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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year ended October 3, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] For the transition period from to
Commission File Number 0-23161
Tropical Sportswear Int'l Corporation
(Exact name of registrant as specified in its charter)
Florida 59-3424305
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
4902 W. Waters Avenue Tampa, FL 33634-1302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (813) 249-4900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ ]
As of December 15, 1998 there were 7,611,129 shares of Common Stock outstanding.
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based on the last sale price reported on the Nasdaq National Market
as of December 15, 1998, was approximately $144,703,175.
DOCUMENT INCORPORATED BY REFERENCE:
Document Form 10-K Reference
Proxy Statement, dated January 4, 1999 Part III, Items 10-13
TROPICAL SPORTSWEAR INT'L CORPORATION
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I Page No.
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 16
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition and Results 18
of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk 29
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial 29
Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant 30
Item 11 Executive Compensation 30
Item 12 Security Ownership of Certain Beneficial Owners and Management 30
Item 13 Certain Relationships and Related Transactions 30
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
Certain statements contained in this report on Form 10-K that are not purely
historical may be forward looking statements, including statements regarding the
Company's expectations, hopes, beliefs, intentions, or strategies regarding the
future. Forward looking statements include statements regarding, among other
things: (i) the Company's backlog and sales; (ii) potential acquisitions by the
Company; (iii) the Company's financing plans; (iv) trends affecting the
Company's financial condition or results of operations; (v) the Company's growth
strategy, operating strategy, and financing strategy; (vi) the declaration and
payment of dividends; (vii) regulatory matters affecting the Company; and (viii)
the outcome of certain litigation involving the Company. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward looking statements as
a result of various factors. All forward looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward looking
statement. Among the factors that could cause actual results to differ
materially are the factors detailed in Items 1 through 3 and 7 of this report
and the risks discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors Affecting the Company's
Business and Prospects" in Item 7. Prospective investors should also consult the
risk factors listed from time to time in the Company's other reports filed with
the Securities and Exchange Commission.
PART I
Item 1. Business
General
The Company produces high quality casual and dress men's and women's
apparel and provides major apparel retailers with comprehensive brand management
programs. The Company's programs currently feature pants, shorts, shirts, coats,
and denim jeans for men and on a limited basis, pants and skirts for women.
These products are marketed under Company brands, private brands and licensed
brand names. The Company distinguishes itself by providing apparel retailers
with customer, product and market analysis, apparel design, production,
merchandising, and inventory forecasting. The Company markets its apparel
through all major retail distribution channels, including department and
specialty stores, national chains, catalog retailers, discount and mass
merchants and wholesale clubs. The Company's mission is to provide total
customer satisfaction through a combination of quality, value and technology.
Management believes that the Company provides its customers with high quality
apparel and services supported by a commitment to advanced information, design
and production technologies, and unique merchandising and operating strategies.
On June 10, 1998, the Company completed the acquisition of Savane
International Corp. (formerly known as Farah, Inc.). Savane is a marketer and
manufacturer of men's and women's apparel bearing national brands such as
Savane(R), Farah(R), and John Henry(R). Savane had similar operations including
the use of independent garment assembly contractors and its own cutting and
distribution facilities. Savane also has sales and distribution operations in
the United Kingdom, Australia, and New Zealand. The Company believes that the
combination of its leading private brand operations with those of a national
brand operation such as Savane's has provided it with a significant competitive
advantage.
The Company's apparel line focuses on basic, recurring styles that the
Company believes are less susceptible to fashion obsolescence and less seasonal
in nature than fashion styles. Most of the Company's products are derived from
six production platforms, or "chassis," each of which incorporates basic
features requiring distinct manufacturing processes, such as inclusion of an
elastic waistband, a jeansband or button-flap pockets. The six basic chassis are
modified to produce separate styles through variations in cut, fabric and
finish. This process enables the Company to achieve both manufacturing
simplicity and efficiencies while producing a wide variety of products through
distinctions in color and style.
Under private brand programs, products receive customer-specific
labeling and packaging upon receipt of confirmation of a customer order. As a
result, a common SKU (i.e. style, color, and size), differentiated only by
labeling and packaging, can be sold by both a high-end department store and a
mass merchant at different retail price points. This merchandising strategy
offers quick-response execution of customer orders without the associated risk
of carrying customer-specific inventories. Under national brand programs,
products bearing labels such as Savane(R), Farah(R), John Henry(R), Bay to
Bay(R), Van Heusen(R), and Bill Blass(R) generally have the label packages
applied during the assembly process and are shipped to the Company's
distribution centers ready for shipment to customers upon receipt of
confirmation of a customer order. Products bearing national brand labels are
sold to many different customers and therefore reduce the risk of carrying
customer specific inventories.
The Company manages the manufacture and distribution of substantially
all of its products utilizing a state-of-the-art 110,000 square foot cutting
facility in Tampa, Florida, a 201,000 square foot cutting facility in El Paso,
Texas, and independent garment assembly contractors located primarily in the
Dominican Republic and Mexico, a product labeling and distribution facility
located in Tampa, and a distribution facility located in Santa Teresa, New
Mexico. The Company also sources certain finished garments from independent
manufacturers located in Mexico, the Pacific Rim and the Middle East. The
Company believes that its commitment to the use of independent contractors in
the Dominican Republic anticipated the trend in the industry toward the use of
the Caribbean and Mexico for production. The Company believes the establishment
of its name and reputation in these areas gives it a distinct competitive
advantage.
The Company utilizes advanced technology in all aspects of its
business, including apparel design, materials sourcing, production planning and
logistics, customer order entry and sales demand forecasting. The Company's
dedication to technology produces greater efficiencies throughout the production
process and results in high-quality products, low-cost production and enhanced
customer order execution. The Company typically designs its apparel lines and
customer programs by tracking its customers' store-level point-of-sale (POS)
system data and responding to retail demand and trends on a per Stock Keeping
Unit (SKU) basis. Apparel products are developed using a computer-aided-design
("CAD") system integrated with fabric cutting to maximize product quality and
materials yield. Management believes that the Company's 92% average fabric
utilization rate is among the highest in the apparel industry. The Company
employs stringent quality control procedures throughout its operations, from raw
materials production at supplier mills through finished goods shipping. In
Fiscal 1998, the return rate for quality defects was less than one percent,
evidencing the impact of the Company's quality control procedures.
Accurate and timely order execution is achieved through electronic data
interchange ("EDI") order entry and quick replenishment of core SKUs. In Fiscal
1998, substantially all orders were placed via EDI. Orders generally are shipped
to the retailer within three working days of receipt of shipping instructions.
The Company's systems enable it to further assist the retailer by tracking
point-of-sale activity by SKU and forecasting consumer demand and seasonal
inventory requirements on a daily basis.
The Company was founded in 1927. Pursuant to a tax-free reorganization
consummated prior to the Company's initial public offering, the Company was
merged into a newly-formed corporation organized under the laws of the State of
Florida on January 27, 1997. The Company's executive offices are located at 4902
West Waters Avenue, Tampa, Florida 33634-1302, and its telephone number is
813-249-4900.
Industry
According to a retail industry research firm, the U.S. apparel industry
totaled approximately $169.2 billion in retail sales in 1997. The industry grew
approximately 4.8% and 5.8% in 1997 and 1996, respectively. In 1997, the men's
bottoms (i.e., pants and shorts) business represented approximately 8.0% of the
total apparel market. TSI believes that the apparel industry is characterized by
the following trends:
Trend Toward Retail Merchandise Management Programs. The Company
believes that major apparel retailers are increasingly outsourcing
apparel merchandise management programs to minimize inventory risks and
increase profitability. In addition, the Company believes that major
apparel retailers are consolidating their suppliers to increase
profitability by improving customer service and enhancing economies of
scale. The Company believes that its ability to offer leading brands,
including those acquired in the Savane acquisition, combined with the
Company's private brand programs, position it well to capitalize on
these trends.
Retail Consolidation of Branded Merchandise. The Company believes that
major apparel retailers are reducing the number of brands they offer in
favor of a few of the most well-recognized consumer brands. Department,
chain and discount store retailers have allocated increasing retail
space to "in-store" apparel shops featuring individual brands
merchandised with customer fixturing supplied by the branded producers.
The Company believes the Savane(R), Farah(R), and licensed John
Henry(R) brands are favored by their respective customers and are
well-positioned to gain market share by investing in enhanced POS
merchandising.
Trend Toward High Quality Private Brand Apparel. The Company believes
that there is an increased trend toward high quality, private brand apparel. The
Company believes that this shift is due primarily to the education of consumers
and retailers as to the benefits of private brand products. Private brand
apparel bears the retailer's own name or a proprietary brand name exclusive to
the retailer. Producers are able to sell these garments at lower wholesale
prices due to certain economies, including lower advertising and promotional
costs, lack of brand name license fees and royalties, and the absence of
"markdown" and other risks and expenses inherent in the brand-name apparel
industry. As a result of the lower wholesale prices, private brand apparel
generally provides higher margins for the retailer than brand name or designer
products. The Company believes consumers increasingly regard private brand
products as less expensive than brand name products, but of equal or better
quality. This increase in consumer demand for private brand garments, coupled
with retailers' demands for higher margins, has resulted in retailers allocating
more space to private brand products.
Trend Toward Casual Dress. The Company believes that there is a growing
trend in the United States toward casual dress, as reflected in the
implementation of policies such as "casual Fridays." In addition, the Company
believes that the number of people who work at home is increasing substantially
and that outside of the workplace, people's social activities are focusing on a
more casual lifestyle.
Expansion of Caribbean and Mexican Production. Until recently, apparel
was produced predominantly domestically or in the Pacific Rim countries. Since
the passage of Section 807 of the Harmonized Tariff Schedule of the United
States (now found under tariff subheading 9802.00.80, but herein referred to as
"Section 807"), American apparel companies have increasingly utilized production
facilities located in the Caribbean Basin, including the Dominican Republic. The
Company believes that the Dominican Republic offers certain competitive
advantages, including favorable pricing and better quality production, a
long-standing and relatively stable production network, and much shorter
transportation periods as compared to goods assembled in the Pacific Rim. Under
Section 807, customs duties on apparel products assembled in the Caribbean Basin
may be offset by the costs incurred in the production of components in the
United States (plus freight and insurance). More recently, the North American
Free Trade Agreement ("NAFTA"), effective 1994, has permitted Mexican
manufacturers to ship finished apparel products into the United States duty-free
or at reduced duties. According to Sandler & Travis Trade Advisory Services,
Inc., 1996 marked the first year in which apparel products exported to the
United States from Mexico exceeded products exported from any other country,
including China.
Business and Growth Strategy
The Company believes that its business and growth strategies will
position it to take advantage of key industry trends including: (i) an
increasing emphasis by major apparel retailers on outsourced merchandise
management programs for core apparel lines; (ii) a reduction by major retailers
in the number of brands offered in favor of a few of the most well-recognized
consumer brands; (iii) an increase in retailer and consumer demand for
high-quality private brand apparel; (iv) a shift in consumer preference toward
casual dress; and (v) a shift in trade policy which favors the manufacture of
products in Mexico, the Caribbean and Latin America. The key elements of the
Company's business and growth strategies include:
Advanced Planning and Control Systems and Procedures. The Company
employs advanced technology and comprehensive operating systems and
procedures which integrate and monitor each operation to reduce
inefficiencies, increase productivity and enhance customer service.
High-Quality Products. The Company applies stringent quality standards
throughout its operations, from the design of its products through the
shipment of customer orders. In fiscal 1998, the application of these
standards resulted in a rate of customer returns for defects of less
than 1%.
Low-Cost and Flexible Operations. The Company is organized to effect a
short production cycle from the receipt of raw materials through the
shipment of a customer order. The Company believes its "chassis"
production concept allows it to execute more cost-effective production
runs than those of its competitors. The Company outsources labor
intensive garment assembly and finishing operations to independent
manufacturers on a fixed cost per unit basis. This strategy reduces the
personnel and capital resources invested in the production process and
enables the Company to vary production levels with changes in customer
demand.
Minimized Inventory Risk. The Company believes that it minimizes its
inventory risk by (i) producing focused lines of core apparel products,
(ii) minimizing the production cycle and maximizing production
flexibility and (iii) tracking customer demand trends by SKU on a per
store basis.
Customer Service. The Company provides customer satisfaction through
high-quality products and customized merchandise management programs.
These programs serve to increase retailer margins by outsourcing
traditional retailer merchandising functions and reducing inventory
risk and excessive markdowns.
Expand Private Brand Programs for Major Retailers. The Company believes
its high-quality and low-cost products, strong customer service and
merchandise management capabilities position it to increase private
brand market share as retailers consolidate and outsource private brand
programs.
New Product Introductions. The Company intends to develop and market
products that complement existing core product lines. Targeted product
categories include lines of men's casual shirts and women's sportswear.
All new product lines will employ the Company's "chassis" production
concept.
Acquisitions. The Company will consider the acquisition of additional
established brands as well as the acquisition of producers of
complementary new product lines. The Company regularly evaluates
acquisition opportunities, but currently has no agreements,
arrangements or understandings with respect to any acquisitions.
