 9.3 20.2 17.1
Selling, general and administrative 22.0 21.3 21.0 20.4
expenses
Other - (2.4) (1.1) 2.0
-------------- --------------- ---------------- --------------
Operating income (loss) (0.8) (14.4) 0.3 (5.3)
Interest expense, net (6.9) 3.2 5.1 2.8
Other, net (0.1) 0.2 - (0.2)
-------------- --------------- ---------------- --------------
Loss before income taxes (7.8) (17.8) (4.8) (7.9)
Provision (benefit) for income taxes 0.1 (13.8) 0.2 (3.4)
-------------- --------------- ---------------- --------------
Net loss (7.7)% (31.6)% (5.0)% (11.3)%
============== =============== ================ ==============
Thirteen weeks ended July 3, 2004 compared to the thirteen weeks ended June 28,
2003
Net Sales. Net sales decreased to $74.8 million for the third quarter of
fiscal 2004 from $96.7 million the comparable prior year quarter. The decrease
was primarily due to a 26.7% decrease in units shipped, offset in part by a
decrease of approximately 50% in sales returns and allowances.
Gross Profit. Gross profit increased to $15.8 million, or 21.2% of net
sales for the third quarter of fiscal 2004 from $9.0 million, or 9.3% 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 lower due to the reduction of shipping difficulties related to
Project Synergy. In addition, as excess inventory was sold, we have reduced
inventory reserves by $3.1 million in the third quarter of fiscal 2004.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $16.4 million, or 22.0% of net sales for
the third quarter of fiscal 2004, from $20.6 million, or 21.3% 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 charges of $2.4 million in the third quarter of fiscal 2003 was
comprised of:
o $2.8 million loss on the sale of one of our corporate aircraft;
o $2.2 million related to reserves for contract disputes/litigations;
o $0.8 million related to partial termination costs for our Duck Head(R)
retail outlet businesses; and
o $0.2 million for investment banking advisory fees; offset in part by a
o $3.7 million gain on the sale of the Duck Head(R)trademarks.
Interest Expense. Interest expense increased to $3.5 million for the third
quarter of fiscal 2004, from $3.0 million for the comparable prior year quarter,
primarily due to higher rates of interest prior to the New Facility.
Loss on Extinguishment of Debt. In connection with our New Facility, we
expensed $1.7 million of capitalized and unamortized debt issue costs related to
our previous Amended Facility and Amended Real Estate loan.
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 future years.
Net Loss. As a result of the above factors, our net loss decreased to $5.8
million for the third quarter of fiscal 2004 compared with a net loss of $30.6
million in the comparable prior year quarter.
Forty weeks ended July 3, 2004 compared to the thirty-nine weeks ended June 28,
2003
Net Sales. Net sales decreased to $246.0 million for the forty weeks ended
July 3, 2004 from $308.5 million in the comparable prior year period. The
decrease was primarily due to a 19.8% decrease in units shipped, offset in part
by a 65.0% 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 thirty-nine weeks June 28, 2003
contains approximately $15.7 million of sales related to discontinued
businesses. We expect fiscal 2004 sales of Savane(R)and private label products
to be below fiscal 2003 levels.
Gross Profit. Gross profit decreased to $49.7 million, or 20.2% of net
sales, for the forty weeks ended July 3, 2004, from $52.8 million, or 17.1% of
net sales, for the comparable prior year period. The reduction in the gross
margin in dollars was primarily due to a decrease in units shipped, 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 was sold, we have reduced
inventory reserves by $7.4 million 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 $51.7 million, or 21.0% of net sales, for
the forty weeks ended July 3, 2004, from $63.2 million, or 20.5% 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 income in the forty weeks ended July 3, 2004 was comprised of:
o $3.5 million gain on the sale of the Company's unoccupied
administration building; offset in part by
o $0.7 million of costs related to the phase o ut of the Tampa, Florida
cutting operations which consists primarily of asset
write-downs and losses on the sale of machinery and equipment.
Other charges in the thirty-nine weeks ended June 28, 2003 was comprised of:
o $5.3 million charge related to a separation agreement with the
Company's former chief executive officer;
o $2.8 million loss on the sale of one of our corporate aircraft;
o $2.2 million related to reserves for contract disputes/litigations;
o $0.8 million related to partial termination costs for our Duck Head(R)
retail outlet businesses; and
o $0.2 million for investment banking advisory fees; offset in part by a
o $3.7 million gain on the sale of our Duck Head(R)trademarks; and
o $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 $10.8 million for the forty
weeks ended July 3, 2004, from $8.7 million for the comparable prior year
period, primarily due to higher rates of interest prior to the New Facility.
Loss on Extinguishment of Debt. In connection with our New Facility, we
expensed $1.7 million of capitalized and unamortized debt issue costs related to
our previous Amended Facility and Amended Real Estate loan.
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 future years.
Net Loss. As a result of the above factors, our net loss decreased to $12.2
million for the forty weeks ended July 3, 2004, compared with a net loss of
$34.9 million for the thirty-nine weeks ended June 28, 2003.