Integration Plan
TSI and Savane produce similar products and use similar production
operations. Because Savane principally marketed branded products, the Company
has started to realize higher average unit selling prices and higher gross
margins on sales of Savane products than sales of products generated by TSI's
private label programs. The Company expects this trend to continue. Because of
the similarity of product lines, the Company believes that operations and unit
production costs will generally be comparable.
Subsequent to the acquisition, the Company started to implement a
comprehensive plan to integrate Savane's products and operations into its
existing systems. As part of this integration strategy, the Company intends to
take the following actions:
Rationalize Savane Product Offerings. The Company intends to reduce the
number of styles and SKUs of Savane branded products to concentrate on
only those products which the Company believes generate appropriate
levels of sales and profitability. The Company believes that this
reduction of Savane's product line will reduce inventory levels and
costly markdown and close-out sales and improve customer service. The
Company also intends to integrate Savane's private label programs with
those of the Company. In addition, the Company intends to develop new
products to merchandise under the Savane brands, which will conform to
the "chassis" production concept.
Develop Independent Brand Strategies. The Company intends to manage the
private brands and each of the Savane(R) and Farah(R) brands and the
licensed John Henry(R) brand as separate businesses with distinct brand
management programs. The Savane(R) brand will continue to be marketed
to the department store channel with key targeted customers including
Federated Department Stores, May Co., Dillard's and Proffitt's, a
division of Saks. The John Henry(R) brand will continue to be marketed
exclusively through Sears, and Farah(R) brand pants, shorts and jeans
will continue to be marketed through the mass merchant channel. The
Company intends to invest in cooperative advertising and merchandising
programs with certain key customers to enhance demand for the Savane
brands. The Company plans to apply its proven merchandise management
and customer service capabilities to improve Savane's partnerships with
its key accounts.
Focus on Market Analysis and Sales Forecasting. Savane has historically
forecasted sales based on customer-specific and market data on a
monthly basis. TSI generally forecasts sales once per week. TSI intends
to initiate weekly sales forecasting for the Savane businesses and
integrate the resulting sales forecasts with TSI's purchasing and
production planning and control systems. The Company believes that the
application of TSI's sales forecasting systems and procedures to
Savane's businesses will reduce the amount of excess, slow moving and
obsolete Savane inventory.
Joint Sales and Marketing. The Company intends to market Savane's
branded products to TSI's customers and TSI's private brand programs to
Savane's customers. TSI's sales mix is concentrated in the wholesale
clubs and mass merchant channels with modest penetration of chain
stores and department stores. Savane's sales mix is strongest with
department stores through its Savane(R) line of products. The Company
believes that it can increase net sales through focused sales and
marketing programs targeting the entire TSI and Savane customer base.
Rationalize Production. The Company intends to apply TSI's
sophisticated production planning and control systems and procedures,
integrated with its sales forecasting system, to manage Savane's
production. The Company also intends to convert Savane's assembly
operations to modular work teams to reduce work in process inventories
and increase productivity and apply TSI's production planning and
control systems to reduce shipping costs and improve customer order
execution.
Consolidate Purchasing. The Company intends to combine TSI's and
Savane's raw materials purchasing to realize economies of scale,
improve raw materials quality and reduce raw materials inventories. The
Company expects to consolidate raw materials suppliers, institute its
just-in-time inventory management programs with its leading suppliers
and inspect raw materials at supplier mills before receipt.
Distribution. Savane recently opened a new distribution facility and
experienced difficulties in processing orders which has led to
substantial customer order cancellations. The Company intends to apply
its comprehensive operating systems and procedures to Savane's
distribution system.
Reduce General and Administrative Expenses. TSI intends to consolidate
Savane into TSI's general and administrative infrastructure, which TSI
believes will result in cost savings by eliminating redundancies
associated with Savane's public company reporting and administrative
costs, insurance coverage and professional fees. Savane's financial
reporting and internal control procedures will be integrated with TSI's
systems. TSI's chief financial officer and controller will assume
supervisory responsibility for Savane's accounting, financial reporting
and internal controls.
Integrate MIS Functions. TSI intends to operate Savane's information
systems in parallel with TSI's, evaluate the best practices of both
systems and integrate systems functions as appropriate on an
application-by-application basis. The separate information systems
staffs will be supervised by TSI's chief information officer.
Potential Divestiture Opportunities. The Company intends to evaluate
Savane's assets in light of TSI's strategic and financial objectives
and, to the extent such assets do not fit within those objectives,
dispose of or discontinue operating such assets.
Integration Activity Update
Since the acquisition of Savane on June 10, 1998, many of the
activities within the Company's integration plan have started to take place. The
brand management programs
remain in place and the Company recently launched a national cable television
and outdoor media advertising program. The sales forecasting process at Savane
is now performed on a weekly basis. The sales forces have been integrated and
cross merchandising has been implemented with all customers. The conversion of
Savane assembly operations to modular work teams is currently being tested at
two factories and will continue to be applied to remaining factories during
fiscal 1999. The Company has started to receive the benefit of the combined
purchasing power and has consolidated certain suppliers. The systems and
procedures at the Savane distribution center have been modified and the
distribution center is now achieving on-time deliveries of over 90%. Certain
general and administrative functions have been consolidated and all financial
reporting and internal control procedures are integrated. The MIS functions
continue to run parallel and will be integrated as appropriate. The Company has
disposed of Savane's retail outlet stores and is in the process of disposing of
certain manufacturing facilities in Costa Rica and continues to evaluate other
assets for potential divestiture.
Products
The Company produces a core line of high quality men's casual and dress
pants, shirts, coats, shorts and denim jeans as well as a core line of high
quality women's casual pants and skirts. Most of the Company's apparel line
focuses on basic, recurring styles that the Company believes are less
susceptible to fashion obsolescence and less seasonal in nature than fashion
styles. Key fabrics include 100% cotton and synthetic blends utilizing rayon,
wool and polyester. Key fabric constructions include twill, denim, corduroy and
wrinkle-free fabrication. The table below sets forth sales mix, expressed as a
percentage of net sales, and retail price points per product category:
Fiscal Fiscal Fiscal Current Retail
1998 1997 1996 Price Range
------------ ------------ ------------- --------------------
Casual Pants 60.5% 53.9% 56.8% $17.99 - $39.99
Dress Pants 10.1 8.6 1.7 24.99 - 39.99
Denim Jeans 3.9 5.4 7.1 16.99 - 24.99
Shorts (including denim) 22.1 32.1 34.4 11.99 - 24.99
Other (including shirts,
coats and women's) 3.4 -- -- Varies
------------ ------------ -------------
100.0% 100.0% 100.0%
The Company's design staff examines domestic and international trends
in the apparel industry as well as industries completely outside the sphere of
clothing manufacture, including the automobile, grocery and home furnishings
industries, to determine trends in styling, color, consumer preferences and
lifestyle. Virtually all of the Company's products are designed by its in-house
staff utilizing CAD technology, which enables the Company to produce computer
simulated samples that display how a particular style will look in a given color
and fabric. The Company can quickly generate samples and alter the simulated
samples in response to customer input. The use of CAD technology minimizes the
time and costs associated with producing actual sewn samples prior to customer
approval and allows the Company to create custom designed products meeting the
specific needs of a customer. The Company's product content and construction
specifications require the use of matched finish thread throughout the garment,
surge seaming of all pockets, rigorous attention to seam construction, color
matching of all components and the generous use of fabric to produce a fuller,
more comfortable fit and minimize costly customer returns.
Customers and Customer Service
The Company markets its products across all major apparel retail
channels to approximately 90 finer department and specialty stores, catalog
retailers, discount merchants and wholesale clubs. The Company's products are
sold at over 6,000 outlets throughout the United States, Canada, Mexico and
Central America. Sales to the Company's five largest customers represented
approximately 50.9% and 71.6% of net sales during Fiscal 1998 and Fiscal 1997,
respectively. Sales to Wal-Mart (including Sam's Club, the nation's largest
chain of wholesale clubs), Price/Costco and Phillips-Van Heusen accounted for
approximately 23.8%, 10.6%, and 6.1% respectively, of net sales during Fiscal
1998 and 28.7, 18.8% and 11.0%, respectively, of net sales during Fiscal 1997.
The Company also sells its products to other major retailers, including
Dillard's, Belks, Proffitt's, a division of Saks, Dayton Hudson, Federated
Department Stores, JC Penney, May Co., and Nordstrom.
Set forth below are comparative sales mix data, expressed as a
percentage of net sales, by marketing channel:
Fiscal Fiscal Fiscal
1998 1997 1996
----------------- ----------------- -----------------
Wholesale Club 31.5% 46.1% 42.3%
Department store 21.9 10.9 14.4
Discount and mass merchant 20.1 21.1 21.4
National chain 10.6 12.3 14.5
Specialty store 8.3 5.4 4.7
Catalog 0.2 0.2 1.1
Other 7.4 4.0 1.6
----------------- ----------------- -----------------
100.0% 100.0% 100.0%
The Company offers its customers comprehensive brand management
programs, which provide: (i) merchandise planning and support; (ii) consistently
high quality products; (iii) value-added services, such as custom labeling and
packaging design, just-in-time electronic order execution, and retail
profitability analysis; and (iv) access to state-of-the-art sales forecasting
and inventory management systems. In addition, the Company will continue to
promote these capabilities to increase sales of Company brands and licensed
brand name apparel offered to multiple retail accounts. The Company believes
that close collaboration with its customers provides the Company's employees the
opportunity to better understand the fashion, fabric and pricing strategies of
the customer and leads to the generation of products that are more consistent
with each customer's expectations. At the same time, the customer is given the
opportunity, at minimal expense and risk, to benefit from the Company's
substantial expertise in designing, packaging and labeling high quality
products.
Product Labeling and Packaging
The Company differentiates its products through customized labeling,
point-of-sale packaging and other brand identification techniques. For most of
its customers, the Company manages the design and production of labeling and
packaging materials. Management regularly analyzes consumer product labeling and
packaging and consumer targeting trends evident in other retailing formats,
including the automobile, grocery and home furnishings industries. The Company
can ship products directly to its customers' retail stores in floor-ready form
and offers innovative packaging and display techniques, such as the "Big Pack."
A "Big Pack" is a specially designed cardboard carton used to ship pants and
shorts directly to Sam's Club stores. Upon delivery, it opens into a floor-ready
display.
Marketing and Sales
The Company's products are sold by sales representatives located across
the United States, each of whom has many years of experience in the apparel
industry. The Company also maintains a sales and marketing support staff in
Tampa and El Paso dedicated to analyzing sales and marketing data.
The Company offers each of its existing and prospective customers a
marketing plan tailored to the customer's market niche. Using its marketing data
and industry experience, the Company is able to create, for each existing and
prospective customer and each particular product, a market plan that outlines
optimum volume, timing and pricing strategies, markdown and sell-through trends
and profit margins.
The Company operates an EDI system, whereby the Company can accept EDI
orders 24 hours a day and typically ship orders within three working days. In
Fiscal 1998, substantially all orders were placed via EDI.
The Company employs approximately 40 associates whose responsibility it
is to visit each major retail customer store and assist the local store with
product arrangement on the floor of the store as well as coordination of product
shipment and restocking of racks and display tables. This service is provided
free of charge to the customer.
Operations
The Company principally cuts its fabric at its Tampa and El Paso
facilities for offshore finishing and assembly. The Company also imports
finished goods, principally denim jeans and shorts, shirts and coats from
Mexico, the Pacific Rim and the Middle East. The Company believes that the use
of numerous independent international suppliers to assemble components cut at
the Company's facilities enables it to provide customers with high quality goods
at significantly lower prices than if it operated its own assembly facilities.
Overview. The Company inventories, spreads, marks and cuts virtually
all of the fabric used in the manufacture of its products at its own facilities
in Tampa and El Paso. The components are then assembled outside the United
States, principally in the Dominican Republic and Mexico. Most private brand
products are then shipped back to the Company's Tampa facilities for labeling,
packaging and distribution. The Savane(R), Farah(R) and John Henry(R) labeled
products are shipped back to the Company's Santa Teresa, New Mexico facility for
distribution. In Fiscal 1998, the production cycle from receipt of raw materials
through the availability for shipping of finished goods averaged 36 days,
including raw materials inventory, transit and assembly. The Company customarily
prepares, packs and ships customer orders within three working days of receipt
of shipping instructions.
Raw Materials Sourcing. The Company purchases raw materials, including
fabrics, thread, trim and labeling and packaging materials, from domestic
sources based on quality, pricing and availability. Prior to shipment, the
Company undertakes a quality audit at its major suppliers to assure that quality
standards are met. An additional quality audit is performed upon receipt of all
raw materials. The Company maintains a laboratory at its Tampa, Florida facility
in order to test the quality of raw materials. The Company has no long-term
agreements with any of its suppliers. The Company projects raw material
requirements through a series of planning sessions taking into account orders
received and future projections by style and color. This data is then translated
to the raw material components needed by production time frame in order to meet
customers' requirements.
Cutting. The Company believes that its domestic cutting facility
provides it with substantial advantages over many of its competitors. Since
1989, the Company has invested in state-of-the-art computerized equipment for
spreading, marking and cutting fabric. The Company's CAD system positions all
component parts of a single garment in close proximity on the same bolt of
fabric to ensure color consistency. This process also enables the Company to
utilize approximately 92% of the fabric. The Company also has invested in
air-table fabric handling equipment that eases the movement of fabric on the
cutting table by the use of forced air through a grid of air ducts on the table
surface. The use of such air-table fabric handling equipment reduces by more
than one-half the number of workers required to handle a bolt of fabric in the
cutting process. In addition, the Company uses three Gerber-brand computerized
cutting systems in its Tampa facility and four Gerber-brand computerized cutting
systems in its El Paso facility. The Tampa cutting systems include
state-of-the-art submerged electrical and vacuum components. The use of such
cutting systems significantly enhances the Company's fabric cutting capacity.
Quality audits in the cutting facility are performed during various stages, from
spreading of fabric through preparation for shipment to independent
manufacturers for assembly.
Assembly. After the component parts are marked and cut, they are
shipped by common carrier to independent foreign manufacturers, principally in
the Dominican Republic and Mexico, for assembly and finishing. The Company
currently uses approximately 17 manufacturers in the Dominican Republic and 22
manufacturers in Mexico that specialize in assembling products on one or more
chassis and adhere to the Company's specific operating procedures. The Company
has used these manufacturers for an average of more than three years and enjoys,
in effect, exclusive relations with 19 of these manufacturers in the Dominican
Republic and Mexico. Several of the Company's independent manufacturers utilize
various equipment, including wrinkle-free processing ovens, owned by the
Company. The Company believes that the Dominican Republic offers the Company
certain competitive advantages, including favorable pricing and better quality
production, a long-standing and relatively stable production network, and much
shorter transportation periods than goods assembled in the Pacific Rim. In
addition, U.S. customs duties programs, such as Section 807, facilitate assembly
in the Caribbean Basin by completely eliminating or substantially reducing the
customs duties on the import of assembled U.S. components.
There are no material formal arrangements between the Company and any
of its contractors, but the Company believes that its relations with its
contractors are generally good. The Company is able to shift its sources of
supply depending upon production and delivery requirements and cost, while at
the same time reducing the need for significant capital expenditures,
work-in-process inventory and a large production work force. The Company
arranges for the assembly or production of its products primarily based on
orders received. The Company has traditionally received a significant portion of
its customers' orders prior to placement of its initial manufacturing orders.
Many of these customer orders may change with respect to colors, sizes,
allotments or assortments prior to the delivery date. The Company utilizes such
orders and its experience to estimate production requirements in order to secure
necessary assembly or manufacturing capacity. The Company inspects prototypes of
each product before production runs are commenced. The Company also performs
random in-line quality control checks during and after assembly before the
garments leave the contractor. The Company currently has 18 and 30 full-time
quality control personnel on-site in the Dominican Republic and Mexico,
respectively.
At the time of the acquisition of Savane in June 1998, Savane owned and
operated two production facilities (one sewing and one finishing) in Costa Rica
and two production facilities (one sewing and one finishing) in Mexico.
Currently, only the sewing plant in Mexico remains in operation. This plant,
which occupies a 73,800 square foot building in Chihuahua, Mexico, employs
approximately 1,120 associates and produces casual pants and shorts.
Labeling, Packaging and Shipping. Under the Company's private brand
programs, upon confirmation of a customer order, the Company picks the
appropriate items from its common inventory. Thereafter, the appropriate tags
and labels, such as pocket flashers, jokers, woven labels, hang tags and leg
tape, are sewn on or applied. The Savane(R), Farah(R) and John Henry(R) branded
products have the appropriate tags and labels sewn on or applied at the assembly
factories. The product is then packaged (e.g., placed on hangers or put in
plastic packaging) and prepared for shipment in accordance with the customer's
specifications. The Company generally ships orders within three days of receipt.
Orders are shipped F.O.B. Tampa or Santa Teresa by customer or common carrier
directly to the customer's individual stores or to its centralized distribution
center. The customer pays the applicable freight charges.
Imports and Import Regulations
The Company presently imports garments under three separate scenarios
having distinct customs and trade consequences: (i) imports of finished goods
(mostly from the Pacific Rim and the Middle East); (ii) imports from the
Caribbean Basin and Central America; and (iii) imports from Mexico.
For direct importation (mostly from the Pacific Rim and the Middle
East), imported garments are normally taxed at most favored nation ("MFN")
tariffs and are subject to a series of bilateral quotas that regulate the number
of garments that may be imported annually into the United States. The tariffs
for most of the countries from which the Company currently imports or intends to
import have been set by international negotiations under the auspices of the
World Trade Organization ("WTO"). These tariffs generally range between 17% and
35%, depending upon the nature of the garment (e.g., shirt, pant), its
construction and its chief weight by fiber. The principal sourcing alternatives
that do not enjoy MFN rates in the Far East are Vietnam and Laos. The Company
does not source from these countries.
In addition to these tariff rates, merchandise from virtually all the
countries from which the Company imports is also subject to bilateral quota
restraints, pursuant to U.S. domestic law or the multi-lateral Agreement on
Textile and Clothing, which is under the auspices of the WTO. Most bilateral
quotas are negotiated on a calendar year basis. After the United States and a
particular country agree to a particular level of exports in a particular quota
category (for instance, cotton men's bottoms (category 347)), the country that
receives the quota has the right to determine the method by which such quota is
assigned to its manufacturers. Some jurisdictions, such as Hong Kong, have a
free market under which quotas are bought and sold. Most countries, however,
assign it to the factories that actually produce the garments. Shipments which
are exported to the United States must, in addition to the usual commercial
documentation, have appropriate and official textile visas, in either an
electronic or paper format, which confirm their quota status. This documentation
must be filed prior to the admission and clearance of the merchandise into the
United States. Accordingly, the Company usually demands that this paperwork be
submitted prior to payment.
The Company also imports garments from countries in the Caribbean Basin
and Central America, most notably the Dominican Republic. Although much
merchandise imported from these jurisdictions is subject to the identical tariff
and quota consequences described above for Far Eastern importation, there are
special circumstances which provide a unique tariff and quota preference for
some merchandise sourced from the Caribbean Basin or Central America. The
principal tariff advantage is the so-called "807" program. Under this program,
merchandise produced under tariff subheading 9802.00.80, HTS, is admitted into
the United States with a substantial tariff reduction. Specifically, this tariff
provision provides a reduction in duty based on the value of exported U.S.
components assembled into a product in a foreign jurisdiction that is
subsequently reimported into the United States. In essence, the duty reduction
is equal to the value of U.S. components incorporated into these assembled goods
plus southbound international freight and insurance. For apparel products, such
U.S. components normally consist of cut-to-shape U.S. fabric parts, finishing
and trim (buttons, thread, etc.). In addition, if the fabric which is cut to
create the cut component parts is also knitted, woven or formed in the United
States, there is a special quota provision which provides for more liberalized
access to the U.S. marketplace. This special quota provision is applicable only
to certain Caribbean Basin, Central American and northern Latin American
countries that have signed special agreements with the United States. Under the
terms of these agreements, such products, known in the trade as "807A" or "Super
807" or "Guaranteed Access Level" products, are controlled through a much more
liberal quota system. Accordingly, a country such as the Dominican Republic
would have a regular quota for men's cotton bottoms produced through a normal
cut, make and trim operation or through the traditional 807 process; at the same
time, it would have a much bigger and, therefore, more liberal quota for
merchandise produced from U.S. cloth under this Super 807 or 807A program. The
Company produces significant garments under one or both of these particular
programs. In those circumstances where garments qualify for both preferences,
"807" and "807A," the merchandise is accorded both substantial and significant
quota and tariff advantages over Pacific Rim, Middle Eastern or non-qualifying
Western hemisphere goods.
The Company also imports finished goods from Mexico under the North
American Free Trade Agreement, commonly known as NAFTA. Under NAFTA, merchandise
that qualifies is accorded reduced or duty-free access, depending upon the type
of merchandise selected. The key requirement for NAFTA qualification for such
garments is that the yarn, cloth, cut, sew and finish of the garments all take
place within North America. This is commonly known as the "yarn-forward rule."
Merchandise produced pursuant to these rules enters the United States at a
preferential or at a zero rate and is not subject to any quota.
In addition to the regular NAFTA program, certain imports made by the
Company are also subject to a tariff preference that was created and enacted as
part of the NAFTA-enabling legislation. This tariff provision, subheading
9802.00.90, HTS, provides for immediate duty-free and quota-free entry into the
United States from Mexico of garments made from components which are cut to
shape in the United States from U.S. knit, woven or formed cloth. This
duty-free, quota-free entry would be available for pant products sourced from
U.S. components cut from U.S. knitted/woven fabric. This merchandise, therefore,
has an even more favorable treatment than merchandise being imported from the
Caribbean Basin. The Company currently imports a limited amount of such
merchandise from Mexico.
Finally, non-NAFTA qualifying goods may be imported from Mexico. Such
merchandise could be imported at reduced duty rates under the 807 (9802.00.80)
program (cut in the U.S.), or special tariff rate quotas called "TPLs."
Otherwise, it is subject to full duty. Such merchandise may also be subject to
Mexican quotas that are effective for some products until 2004.
See also Note 13 to Notes to Consolidated Financial Statements for
information regarding financial information about foreign and domestic
operations and export sales.
Personnel
At November 28, 1998, the Company had 2,622 associates, including 26 in
the Dominican Republic, 1,118 in Mexico, 80 in the United Kingdom, 28 in
Australia, and 11 in New Zealand. Of the total, approximately 484 hold executive
and administrative positions, approximately 27 are engaged in design and
merchandising, approximately 1,514 are engaged in production (e.g., marking,
cutting, assembly and labeling), approximately 110 are engaged in sales,
approximately 439 are engaged in distribution and approximately 48 are engaged
in quality control. Approximately 100 of Savane's domestic employees are members
of the Union of Needletrades Industrial and Textile Employees. The collective
bargaining agreement with these employees expires in February 2000.
Approximately 750 of Savane's employees in Mexico are members of Sindicato de
Trabajadores de la Industria Costurera, Similaries y Conexes, C.T.M. The
collective bargaining agreement with these employees expires in December 1998.
The Company considers its relations with its employees to be generally good.
The Company is committed to developing and maintaining a well-trained
workforce. The Company provides or pays for in excess of 20,000 hours of
continuing education annually for its employees on subjects ranging from
computers to foreign languages. The Company is equally committed to the
well-being of its employees. The Company offers its full-time employees and
their families a comprehensive benefits package that includes a 401(k) plan, a
choice of group health insurance plans, term life insurance (with an option to
purchase additional coverage), a choice of dental plans, and a vision plan. The
Company also offers tuition reimbursement for business-related courses and pays
a retirement bonus to persons employed by the Company for twenty-five years or
more. The Company maintains a recreation area and health club facilities in
Tampa for the use and enjoyment of its employees and their families. The Company
also enjoys long-standing relationships with certain of its independent assembly
contractors in the Dominican Republic and Mexico and has contributed financial
resources to improving conditions for their employees.
Management Information Systems
The Company believes that advanced information processing is important
to maintain its competitive position. Consequently, the Company continues to
upgrade its management information systems in order to maintain better control
of its inventory and to provide management with information that is both more
current and more accurate than was available previously. The Company's
management information systems provide, among other things, comprehensive order
processing, production, accounting and management information for the marketing,
manufacturing, importing and distribution functions of the Company's business.
The Company has purchased and implemented a software program that enables the
Company to track, among other things, orders, manufacturing schedules, inventory
and unit sales of its products. In addition, to support the Company's flexible
inventory replenishment program, the Company has an EDI system through which
customer inventories can be tracked and orders automatically placed by the
retailer with the Company. (See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources). The Company is in the process of implementing SAP/AFS, an
enterprise-wide software package that will serve the Tampa facilities. The
Company expects to complete the implementation during fiscal 1999. The Company
recently implemented a new enterprise-wide software package that will serve the
El Paso and Santa Teresa facilities.
Competition
The apparel industry is highly competitive and the Company competes
with numerous apparel manufacturers, including brand name and private label
producers, and retailers that have established, or may establish, internal
product development and sourcing capabilities. The Company's main competitors
are Levis Straus & Co., Haggar Corp., and other private label producers. The
principal markets in which the Company competes are the United States, United
Kingdom, and Southeast Asia. The Company's products also compete with a
substantial number of designer and non-designer product lines. Many of the
Company's competitors and potential competitors have greater financial,
manufacturing and distribution resources than the Company. The Company believes
that it competes favorably on the basis of quality and value of its programs and
products, price, the production flexibility that it enjoys as a result of its
cutting and labeling capabilities and its sourcing network, and the long-term
customer relationships it has developed. Nevertheless, any increased competition
from manufacturers or retailers, or any increased success by existing
competition, could result in reductions in unit sales or prices, or both, which
could have a material adverse effect on the Company's business and results of
operations.