Liquidity and Capital Resources
On June 6, 2003, we renewed our revolving credit line (the "Facility"). The
Facility provided 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, and were secured by
substantially all of our domestic assets. The Facility was scheduled to mature
in June 2006. The Facility contained significant financial and operating
covenants if availability under the Facility fell below $20 million. These
covenants included 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 included prohibitions on our ability to incur certain
additional indebtedness or to pay dividends, and restrictions on its ability to
make capital expenditures.
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 the Facility fell below $20 million, triggering financial
covenants, which were 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. Additionally, the Amended
Facility contained a $10 million availability reserve base and higher rates of
interest than the Facility. The Amended Facility contained 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 were to begin March 2005. The fiscal 2004 minimum EBITDA
levels were cumulative month amounts which began in the second quarter of fiscal
2004. We were in compliance with the EBITDA covenants during the term of the
Amended Facility.
The cross default provision on our 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 increase the quarterly interest payments from
$200,000 to $250,000 per quarter.
On June 17, 2004, we entered into a new Loan and Security Agreement (the
"New Facility") with The CIT Group ("CIT") as Agent, and Fleet Capital
continuing to participate as a syndicated lender. The New Facility provides for
borrowings of up to $60 million, and matures October 31, 2006. The New Facility
provides for increased borrowing availability and reduced rates of interest. 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 of the
New Facility. The New Facility also contains a $6 million availability reserve
base. We are only subject to financial covenants when availability is below 20%
of the New Facility. If availability falls below 20%, we have ten business days
to bring availability back up above the 20% threshold. If availability does not
increase above the 20% threshold within ten business days, the financial
covenants include a quarterly minimum EBITDA level beginning with the third
quarter of fiscal 2004, and a quarterly fixed charge coverage ratio beginning
with the second quarter of fiscal 2005. The New Facility also includes
prohibitions on our ability to incur certain additional indebtedness or to pay
dividends, and restrictions on its ability to make capital expenditures.
The outstanding balance on our Amended Real Estate Loan of $5.7 million was
assumed by CIT and is a fixed asset portion of the New Facility. The fixed asset
portion of the New Facility will be reduced by $400,000 beginning on September
1, 2004 and on the first day of each third month thereafter.
The New 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 New 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 New Facility are classified as short-term. Outstanding
borrowings under our previous Amended Facility were also classified as
short-term.
Borrowings under the New Facility bear variable rates of interest based on
LIBOR plus an applicable margin (4.3% at July 3, 2004). The outstanding balance
on the New Facility was $7.7 million at July 3, 2004 and availability was $24.8
million.
While we believe our operating plans, if met, will be sufficient to assure
compliance with the terms of the New Facility, there can be no assurances that
we will be in compliance through fiscal 2004.
In addition to the financial covenants discussed above, our New Facility
also contains 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 New 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 New 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.
In June 2004, we announced our plans to market for sale our cutting
facility located in Tampa, Florida. Proceeds from the sale of this building,
when sold, will be used to pay down borrowings under the New Facility. These
assets have been classified as Assets held for sale on the consolidated balance
sheet.
We anticipate using approximately $1.0 million of cash during fiscal 2004
for advertising programs to support our Savane(R)brand. These programs will
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 approximately $704,000 for the forty weeks
ended July 3, 2004 and are expected to approximate $1.0 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 forty weeks ended July 3, 2004, we generated $21.4 million of
cash from our operations. This was primarily the result of a decrease in
inventory of $29.2 million, a decrease in accounts receivable of $18.6 million,
and a decrease in prepaid expenses and other current assets of $2.2 million,
offset in part by a decrease in accounts payable and accrued expenses of $19.8
million, and a net loss of $12.2 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; inability to meet operating plans to assure
compliance with loan agreement covenants; inability to achieve greater
availability or reduced interest costs under the new loan agreement; inability
to achieve minimum availability levels; 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 our 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. We are 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
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 April 27, 2004, we filed a Form 8-K which contained a press
release announcing our second quarter fiscal 2004 results.
On April 27, 2004, we filed a Form 8-K which contained a press
release announcing the appointment of Dennis Kraus as Vice
President of Sales.
On June 22, 2004, we filed a Form 8-K which contained a press
release announcing the signing of a new Loan and Security
Agreement with The CIT Group.
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)
August 11, 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 Third Amended and Restated By-Laws of Tropical Sportswear
Int'l Corporation (filed herewith).
*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).
*10.6 Loan and Security Agreement with The CIT Group/Commercial
Services, Inc. dated June 17, 2004 (filed as Exhibit 99.5 of
Tropical Sportswear Int'l Corporation's Form 8-K filed June
22, 2004).
10.7 Employment Agreement effective July 18, 2003 between Steven
S. Barr and Tropical Sportswear Int'l Corporation (filed
herewith).
10.8 Employment Agreement effective April 13, 2002 between Frank
Keeney and Tropical Sportswear Int'l Corporation (filed
herewith).
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.