Trademarks and Licenses
The Company holds or has applied for 119 U.S. trademark registrations
covering its various brand names. The Company believes that its Savane(R),
Farah(R), Flyers?, and Bay to Bay(R) trademarks are material to its business.
The word marks Savane(R), Farah(R), and Bay to Bay(R) are registered with the
United States Patent and Trademark Office. These registrations expire in 2007,
2005, and 2001, respectively, and are subject to renewal. Pursuant to separate
license agreements, the Company has the exclusive rights to use (i) the John
Henry(R) trademark with respect to men's bottoms and coats distributed or sold
in the United States, its territories and possessions, U.S. Military bases
worldwide and Canada, and (ii) the Bill Blass(R) trademark with respect to
casual pants and shorts, jeans and certain pre-hemmed dress pants distributed or
sold in the United States, Mexico and Canada and (iii) the Generra(R) trademark
with respect to the design, manufacture and wholesale in the United States and
Canada of men's casual pants, shorts and dress slacks (excluding open bottom
construction) and men's jean-constructed bottoms made of denim or heavy weight
fabrics (excluding open bottom construction). These licenses expire in 2003,
2000 and 1999, respectively. The license agreement with respect to the
Generra(R) trademark is subject to two renewal options that expire September 30,
2002 and 2005, respectively. The license agreement with respect to the John
Henry trademark is subject to seven renewal options which extend the expiration
date through 2038. The Company believes that it has the exclusive use of all of
its owned and licensed trademarks.
Credit Facilities
The Company needs significant working capital to purchase inventory and
finance accounts receivable and, consistent with industry practice, is often
required to post letters of credit when placing an order with certain
international manufacturers. Currently, a substantial portion of the Company's
working capital requirements are met through a new $110 million credit facility
with a syndicate of banks (the "Facility"), which expires in June 2003.
Factoring of Accounts Receivable
Historically, the Company has sold substantially all of its trade
accounts receivable to a factor that assumes virtually all of the credit risk
with respect to collection of such accounts. The factor pays the Company the
receivable amount upon the earlier of (i) receipt by the factor of payment from
the Company's customer or (ii) 120 days past the due date for such payment. The
factor approves the credit of the Company's customers prior to sale. If the
factor disapproves or limits a sale to a customer and the Company decides to
proceed with the sale, the Company bears some credit risk. The factoring
agreement expires in September 2001, at which time the Company intends to renew
or replace it. At the time of the acquisition of Savane, the Company established
a factoring arrangement for the sales of Savane under terms that are similar to
those of the Company.
Seasonality
Historically, the Company's business has been seasonal, with slightly
higher sales and income in the second and fourth fiscal quarters, just prior to
and during the two peak retail selling seasons for spring and fall merchandise.
In addition, certain of the Company's products, such as shorts and corduroy
pants, tend to be seasonal in nature. In the event such products represent a
greater percentage of the Company's sales in the future, the seasonality of the
Company's sales may be increased.
Backlog
At October 3, 1998, including the orders of Savane, the Company had
unfilled customer orders of approximately $292.8 million. All of such orders are
scheduled for shipment in Fiscal 1999. At September 27, 1997, the Company had
unfilled customer orders of approximately $135.8 million. Fulfillment of orders
is affected by a number of factors, including revisions in the scheduling of
manufacture and shipment of the product which, in some instances, depends on the
demands of the retail consumer. Accordingly, a comparison of unfilled orders
from period to period is not necessarily meaningful, and the level of unfilled
orders at any given time may not be indicative of eventual actual shipments.
Executive Officers of the Registrant
The following table provides the names and ages of the Company's
executive officers, and the positions and offices currently held by each of
them:
Name Age Position(s)
William W. Compton 55 Chairman of the Board, Chief Executive Officer and Director
Richard J. Domino 50 President
Michael Kagan 59 Executive Vice President, Chief Financial Officer,
Secretary and Director
William W. Compton has served as Chairman of the Board, Chief Executive
Officer and a Director of the Company since November 1989. He also served as
President of the Company from November 1989 to November 1994. Mr. Compton has
over 30 years of experience in the apparel industry. Prior to joining the
Company, he served as President and Chief Operating Officer of Munsingwear,
Inc., an apparel manufacturer and marketer, President/Executive Vice President
of Corporate Marketing for five apparel divisions of McGregor/Faberge
Corporation and President, U.S.A. and a director of Farah Manufacturing
Corporation.
Richard J. Domino joined the Company in 1988 and has served as
President of the Company since November 1994. Mr. Domino served as Senior Vice
President of Sales and Marketing from January 1994 to October 1994 and Vice
President of Sales from December 1989 to December 1993. He has over 25 years
experience in apparel-related sales and marketing. Before joining the Company,
Mr. Domino was employed by Thompson Sportswear, Inc., a men's apparel
manufacturer and marketer, as its Sales Manager for the Northwest Territory, and
by Haggar Corp., a men's apparel manufacturer and marketer, as its New Jersey
Salesman.
Michael Kagan has served as Executive Vice President, Chief Financial
Officer, Secretary and a Director of the Company since November 1989. He was
also Treasurer of the Company from November 1989 to January 1998. Mr. Kagan has
more than 32 years experience in the apparel industry. Prior to joining the
Company, Mr. Kagan served as Senior Vice President of Finance for Munsingwear,
Inc. and as Executive Vice President and Chief Operating Officer of Flexnit
Company, Inc., a manufacturer of women's intimate apparel.
Item 2. Properties
The Company's corporate headquarters are located in Tampa, Florida and
is owned by the Company. The Company considers both its domestic and
international facilities to be suitable and adequate and to have sufficient
productive capacity for current operations. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors
Affecting the Company's Business and Prospects.")
The following table reflects the general location, use and approximate
size of the Company's significant real properties currently in use:
Approximate Owned/
Location Use Square Footage Leased (1)
- ------------------------------ ------------------------------------------- ------------------ ------------
Tampa, Florida Corporate Offices/Distribution Warehouse 190,000 Owned
Tampa, Florida Fabric cutting facility 110,000 Owned
Chihuahua, Mexico Garment manufacturing plant 73,800 Owned
San Jose, Costa Rica Garment manufacturing plant 124,000 Owned (2)
Cartago, Costa Rica Garment manufacturing plant 77,000 Owned (2)
Auckland, New Zealand Office/Warehouse 9,000 Owned
El Paso, Texas Administrative office 43,500 Leased
El Paso, Texas Fabric cutting facility 201,000 Leased
Sydney, Australia Office/Warehouse 29,000 Leased
Suva, Fiji Two garment manufacturing plants 35,000 Leased (3)
Witham, United Kingdom Office/Warehouse 57,000 Leased
Santa Teresa, New Mexico Distribution Warehouse 250,000 Leased
Juarez, Mexico Garment manufacturing plant 73,500 Leased (2)
Queretero, Mexico Warehouse 32,700 Leased (2)
(1) See Note 6 of Notes to Consolidated Financial Statements for a discussion of lease terms.
(2) Currently unoccupied.
(3) The facilities are leased by a 50% joint venture of which the Company is a party.
Item 3. Legal Proceedings
On March 21, 1997, Levi Straus & Co. brought suit against the Company
in United States District Court for the Northern District of California. The
complaint alleges, among other things, that several marks in the Company's
family of Flyers(TM) trademarks and certain trade dress used in the labeling and
packaging of the Company's Flyers(TM) and Bay to Bay(R) products infringe upon
certain of plaintiff's proprietary trademark and trade dress rights in violation
of federal Lanham Act and California law. The complaint seeks injunctive relief,
as well as treble damages and attorneys' fees. Levi Strauss & Co. has also filed
opposition proceedings in the United States Patent and Trademark Office against
the Company's trademark applications for two marks in the Flyers(TM) family of
marks. These opposition proceedings have been suspended pending resolution of
the litigation. In addition, plaintiff had indicated that it believes that
certain trade dress used in the labeling and packaging of the Company's Bill
Blass(R) brand dress slacks also infringes upon certain of plaintiff's
proprietary trade dress rights. In an attempt to limit the Company's liability,
if any, with respect to such alleged infringement, the Company has unilaterally
altered the trademark and trade dress which are currently the subjects of this
litigation. The Company previously reported that the parties appeared to be very
close to finalizing a settlement agreement; however, a final settlement
agreement was not ultimately agreed upon and the parties have re-commenced
litigation activities. The parties are continuing settlement discussions while
the litigation ensues. The Company intends to vigorously defend these claims,
but remains open to reasonable settlement terms. Given the vagaries of
litigation, the Company cannot predict the outcome of this suit. If plaintiff
prevails, the outcome could have a material adverse effect on the Company's
business, results of operations or financial condition.
As previously reported, on July 3, 1997, Out-of-Mexico Apparel, Ltd.
brought suit against the Company in California Superior Court for, among other
things, breach of contract, breach of a non circumvention agreement, and
violation of the California Unfair Business Practices Act. The complaint alleged
that the Company entered into contracts for the manufacture of apparel with
certain manufacturers in contravention of a customer non-disclosure and
non-circumvention agreement between Out-of-Mexico Apparel, Ltd. and the Company.
The complaint sought compensatory damages and pre-judgement interest, punitive
damages and the costs of suit. The Company has reached a settlement with the
plaintiffs in November 1998 for an amount that did not materially affect the
Company's operating results.
On December 30, 1997, the Company brought suit against Bremen Trousers
Inc. ("Bremen") in the State Circuit Court in Tampa, Florida seeking a
declaratory judgement that the Company has the right to manufacture and sell
casual pants with "busted seams" using the Bill Blass(R) label pursuant to a
license agreement (the "Pincus License Agreement") between the Company and
Pincus Bros., Inc. ("Pincus"). Bremen is a licensee of Pincus under a separate
license agreement. In March 1998, the Company filed an amended complaint, which
added Pincus as a defendant, alleging breach of contract against Pincus and
tortuous interference with business relations against Bremen. Also in March
1998, Pincus and Bremen filed a separate complaint against the Company,
alleging, among other things, that the Company violated the terms of the Pincus
License Agreement by manufacturing "busted seam" pants. Pincus and Bremen sought
unspecified damages and other non-monetary relief. The Company reached a
settlement agreement in October 1998 with regard to this litigation that did not
require that the Company pay any monetary amounts.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been traded on The Nasdaq National
Market under the symbol "TSIC" since its initial public offering on October 28,
1997. The initial public offering price of the Common Stock was $12.00 per
share. Prior to such time, there was no established public trading market for
the Company's Common Stock. At December 15, 1998 there were approximately 115
record holders of the Company's Common Stock, and the Company estimates that
there were approximately 1,000 beneficial holders as of the same date. The
following sets forth the quarterly high and low last sale prices per share of
the Common Stock as reported by the Nasdaq National Market for the last fiscal
year.
Fiscal Year Ended
October 3, 1998 High Low
- ------------------------------- ---------------- -----------------
First Quarter 13 1/4 10
Second Quarter 10 1/8 14 1/8
Third Quarter 23 3/8 13 5/8
Fourth Quarter 24 3/4 16 3/4
The transfer agent for the Common Stock is Firstar Trust Company,
Milwaukee, Wisconsin.
The Company has not declared or paid any cash dividends on the Common
Stock since 1989. The Company currently anticipates that all of its earnings
will be retained for development and expansion of the Company's business and
does not anticipate declaring or paying any cash dividends in the foreseeable
future. Moreover, each of the new senior credit facility, (the "Facility") and
the indenture (the "Indenture") underlying the 11% Senior Subordinated Notes due
2008 (the "Notes") contains a covenant expressly prohibiting the payment of any
cash dividends. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources," and Note 5
to the Consolidated Financial Statements.")
Item 6. Selected Financial Data
The following selected financial data (in thousands, except share and
per share data) are derived from the consolidated financial statements of the
Company for each of the five years in the period ended October 3, 1998. These
consolidated financial statements have been audited and reported upon by Ernst &
Young LLP, independent certified public accountants.
Fiscal Year Ended
-----------------------------------------------------------------------
October 3, September 27, September 28, September 30, October 1,
1998 1997 1996 1995 1994
Statement of Income Data:
Net sales $263,976 $151,692 $117,355 $110,064 $100,359
Gross profit 68,889 36,055 26,223 22,206 24,682
Selling, general and administrative
expenses 43,204 19,443 15,189 15,060 14,291
Operating income 25,685 16,612 11,034 7,146 10,391
Interest expense 6,866 2,889 2,498 3,160 2,115
Income before income taxes 17,283 13,176 7,916 2,985 8,591
Net income 10,802 8,269 5,171 2,160 4,978
Net income per common share - 1.43 1.37 0.86 0.36 0.83
diluted
Weighted average number of shares
used in the calculation - 7,550,000 6,015,000 6,015,000 6,015,000 6,015,000
diluted (1)
At
-----------------------------------------------------------------------
October 3, September 27, September 28, September 30, October 1,
1998 1997 1996 1995 1994
Balance Sheet Data:
Working capital $107,397 $30,234 $25,483 $31,655 $23,600
Total assets 297,476 69,658 63,415 55,237 52,023
Long-term debt and obligations
under capital leases 171,494 24,055 24,162 27,175 20,973
Shareholders' equity 50,964 26,651 18,382 13,211 11,051
(1) Computed on the basis described in Notes to Consolidated Financial Statements
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company manages the production of substantially all of its products
utilizing Company-owned facilities in Tampa, Florida and El Paso, Texas and
independent assembly manufacturers located in the Dominican Republic and Mexico.
Savane currently produces a limited amount of finished goods in a company-owned
manufacturing facility in Mexico. The Company also sources finished goods from
independent suppliers. For goods assembled by independent manufacturers, the
Company purchases and inventories all of its raw materials and cuts its fabric
in it's Tampa and El Paso cutting facilities based on expected customer orders.
The Company ships cut fabric parts and other product components via common
carrier to the independent manufacturers, who assemble components into finished
garments (except for labeling and packaging in the case of private brand
products) and perform certain finishing processes. The Company pays its
independent manufacturers based on a specified unit price for actual
first-quality units produced. Accordingly, a substantial portion of the
Company's production labor and overhead is variable. The Company has no material
contractual arrangements with its manufacturers. The Company ships assembled
goods from the Dominican Republic and Mexico to its Tampa and Santa Teresa, New
Mexico distribution centers via common carrier. Upon receipt of a customer order
confirmation, the Company ships orders to customers or, in the case of private
brand products, attaches designated labels and point-of-sale packaging and then
ships orders to customers.
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the Company's
consolidated financial statements and notes thereto.
Results of Operation
As a result of the acquisition of Savane on June 10, 1998, the fiscal 1998
results of operations may not be comparable to prior years. The following table
sets forth, for the periods indicated, selected items in the Company's
consolidated statements of operations expressed as a percentage of net sales:
Year Ended
----------------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 73.9 76.2 77.7
---- ---- ----
Gross profit 26.1 23.8 22.3
Selling, general and
administrative expenses 16.4 12.8 12.9
---- ---- ----
Operating income 9.7 11.0 9.4
Interest expense 2.6 1.9 2.1
Bridge loan funding fee 0.2 -- --
Other expense, net 0.4 0.4 0.6
--- --- ---
Income before income taxes 6.5 8.7 6.7
Provision for income taxes 2.4 3.2 2.3
--- --- ---
Net income 4.1% 5.5% 4.4%
==== ==== ====
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales for Fiscal 1998 were $264.0 million as compared to
$151.7 million for Fiscal 1997, an increase of $112.3 million or 74.0%. The
increase was due to an increase in units shipped and an increase in average
selling price per unit, both of which were caused by the inclusion of Savane's
operations since the date of acquisition as well as increased market penetration
and brand acceptance.
Gross Profit. Gross profit for Fiscal 1998 was $68.9 million or 26.1%
of net sales as compared with $36.1 million or 23.8% of net sales for Fiscal
1997. The increase in gross margin was driven by a change in mix to higher
margin products caused primarily by the inclusion of Savane's higher margin
branded product sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Fiscal 1998 were $43.2 million, or 16.4% of net
sales, as compared to $19.4 million, or 12.8% of net sales for Fiscal 1997. The
increase in selling, general and administrative expenses was primarily due to
higher advertising and brand support related expenses as well as higher general
and administrative expenses associated with the Savane operations.
Interest Expense. Interest expense for Fiscal 1998 was $6.9 million as
compared to $2.9 for Fiscal 1997. The increase was due to the increase in
average outstanding borrowings caused by the acquisition of Savane, including
Savane's outstanding borrowings as of the date of the acquisition and the
Company's issuance of $100 million of the Notes, the proceeds of which were used
to finance the acquisition of Savane.
Bridge Loan Funding Fee. The Company entered into a $100 million bridge
financing facility to finance the Savane acquisition until the closing of the
offering of $100 million of the Notes. The bridge loan funding fee of $500,000
was incurred to originate the bridge financing.
Income Taxes. The Company's effective tax rate for Fiscal 1998 was
37.5% as compared with 37.2% in Fiscal 1997.
Net Income. As a result of the above factors, net income for Fiscal
1998 was $10.8 million, or 4.1% of net sales, as compared to $8.3 million, or
5.5% of net sales, for Fiscal 1997.
Fiscal 1997 Compared To Fiscal 1996
Net Sales. Net sales for Fiscal 1997 were $151.7 million as compared to
$117.4 million for Fiscal 1996, an increase of $34.3 million, or 29.3%. This
increase was attributable to a 27% increase in the number of units shipped and a
2% increase in the average selling price per unit. These increases were
primarily the result of increased market penetration and brand acceptance.
Gross Profit. Gross profit for Fiscal 1997 was $36.1 million, or 23.8%
of net sales, as compared with $26.2 million, or 22.3% of net sales, for Fiscal
1996. The increase in gross profit percentage resulted primarily from a
significant reduction in the level of markdowns. During the first several weeks
of Fiscal 1996, a significant number of orders were canceled due to the soft
retail market experienced by most major retailers. In an effort to control the
cost of rising inventories and in anticipation of a continued weak retail
market, the Company sold products below its normal selling prices and in some
cases below its cost. Also, the Company recorded additional markdown allowances
for any remaining excess inventory. During the latter part of Fiscal 1996, the
retail market strengthened and the level of markdowns decreased significantly.
This trend continued during Fiscal 1997 and the gross profit percentage returned
to historical levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for Fiscal 1997 were $19.4 million, or 12.8% of net
sales, as compared to $15.2 million, or 12.9% of net sales, for Fiscal 1996. The
increase in selling, general and administrative expenses was principally due to
the overall increase in the level of operations of the Company. The principal
components of the increase included $590,000 in distribution center labor,
$370,000 in depreciation and occupancy costs related to the Company's new
distribution center, $520,000 in commissions and selling costs, $450,000 in
information technology costs, $515,000 in merchandising costs, $330,000 in
certain legal expenses, and $330,000 in bad debts related to a customer
bankruptcy.
Interest Expense. Interest expense for Fiscal 1997 was $2.9 million as
compared to $2.5 million for Fiscal 1996. The increase in interest expense was
the result of higher average outstanding borrowings, offset in part by a lower
average interest rate due to a re-negotiation of the Credit Agreement in
November 1996.
Income Taxes. The Company's effective income tax rate for Fiscal 1997
was 37.2% as compared with 34.7% in the comparable period in Fiscal 1996. The
increase in the effective rate for Fiscal 1997 was primarily due to the Company
receiving in Fiscal 1996 a benefit for previously unrecognized losses of an
international subsidiary, which was closed in Fiscal 1995.
Net Income. As a result of the above factors, net income for Fiscal
1997 was $8.3 million, or 5.5% of net sales, as compared to $5.2 million, or
4.4% of net sales, for Fiscal 1996.
Liquidity and Capital Resources
Prior to the acquisition of Savane, the Company's primary capital
requirements have been the funding of the growth in operations and capital
expenditures. The Company has historically financed its growth in sales and the
resulting increase in inventory and receivables through a combination of
operating cash flow and borrowings under its senior credit facility.
On June 10, 1998, the Company closed on the Facility, which provides
for borrowings of up to $110 million, subject to certain borrowing base
limitations. The Facility was obtained in conjunction with the Company's
acquisition of Savane and was used to refinance indebtedness then outstanding
under the Company's previous senior credit facility, to refinance indebtedness
of Savane, to pay fees incurred in connection with the acquisition of Savane and
with the Facility, and for general corporate purposes. Borrowings under the
Facility bear variable rates of interest (8.4% at October 3, 1998) and are
secured by substantially all of the Company's domestic assets. The Facility
matures in June 2003. As of October 3, 1998, excluding outstanding letters of
credit of approximately $12.8 million, an additional $30.1 million was available
for borrowings under the Facility.
In addition, on June 10, 1998, the Company closed a $100 million bridge
financing facility (the "Bridge Facility"). Borrowings of $100 million under the
Bridge Facility and approximately $70.4 million under the Facility were incurred
to finance the purchase price for the acquisition of Savane, the repayment of
indebtedness outstanding under the Company's and Savane's former senior credit
facilities and the redemption of $1.7 million of Savane's 8.50% convertible
subordinated debentures due 2004. As discussed below, debt under the Bridge
Facility was repaid in full with the $95.6 million of net proceeds from the
offering and sale of the Notes, together with borrowings of approximately $4.4
million under the Facility. A funding fee of $500,000 was paid to the lender
under the Bridge Facility, which was amortized to expense over the 14-day life
of the loan.
On June 24, 1998, the Company closed the issuance and sale of $100
million of the Notes through a private placement. Under the terms of the
indenture agreement underlying the Notes, the Company will pay semi-annual
interest at the rate of 11% for ten years at which time the entire principal
amount is due. The net proceeds from the Notes were used to repay a portion of
the borrowings outstanding under The Bridge Facility.
Effective February 1, 1998, the Company negotiated a reduction in the
interest rate applicable to its real estate loan. The loan now bears annual
interest at 7.38%, a decrease of 1.5% from the previous rate of 8.88%. The new
rate is fixed through July 18, 2002, at which time the rate will be adjusted in
accordance with the provisions of the loan agreement.
The Company's credit agreements contain significant financial and
operating covenants, including requirements that the Company maintain minimum
net worth levels and certain financial ratios, prohibitions on the ability of
the Company to incur certain additional indebtedness or to pay dividends, and
restrictions on its ability to make capital expenditures. The Company is
currently in compliance with all covenants under its credit agreements.
Pursuant to two separate factoring agreements (the "Factoring
Agreements"), the Company factors substantially all of its accounts receivable.
The Factoring Agreements provide that the factor will pay the Company an amount
equal to the gross amount of the Company's accounts receivable from customers,
reduced by certain offsets, including among other things, discounts, returns and
a commission payable by the Company to the factor. The commission ranges from
.18% to .28% of the gross amount factored. The factor subjects all sales to its
credit review process and assumes 99.9% of the credit risk for amounts factored
pursuant to the Factoring Agreements. Funds are transferred to reduce
outstanding borrowings under the Facility once payment is received from the
factor. The factor pays the Company the receivable amount upon the earlier of
(i) receipt by the factor of payment from the Company's customer or (ii) 120
days past the due date for such payment. The Factoring Agreements expire in
2001.
As a result of the acquisition of Savane in June 1998, certain
consolidation and cost savings activities have transpired that will impact the
Company's capital resources. Specifically, the Company has chosen to exit
certain owned or leased facilities or dispose of certain operations. The sale of
owned facilities will generate cash while the payment of lease termination costs
or other exit costs (including severance) will utilize cash. In November 1998,
the Company disposed of Savane's 32 retail outlet stores to an unrelated third
party. Under the terms of the sale, the buyer paid the Company approximately
$1.3 million in cash, received approximately $4.6 million in assets, and assumed
approximately $5.3 million in outstanding lease obligations.
During Fiscal 1998, the Company used $1.6 million of cash in its
operations. This was primarily the result of net income of $10.8 million (which
included non-cash charges of approximately $4.8 million) and an increase in
accounts payable of $2.6 million, offset by an increase in accounts receivable
and prepaid expenses and other assets of $13.5 million and $7.9 million,
respectively.
The Company has historically financed its capital expenditures through
a combination of operating cash flow and long-term borrowings. Capital
expenditures were $6.9 million and $5.2 million for Fiscal 1998 and Fiscal 1997,
respectively. The expenditures primarily relate to the upgrade or replacement of
the Company's existing equipment and computer systems including hardware and
software and consulting fees related to the new system.
During Fiscal 1999, the Company anticipates capital expenditures to
total approximately $10 million include completing the installation of its new
computer system, the upgrading or replacement of other ancillary existing
computer systems and the upgrading or replacement of certain existing equipment.
Additionally, due to increases in volume, the Company intends to add
approximately 90,000 square feet to its distribution center in Tampa.
At October 3, 1998 and at September 27, 1997, the Company had working
capital of $107.4 million and $30.2 million, respectively. The increase in
working capital was due primarily to the working capital acquired with the
acquisition of Savane. Additionally, working capital was impacted by a $13.5
million increase in accounts receivable. The Company expects its working capital
needs will continue to fluctuate based on seasonal increases in sales and
accounts receivable and seasonal decreases in trade accounts payable.
The Company received $17.3 million in proceeds from its initial public
offering in October 1997. Of the proceeds, $3.9 million was used to redeem the
Company's preferred stock, $10.6 million was used to reduce amounts outstanding
under the Facility and the remainder was invested for use in operations.
The Company believes that the combination of existing working capital,
funds anticipated to be generated from operating activities and the borrowing
availability under the current and anticipated credit agreements will be
sufficient to fund both its short-term and long-term capital and liquidity
needs.
Impact of Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards 130, "Reporting Comprehensive Income." Statement
130 establishes standards for reporting and display of comprehensive income and
its components in financial statements. Comprehensive income, as defined, is the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. The provisions of
Statement 130 are effective for periods beginning after December 15, 1997 and
adoption of Statement 130 is not expected to have a material impact on the
consolidated financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards 131, "Disclosures about Segments of an Enterprises and Related
Information." Statement 131 establishes standards for segment reporting and
disclosure of additional information on products and services, geographic areas,
and major customers. The Company is assessing implementation of the disclosure
requirements of this standard which is effective for periods beginning after
December 15, 1997. The adoption of Statement 131 may result in additional
financial statement disclosure.
Impact of the Year 2000 Issue
The "Year 2000 Issue" is the result of computer programs and systems
having been designed and developed to use two digits, rather than four, to
define the applicable year. As a result, these computer programs and systems may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
In fiscal 1998, The Company completed the evaluation and modification
of all of its information techno9logy systems with regard to the Year 2000
issue. The amount expensed by the Company to accomplish this process was not
material to the operations or financial condition of the Company, and has been
included in its entirety in the results of operations for fiscal 1998. The
Company believes that all of its information technology systems are now Year
2000 compliant.
Based on assessments made during fiscal 1996 and 1997, Savane decided
to replace its entire inventory management, warehouse distribution and order
processing systems so that those systems will be Year 2000 compliant. The new
systems became operational in early December 1998 and therefore, all existing
systems are now Year 2000 compliant.
Should there be any portions of the Company's information systems that
were overlooked in the remediation process, or become susceptible to the Year
2000 subsequent to such remediation as the result of interaction with supplier
or customer systems, or otherwise, the impact could be felt throughout the
Company's main operating system which includes subsystems related to customer
analysis, order processing, planning, procurement, production and sales.
Information technology plays a vital role in almost every aspect of the
Company's operations. See "Business - Management Information Systems." In
addition, the Year 2000 issue would strike at a time of the calendar year that
is one of the Company's busiest in terms of production and distribution. While
the Company believes that it will be able to sustain normal operations even
without any of its information technology systems, this could only continue for
a short period of time. The resources necessary to address any Year 2000 issue
which may arise will not be available entirely from internal personnel, and the
Company will be forced to contract with third-party consultants. At this time,
the Company does not have any such third-party consultants under contract and
does not anticipate that it will enter into any such contracts prior to the end
of calendar 1999. Further, the Company does not anticipate that it will
stockpile raw materials or inventory in advance of the end of calendar 1999.
The worst case scenario for the Company would occur if the new
management information system currently being implemented was not operational at
December 31, 1999. To plan for this possibility, and as noted above, the
Company" current systems have been modified and are now Year 2000 compliant.
Based on the Company" current Year 2000 compliant status, the Company believes a
contingency plan is not necessary.
The Company has communicated with all significant suppliers and large
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issues. As of the date
of this report, substantially all of the Company's suppliers and customers have
informed the Company that their systems are or will be Year 2000 compliant
within the next six months. If certain suppliers were not able to remediate
their own Year 2000 issues, it could affect the Company's ability to order and
receive raw materials shipments on a timely basis, which will have a direct and
adverse impact on the Company's production schedule. This will then affect the
Company's ability to fill customer orders on a timely basis, the result of which
may be a loss of customer sales. In addition, if the Company's customers do not
remediate their systems, it could affect the Company's ability to receive order
information through EDI and receive POS inventory information, both of which
will also have a direct and adverse impact on the Company's sales.
Seasonality
Historically, the Company's business has been seasonal, with slightly
higher sales and income in the second and fourth fiscal quarters, just prior to
and during the two peak retail selling seasons for spring and fall merchandise.
In addition, certain of the Company's products, such as shorts and corduroy
pants, tend to be seasonal in nature. In the event such products represent a
greater percentage of the Company's sales in the future, the seasonality of the
Company's sales may be increased.
Euro Conversion Issue
On January 1, 1999, 11 of the 15 member countries of the European Union
are scheduled to establish fixed conversion rats between their existing
currencies and the Euro and to adopt the Euro as their common legal currency
(the "Euro Conversation"). The Company has begun consideration of the effects of
the Euro Conversation on its operations, but it is currently unsure of the
potential impact that the Euro Conversion will have on its business, financial
condition and results of operations, particularly as the Euro Conversation
relates to the Company's European operations.
Risk Factors Affecting the Company's Business and Prospects
We must successfully integrate Savane into our existing operations to remain
profitable.
The acquisition of Savane resulted in a significant increase in the scope
of our business. Specifically, as a result of the acquisition of Savane, we have
significantly increased the total scale of our operations, including: (i) the
number of our branded and private brand apparel offerings, (ii) the number of
our manufacturing and other operating locations, (iii) the number of our
employees, and (iv) our geographical scope. Management must devote substantial
attention and financial resources to address the coordination of our purchasing,
distribution, manufacturing and warehousing for the combined companies; the
coordination of our sales and marketing operations; and the implementation of
appropriate financial and management systems. Our inability to successfully
integrate Savane in a timely and efficient manner could have a material adverse
affect on our business, results of operations and financial condition.
We expect to realize certain cost savings and business synergies as a
result of our acquisition of Savane. However, realization of these savings and
synergies could be affected by a number of factors beyond our control, such as
general economic conditions, increased operating costs, the response of our
competitors, customers or employees and regulatory developments. There can be no
assurance that we will achieve the expected cost savings and business synergies.
To acquire Savane we incurred a substantial amount of debt that will require
successful future operating performance and financial results and may impose
important limitations on us.
As a result of the acquisition of Savane, we are highly leveraged. The
degree to which we are leveraged will have important consequences, including the
following:
- a substantial portion of our cash flow from operations will be dedicated
to the payment of principal and interest on our debt and will not be
available for other purposes;
- our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be
impaired;
- our leverage may increase our vulnerability to economic downturns and
limit our ability to withstand competitive pressures;
- our ability to capitalize on significant business opportunities may be
limited; and
- our leverage may place us at a competitive disadvantage in relation to
less leveraged competitors.
Our ability to meet our debt service obligations will depend on our future
operating performance and financial results, which will be subject in part to
factors beyond our control. Although we believe that our cash flow will be
adequate to meet our interest and principal payments, there can be no assurance
that we will generate earnings in the future sufficient to cover our fixed
charges. If we are unable to generate earnings in the future sufficient to cover
our fixed charges and are unable to borrow funds from existing credit facilities
or from other sources, we may be required to refinance all or a portion of our
existing debt or to sell all or a portion of our assets. There can be no
assurance that a refinancing would be possible, nor can there be any assurance
as to the timing of any asset sales or the proceeds that we could realize
therefrom. In addition, the terms of the debt restrict our ability to sell
assets and the use of the proceeds therefrom.
If for any reason, including a shortfall in anticipated operating results
or proceeds from asset sales, we were unable to meet our debt service
obligations, we would be in default under the terms of our existing debt. In the
event of such a default, some of our lenders could elect to declare certain debt
to be immediately due and payable, including accrued and unpaid interest, and to
their commitments to provide future funding. In addition, such lenders could
proceed against the collateral securing the debt, which consists of
substantially all of our current and future personal property. Default on our
senior debt obligation could result in a default under our other debt or result
in bankruptcy.
The terms of our existing debt place significant restrictions on our ability to
pursue financial and strategic opportunities.
The terms of our existing debt contain a number of significant covenants
that, among other things, restrict our ability to:
- dispose of assets,
- incur additional debt,
- repay other debt,
- pay dividends,
- make certain investments or acquisitions,
- repurchase or redeem capital stock,
- engage in mergers or consolidations,
or engage in certain transactions with subsidiaries and affiliates,
and
- engage in certain corporate activities.
There can be no assurance that these restrictions will not adversely affect
our ability to finance future operations or capital needs or engage in other
business activities that may be in our best interest. In addition, the terms of
our existing debt require us to maintain compliance with certain financial
ratios. Our ability to comply with such ratios may be affected by events beyond
our control. A breach of any of these terms or our inability to comply with the
required financial ratios could result in our default under the terms of other
debt or result in bankruptcy.
We may not be able to successfully identify, acquire and profitably operate
companies and businesses that are compatible with our operations.
We continually evaluate the potential acquisition of other companies,
brands and producers of complementary product lines. Our search may not yield
any complementary companies or brands, and even if we do find a suitable
acquisition we may not be able to obtain sufficient financing to fund the
purchase. We may not be able to successfully integrate the operations of any
company that we acquire into our own operations and we cannot assure you that
the acquired operation will achieve the results we expected. For example, the
acquired business may not achieve revenues, profits or productiveness at the
same levels as our existing operations. The success of any acquisition will also
depend upon our ability to retain or hire, and then train key personnel.
Acquiring another company or business may also have negative effects on our
business, results of operations and financial condition because our officers and
directors may focus their attention on completing the acquisition, or because
other resources may be diverted to fulfilling the needs of the acquisition.
We compete with other companies who have greater resources than we do
for the opportunities to buy other companies and businesses and to expand our
operations. As a result, even if we do identify a suitable acquisition, we may
lose the acquisition to a competitor who offers a more attractive purchase
price. At this time, we do not have any agreement or arrangement to buy any
other company or business, or to expand our operations.
Our financial success is linked to that of our customers, and to our customers'
commitment to our products.
Our financial success is directly related to the success of our
customers and the willingness of our customers, in particular our major
customers, to continue buying our products. The following chart shows who our
major customers are, and the percentage of our net sales that their purchase of
our products comprises:
Percentage of Our Net Sales
for the Year Ended
Major Customer October 3, 1998
- ---------------------------- -------------------------------
Wal-Mart 23.8%
Price/Costco 10.6%
Phillips-Van Heusen 6.1%
We do not have long-term contracts with any of our customers. Sales to
our customers are generally on an order-by-order basis and are subject to rights
of cancellation and rescheduling by the customer or by us. Accordingly, the
number of unfilled orders at any given time is not indicative of the number that
will eventually be shipped. If we cannot timely fill our customers' orders, our
relationships with our customers may suffer, and this could have a material
adverse effect on us, especially if the relationship is with a major customer.
Furthermore, if any of our major customers experiences a significant downturn in
its business, or fails to remain committed to our programs or brands, then these
customers may reduce or discontinue purchases from us, which would have a
material adverse effect on our business, results of operations and financial
condition. See "Business-Customers and Customer Service."
We are subject to changes in the apparel industry, including changing fashion
trends and consumer preferences.
The apparel industry has historically been subject to cyclical
variations. A recession in the general economy, or any other events or
uncertainties that discourage consumers from spending, could have a significant
effect on our sales and profitability. We believe that our success is largely
dependent on our ability to anticipate and respond promptly to changing consumer
demands and fashion trends in the design, styling and production of our
products. If we cannot gauge consumer needs and fashion trends and respond
appropriately, then consumers may not purchase our products and this would have
a material adverse effect on our business, results of operations, and financial
condition.
Various apparel retailers, some our customers, have in recent years
experienced financial problems. Many have been subject to bankruptcy,
restructuring, or liquidation, while others have consolidated ownership and
centralized buying decisions. This increases our risk of extending credit to
these retailers, and may lead us to reduce or discontinue business with such
customers, or to assume more credit risk relating to their receivables. Either
one of these actions could have a material adverse effect on our business,
results of operations and financial condition. See "Business - Industry."
We compete with manufacturers and retailers in the highly competitive apparel
industry.
We compete with many apparel manufacturers, including brand name and
private label producers and retailers who have, or may have, the capability to
develop their product and source their products internally. Our products are
also in competition with many designer and non-designer product lines. Our
products compete primarily on the basis of price, quality, and our ability to
satisfy customer orders in a timely manner. Our failure to satisfy any one of
these factors could cause our customers to purchase products from our
competitors. Many of our competitors and potential competitors have greater
financial, manufacturing and distribution resources than we do. If manufacturers
or retailers increase their competition with us, or if our current competitors
become more successful in competing with us, we could experience material
adverse effects on our business, results of operations and financial condition.
See "Business - Competition."
Our use of our trademarks and trade dress may subject us to claims of
infringement by other parties.
We use many trademarks in our business, some of which have been
registered with the United States Patent and Trademark Office. We believe these
registered and common law trademarks and other proprietary rights are important
to our competitive position and to our success. The use and registration of our
trademarks and the use of our trade dress are challenged periodically. Levi
Strauss & Co. recently sued us, claiming, among other things, that a TSI
trademark and the trade dress used in the labeling and packaging of certain of
our products infringe on certain proprietary trademark and trade dress rights of
Levi Strauss & Co. The outcome of the litigation cannot be determined at this
time. Nevertheless in an attempt to limit our liability, if any, we have
unilaterally altered the trademark and trade dress which are the subject of the
suit. We cannot assure you, however, that the modifications made to the
trademark and trade dress do not infringe on Levi Strauss & Co.'s rights. It is
possible that Levi Strauss & Co. will continue to seek to recover damages and
attorney's fees from us regarding the use of the trademark and trade dress, or
regarding the use of the trademark and trade dress as modified. See "Business -
Legal Proceedings."
Despite our efforts to the contrary, our trademarks and proprietary
rights may violate the proprietary rights of others. If any of our trademarks or
other proprietary rights were found to violate the proprietary rights of others,
or were subjected to some other challenge, we cannot assure you that we would be
permitted to continue using these trademarks or other proprietary rights.
Furthermore, if we were sued for alleged infringement of another's proprietary
rights, the party claiming infringement might have greater resources than we do
to pursue its claims, and we could be forced to incur substantial costs to
defend the litigation. Moreover, if the party claiming infringement prevails, we
could be forced to pay significant damages, or to enter into expensive royalty
or licensing arrangements with the prevailing party.
Pursuant to licensing agreements, we also have exclusive rights to use
trademarks owned by other companies in promoting, distributing and selling their
products. We have periodically been involved in litigation regarding these
licensing agreements. We cannot assure you that these licensing agreements will
remain in effect, or that they will be renewed. In addition, any future disputes
concerning these licenses may cause us to incur significant litigation costs or
force us to suspend use of the trademarks. See "Business Trademarks and
Licenses."
Our success depends upon our ability to recruit qualified personnel and to
retain senior management.
Our continued success is dependent on retaining our senior management
as well as attracting and retaining qualified management, administrative and
sales personnel. If we lose any members of our senior management, or if we do
not recruit and retain other qualified personnel, then our business, results of
operations and financial condition could be materially, adversely affected. See
"Management."
Fluctuations in the price, availability and quality of the fabrics or other raw
materials we use could increase our cost of sales and reduce our ability to meet
our customers' demands.
The principal fabrics used in our apparel consist of cotton, wool,
synthetic and blended fabrics. The price we pay for these fabrics is mostly
dependent on the market prices for the raw materials used to produce them,
namely cotton, wool, rayon and polyester. Depending on a number of factors,
including crop yields and weather patterns, the market price of these raw
materials may fluctuate significantly. Moreover, only a limited number of
suppliers are available to supply the fabrics at the level of quality we
require. If we have to procure fabrics from sources other than our current
suppliers, the quality of the fabric may be significantly different from that
obtained from our current suppliers. Fluctuations in the price, availability and
quality of the fabrics or raw materials could increase our cost of sales and
reduce our ability to meet our customers' demands. We cannot assure you that we
will be able to pass along to our customers all, or any portion of, any
increases in the prices paid for the fabrics used in the manufacture of our
products. See "Business Production."
We depend upon independent manufacturers in the production of our apparel.
We use independent manufacturers to assemble or produce a substantial
portion of our products. We depend on these manufacturers' ability to finance
the assembly or production of goods ordered and to maintain manufacturing
capacity. We do not exert direct control over these independent manufacturers,
however, and so we may be unable to obtain timely delivery of acceptable
products. We generally do not have long-term contracts with any of these
independent manufacturers. As a result, we cannot be assured of an uninterrupted
supply of our product from our independent manufacturers. If there is an
interruption, we may not be able to substitute suitable alternative
manufacturers because such substitutes may not be available, or they may not be
able to provide us with products or services of a comparable quality, at an
acceptable price or on a timely basis. See "Business - Production."
Our ability to successfully conduct assembly and production operations in
facilities in foreign countries depends on many factors beyond our control.
During Fiscal 1998, almost all of our products were assembled or
produced by independent manufacturers in the Dominican Republic and Mexico. It
is possible that we will experience difficulties with these independent
manufacturers, including reduced production capacity, failure to meet production
deadlines or increases in manufacturing costs as more fully discussed above.
Also, using foreign manufacturers requires us to order products further in
advance to account for transportation time. If we overestimate customer demand,
we may have to hold goods in inventory, and we may be unable to sell these goods
at the same margins as we have in the past. On the other hand, if we
underestimate customer demand, we may not be able to fill orders in time.
Other problems we may encounter by using foreign manufacturers include,
but are not limited to:
o work stoppages;
o transportation delays and interruptions;
o delays and interruptions from natural disasters;
o political instability;
o economic disruptions;
o expropriation;
o nationalization;
o imposition of tariffs;
o imposition of import and export controls;
o changes in government policies.
We also own a number of manufacturing facilities which operate outside
the United States, and this subjects us to additional risks associated with
owning and operating manufacturing facilities abroad. For example, a facility
operated in a foreign country may become subject to that country's labor laws
and government regulations. If the laws are unfavorable to our operations in any
foreign country, we could experience a loss in revenues, customer orders and
customer goodwill.
We are also exposed to foreign currency risk. In the past, most of our
contracts to have goods assembled or produced in foreign countries were
negotiated in United States dollars. If the value of the United States dollar
decreases, then the price that we pay for our products could increase, and it is
possible that we would not be able to pass this increase on to our customers.
See "Business--Production."
Our products that are imported into the United States are subject to certain
restrictions and tariffs.
Most of our import operations are subject to bilateral textile
agreements between the United States and a number of other countries. These
agreements establish quotas for the amount and type of goods that can be
imported into the United States from these countries. These agreements allow the
United States, in certain circumstances, to impose restraints at any time on the
importation of additional or new categories of merchandise. Future bilateral
textile agreements may also contain similar restraints. Our imported products
are also subject to United States customs duties. The United States and the
countries in which we manufacture our products may adjust quotas, duties,
tariffs or other restrictions currently in effect. There are no assurances that
any adjustments would benefit us. These same countries may also impose new
quotas, duties, tariffs or other restrictions. Furthermore, the United States
may bar imports of products that are found to be made by convicts, or forced or
indentured labor. The United States may also withdraw the "most favored nation"
status of certain countries, which could result in the imposition of higher
tariffs on products imported from those countries. All of these changes could
have a material adverse effect on our business, results of operations and
financial condition. See "Business - Imports and Import Regulations."
Our management information system is an integral part of our operations and must
be updated regularly to respond to changing business needs.
We rely upon our management information system to provide distribution
services and to track operating results. We implemented a new, integrated
management information system in 1998 and are still in the process of
integrating additional functions. Further modification and refinement will
be required as we grow and our business needs change. If we experience a
significant system failure or if we are unable to modify our management
information systems to respond to changes in our business needs, then our
ability to properly and timely produce and distribute our products could be
adversely affected. See "Business - Management Information Systems."
Principal shareholders of our company have a great deal of influence over the
constitution of our board of directors, and over matters submitted to a vote of
shareholders.
The following table sets forth our principal shareholders and the
percentage of our common stock that they each own or control:
Name of Shareholder and Title Percentage of Shares of
(if applicable) Common Stock Owned
- ----------------------------------------------------------- ------------------------------
William W. Compton 12.7%
Chairman of the Board and Chief Executive Officer
Michael Kagan 7.5%
Executive Vice President and Chief Financial Officer
Accel, S.A. de C.V. 21.1%
( a Mexican corporation) ("Accel")
Pursuant to our Amended and Restated Articles of Incorporation, Accel currently
has the right to nominate two persons to stand for election to our nine member
Board of Directors, and separate family limited partnerships controlled by Mr.
Compton and by Mr. Kagan, respectively, each have the right to nominate one
person to stand for election to our Board of Directors. Each of the following
has entered into a shareholders' agreement:
o Accel;
o Mr. Compton;
o Mr. Kagan;
o The Compton Family Limited Partnership;
o The Kagan Family Limited Partnership.
The shareholders' agreement provides that each of the parties will vote the
shares of common stock each owns or controls to elect the nominees of the other
parties to our Board of Directors. Given their collective ownership of 41.4% of
our common stock, and the terms of the shareholders' agreement, these parties
will have the ability to significantly influence the election of our directors
and the outcome of all other issues submitted to a vote of our shareholders. See
"Management" and "Principal Shareholders."
Our sales and income levels are seasonal.
Our business has generally been seasonal, with higher sales and income
in the second and fourth fiscal quarters, just before and during the two peak
retail selling seasons for spring and fall merchandise. Also, some of our
products, such as shorts and corduroy pants, tend to be seasonal in nature. If
these types of seasonal products represent a greater percentage of our sales in
the future, the seasonality of our sales may be increased. This could alter the
differences in sales and income levels in the second and fourth fiscal quarters
from the first and third fiscal quarters.
If we, our customers and suppliers are not Year 2000 compliant, we may
experience significant problems in several areas of our business.
In fiscal 1998, the Company completed the evaluation and modification
of all of its information technology systems with regard to the Year 2000 Issue,
and the Company believes that all of its information technology systems are now
Year 2000 compliant. Should there be any portions of the Company's information
systems that were overlooked in the remediation process, or become susceptible
to The Year 2000 Issue subsequent to such remediation as the result of
interaction with supplier or customer systems or otherwise, the impact could be
felt throughout the Company's main operating system which includes subsystems
related to customer analysis, order processing, planning, procurement,
production, distribution and sales. Information technology plays a vital role in
almost every aspect of the Company's operations. See "Business - Management
Information Systems."
Any problems with the Company's information technology systems
resulting from a Year 2000 Issue would strike at a time of the calendar year
that is one of the Company's busiest in terms of production and distribution.
While the Company believes that it will be able to sustain normal operations
even without any of its information technology systems, this could only continue
for a short period of time. The resources necessary to address any Year 2000
Issue which may arise will not be available entirely from internal personnel,
and the Company will be forced to contract with third-party consultants. At this
time, the Company does not have any such third-party consultants under contract
and does not anticipate that it will enter into any such contracts prior to the
end of calendar 1999. Further, the Company does not anticipate that it will
stockpile raw materials or inventory in advance of the end of calendar 1999. As
a result, if the Company does experience Year 2000 Issue-related problems with
its information technology systems, it may not be able to:
- Design new products;
- Control, adjust or operate the computerized cutting systems;
- Receive customer ordering information;
- Monitor customer inventory and POS information;
- Efficiently execute distribution functions;
- Monitor and evaluate overall management information such as
inventory, order flow and distribution;
The Company has communicated with all significant suppliers and large
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Issues. As of the date
of this report, substantially all of the Company's significant suppliers and
customers have informed the Company that their systems are or will be Year 2000
compliant within the next six to nine months. If certain suppliers were not able
to remediate their own Year 2000 issues, it could affect the Company's ability
to order and receive raw materials shipments on a timely basis, which will have
a direct and adverse impact on the Company's production schedule. This will then
affect the Company's ability to fill customer orders on a timely basis, the
result of which may be a loss of customer sales. In addition, if the Company's
customers do not remediate their systems, it could affect the Company's ability
to receive order information through EDI and receive POS inventory information,
both of which will also have a direct and adverse impact on the Company's sales.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates,
foreign exchange rates, and commodity prices. This does not use any hedging
transactions in order to modify the risk from these interest rate, foreign
currency exchange rate, and commodity price fluctuations. The Company also does
not use financial instruments for trading purposes and is not a party to any
leveraged derivatives.
Item 8. Financial Statements and Supplementary Data
The information called for by this Item is contained in pages 31
through 51 of this report.
Item 9. Changes in and disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information under the captions "Election of Directors - Nominees
for Director," "Election of Directors - Directors Continuing in Office," and
"Other Matters - Section 16(a) Beneficial Reporting Compliance" in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on February 4,
1999 (the "1998 Proxy Statement") is incorporated herein by reference. The
information called for by this Item, with respect to Executive Officers, is set
forth in Item 1 of this report under the caption "Executive Officers of the
Registrant."
Item 11. Executive Compensation.
The information under the captions "Election of Directors -
Compensation of Directors" and "Election of Directors - Executive Compensation"
in the Company's 1998 Proxy Statement is incorporated by reference. In no event
shall the information contained in the 1998 Proxy Statement under the captions
"Election of Directors Executive Compensation - Compensation Committee Report on
Executive Compensation" and "Shareholder Return Comparison" be incorporated
herein by reference..
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information under the caption "Election of Directors - Stock
Ownership" in the Company's 1998 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
The information under the caption "Election of Directors - Executive
Compensation - Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" in the Company's 1998 Proxy Statement is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Index to Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits
The Index to Exhibits attached hereto lists the exhibits that are filed
as part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
1998.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tropical Sportswear Int'l Corporation
We have audited the accompanying consolidated balance sheets of
Tropical Sportswear Int'l Corporation as of October 3, 1998 and September 27,
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended October 3, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tropical Sportswear Int'l Corporation at October 3, 1998 and September 27, 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended October 3, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Tampa, Florida
November 16, 1998
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED BALANCE SHEETS
October 3, 1998 and September 27, 1997
(In thousands, except share data)
1998 1997
------------------- ------------------
ASSETS
Current assets:
Cash $ 2,097 $ 116
Accounts receivable 72,355 24,981
Inventories 84,099 21,351
Deferred income taxes 9,372 1,495
Prepaid expenses and other 5,674 812
------------------- ------------------
Total current assets 173,597 48,755
Property and equipment 60,920 25,245
Less accumulated depreciation and amortization 8,923 4,962
------------------- ------------------
51,997 20,283
Other assets 20,176 227
Trademarks 15,000 --
Excess of cost over fair value of net assets of acquired 36,706 393
subsidiary, net
------------------- ------------------
Total assets $297,476 $69,658
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,451 $12,828
Accrued expenses and other 23,737 2,424
Accrued incentive compensation 1,920 1,934
Current installments of long-term debt 831 801
Current installments of obligations under capital leases 2,261 534
------------------- ------------------
Total current liabilities 66,200 18,521
Long-term debt 166,339 23,442
Obligations under capital leases 5,155 613
Deferred income taxes 5,117 431
Other 3,701 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, $100 par value; 10,000,000 shares
authorized; none and 38,630 shares issued and
outstanding in 1998 and 1997, respectively -- 3,863
Common stock, $.01 par value; 50,000,000 shares authorized;
7,600,000 and 6,000,000 shares issued and outstanding in
1998 and 1997, respectively 76 60
Additional paid in capital 17,270 --
Foreign currency translation adjustment 88 --
Retained earnings 33,530 22,728
------------------- ------------------
Total shareholders' equity 50,964 26,651
=================== ==================
Total liabilities and shareholders' equity $297,476 $69,658
=================== ==================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
Year Ended
-----------------------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
----------------- ----------------- -----------------
Net sales $263,976 $151,692 $117,355
Cost of goods sold 195,087 115,637 91,132
----------------- ----------------- -----------------
Gross profit 68,889 36,055 26,223
Selling, general and administrative expenses 43,204 19,443 15,189
----------------- ----------------- -----------------
Operating income 25,685 16,612 11,034
Other expenses:
Interest 6,866 2,899 2,498
Bridge funding fee 500 -- --
Other, net 1,036 537 620
----------------- ----------------- -----------------
8,402 3,436 3,118
----------------- ----------------- -----------------
Income before income taxes 17,283 13,176 7,916
Provision for income taxes 6,481 4,907 2,745
-----------------
================= =================
Net income $ 10,802 $ 8,269 $ 5,171
================= ================= =================
Net income per common share
Basic $1.45 $1.38 $0.86
================= ================= =================
Diluted $1.43 $1.37 $0.86
================= ================= =================
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Cumulative
Foreign
Additional Currency
Preferred Stock Common Stock Paid In Translation Retained
Shares Amount Shares Amount Capital Adjustment Earnings Total
Balance at September 30, 39 $3,863 6,000 $60 $ -- $ -- $9,288 $13,211
1995
Net income -- -- -- -- -- -- 5,171 5,171
---------- ----------- ---------- ---------- ------------ ----------- ----------- ----------
Balance at September 28, 39 3,863 6,000 60 -- -- 14,459 18,382
1996
Net income -- -- -- -- -- -- 8,269 8,269
---------- ----------- ---------- ---------- ------------ ----------- ----------- ----------
Balance at September 27, 39 3,863 6,000 60 -- -- 22,728 26,651
1997
Foreign currency
translation adjustment -- -- -- -- -- 88 -- 88
Sale of common stock -- -- 1,600 16 17,270 -- -- 17,286
Redemption of preferred
stock (39) (3,863) -- - -- -- -- (3,863)
Net income -- -- -- -- -- -- 10,802 10,802
---------- ----------- ---------- ---------- ------------ ----------- ----------- ----------
Balance at October 3, 1998 -- -- 7,600 $76 $17,270 $88 $33,530 $50,964
========== =========== ========== ========== ============ =========== =========== ==========
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
--------------------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
---- ---- ----
Operating activities
Net income $ 10,802 $ 8,269 $ 5,171
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
(Gain) loss on disposal of property and 150 (6) 152
equipment
Depreciation and amortization 4,758 2,121 1,431
Provision for doubtful accounts (347) 331 --
Deferred income taxes 1,970 386 (204)
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (13,490) (5,115) 704
Inventories (327) 1,931 (848)
Prepaid expenses and other assets (7,881) (257) 779
Increase (decrease) in liabilities:
Accounts payable 2,556 (1,121) 3,863
Accrued expenses and other 221 843 (73)
Accrued incentive compensation (14) (431) 1,576
---- ----- -----
Net cash (used) provided by operating activities (1,602) 6,951 12,551
Investing activities
Capital expenditures (6,881) (5,162) (10,119)
Acquisition of Farah, Inc. (89,821) -- --
Proceeds from sale of property and equipment 592 78 234
--- -- ---
Net cash used by investing activities (96,110) (5,084) (9,885)
Financing activities
Proceeds of long-term debt 200,000 4,676 7,330
Proceeds from sale of common stock 17,286 -- --
Redemption of preferred stock (3,863) -- --
Principal payments of long-term debt (156,335) (3,253) (1,628)
Principal payments of capital leases (1,257) (424) (500)
Net proceeds from (repayment of) long-term
revolving credit line borrowings 43,862 (3,011) (7,675)
------ ------- -------
Net cash provided (used) by financing activities 99,693 (2,012) (2,473)
------ -------
Net increase (decrease) in cash 1,981 (145) 193
Cash at beginning of year 116 261 68
--- --- --
Cash at end of year $ 2,097 $ 116 $ 261
======= ====== =====
See accompanying notes.
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997, and September
28, 1996 (Tables in thousands, except share and per
share amounts)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Tropical
Sportswear Int'l Corporation (the Company) and its wholly-owned subsidiaries,
Savane International Corp. (Savane) and its subsidiaries, Tropical Sportswear
Company, Inc, and Apparel Network Corporation. All significant intercompany
balances and transactions have been eliminated in consolidation.
Nature of Operations
The Company's principal line of business is the marketing, design,
manufacture and distribution of sportswear, primarily men's and women's casual
pants and shorts. The principal markets for the Company include major retailers
within the United States, United Kingdom, and Australia. The Company
subcontracts a substantial portion of the assembly of its products with
independent manufacturers in the Dominican Republic and Mexico and, at any point
in time, a majority of the Company's work-in-process inventory is located in
those countries.
Accounting Period
The Company operates on a 52/53-week annual accounting period ending on
the Saturday nearest September 30th. The years ended October 3, 1998, September
27, 1997, and September 28, 1996 contain 53, 52, and 52 weeks, respectively.
Net Income Per Share
Net income per common share is computed by dividing net income by the
weighted average number of common and common equivalent shares outstanding. In
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
83, common equivalent shares issued by the Company at prices below the public
offering price during the period beginning one year prior to the filing date of
the initial public offering have been included in the calculation as if they
were outstanding for all periods prior to the offering.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(Statement 128). The Company adopted the provisions of Statement 128 during 1998
and has applied this method of accounting to all periods presented.
The following table sets forth the computation of basic and diluted
earnings per share:
Year Ended
------------------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
--------------- ----------------- ---------------
Numerator for basic and diluted earnings
per share:
Net income $ 10,802 $ 8,269 $ 5,171
Denominator for basic earnings per share:
Weighted average shares of common
stock outstanding 7,470,620 6,000,000 6,000,000
Effect of dilutive stock options using the
treasury stock method 79,593 15,000 15,000
--------------- ----------------- ---------------
Denominator for diluted earnings per share 7,550,213 6,015,000 6,015,000
=============== ================= ===============
Net income per common share:
Basic $1.45 $1.38 $0.86
=============== ================= ---------------
Diluted $1.43 $1.37 $0.86
=============== ================= ===============
Revenue Recognition
Based on its terms of F.O.B. shipping point, the Company records sales
upon the shipment of finished products to the customer.
Foreign Currencies
Foreign entities whose functional currency is the U.S. dollar
translate monetary assets and liabilities at year-end exchange rates and
non-monetary items at historical rates. Income and expense accounts are
translated at the average rates in effect during the year, except for
depreciation which is translated at historical rates. Gains and losses from
changes in exchange rates are recognized in consolidated income in the year of
occurrence.
Foreign activities whose functional currency is the local currency
translate net assets at year-end rates and income and expense accounts at
average exchange rates. Adjustments resulting from these translations are
reflected in the Shareholders' equity section titled, "Cumulative Foreign
Currency Translation Adjustment."
Advertising and Promotion Costs
Advertising and promotion costs are expensed in the year incurred.
Advertising expense was $3.0 million in 1998, and none in 1997 or 1996.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. The Company records provisions
for markdowns and losses on excess and slow-moving inventory to the extent the
cost of inventory exceeds estimated net realizable value.
Property and Equipment
Property and equipment are stated at cost. The Company primarily uses
straight-line depreciation methods over periods that approximate the assets'
estimated useful lives.
Trademarks
Trademarks represent the fair value of the Savane(R) and Farah(R)
trademarks that were acquired with the acquisition of Savane (see Note 8). The
trademarks effectively have an indefinite legal life and their value is being
amortized on the straight-line basis over a period of 30 years. Accumulated
amortization at October 3, 1998 totaled $124,000.
Excess of Cost Over Fair Value of Net Assets of Acquired Subsidiary
The excess of cost over fair value of net assets of acquired subsidiary
is primarily related to the acquisition of Savane (see Note 8) and is amortized
on the straight-line basis over a period of 30 years.
Accumulated amortization at October 3, 1998 totaled $303,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from the estimates.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations
when impairment indicators are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. When
impairment is indicated, a loss is recognized for the excess of the carrying
values over the fair values.
Financial Instruments
The Company's financial instruments include cash, accounts receivable,
accounts payable, long-term debt and obligations under capital leases. The
carrying amount of these financial instruments approximate their fair value
based on current interest rates.
Reclassifications
Certain amounts in the fiscal 1997 and 1996 financial statements have
been reclassified to conform to the fiscal 1998 presentation.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income." Statement 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income, as defined, is the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. The provisions of Statement 130 are effective for periods beginning
after December 15, 1997 and adoption of Statement 130 is not expected to have a
material impact on the consolidated financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards 131, "Disclosures about Segments of an Enterprises and Related
Information." Statement 131 establishes standards for segment reporting and
disclosure of additional information on products and services, geographic areas,
and major customers. The Company is assessing implementation of the disclosure
requirements of this standard which is effective for periods beginning after
December 15, 1997. The adoption of Statement 131 may result in additional
financial statement disclosure.
Statement of Cash Flows
Supplemental cash flow information:
Year Ended
----------------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
---- ---- ----
Cash paid for:
Interest $3,262 $2,937 $2,439
Income taxes 6,068 4,150 2,051
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations of $630,000 were incurred when the Company
entered into leases for new equipment in the year ended September 27,
1997.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
October 3, September 27,
1998 1997
---------------- ----------------
Receivable from factor $62,330 $24,631
Receivable from trade accounts 11,311 997
Reserve for returns and allowances and bad debts (1,286) (647)
================ ================
$72,355 $24,981
================ ================
The Company has two separate factoring agreements. Under the
agreements, substantially all of the Company's trade receivables are assigned on
an ongoing basis, without recourse, except for credit losses on the first .10%
of amounts factored. The factoring agreements are with national companies,
which, in management's opinion, are highly creditworthy. The purchase price of
each receivable is the net face amount, less a factoring discount of .18% to
.28%.
3. INVENTORIES
Inventories consist of the following:
October 3, September 27,
1998 1997
----------------- ----------------
Raw materials $11,340 $2,255
Work in process 21,886 5,617
Finished goods 50,873 13,479
================= ================
$84,099 $21,351
================= ================
The Company has established valuation reserves of approximately $9.1
million, $2.2 million, and $2.2 million at October 3, 1998, September 27, 1997
and September 28, 1996, respectively, to reflect a write down of excess and
slow-moving inventory to net realizable value.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
October 3, September 27, Life
1998 1997 (Years)
---------------- ---------------- ------------
Land $3,976 $3,976 --
Land improvements 1,594 1,581 15
Building and improvements 10,723 9,317 3 - 50
Machinery and equipment 35,521 10,313 3 - 12
Leasehold improvement 5,146 58 5 - 25
Construction in progress 3,960 -- --
================ ================
$60,920 $25,245
================ ================
During 1998 and 1997, the Company capitalized $96,000 and $72,000 of
interest cost, respectively, for property and equipment in the process of
construction.
5. DEBT
Long-term debt consists of the following:
October 3, September 27,
1998 1997
----------------- ----------------
Revolving credit line $55,997 $ 12,135
Equipment loan facility -- 2,354
Real estate loan 9,520 9,754
Other notes payable 1,653 --
Senior subordinated notes 100,000 --
----------------- ----------------
167,170 24,243
Less current maturities 831 801
================= ================
$166,339 $23,442
================= ================
On June 10, 1998, the Company closed on a new senior credit facility
(the Facility) which provides for borrowings of up to $110 million, subject to
certain borrowing base limitations. The Facility was obtained in conjunction
with the Company's acquisition of Savane (See Note 8) and was used to refinance
indebtedness then outstanding under the Company's previous revolving credit line
and equipment loan facility, to refinance indebtedness of Savane, to pay fees
incurred in connection with the acquisition of Savane and with the Facility, and
for general corporate purposes. Borrowings under the Facility bear variable
rates of interest based on LIBOR plus an applicable margin (8.4% at October 3,
1998) and are secured by substantially all of the Company's domestic assets. The
Facility matures in June 2003. Debt issue costs of $1.5 million were incurred in
connection with the Facility and are included in other assets. These costs are
being amortized to interest expense over the life of the Facility using the
effective interest method. As of October 3, 1998, excluding outstanding letters
of credit of approximately $12.8 million, an additional $30.1 million was
available for borrowings under the Facility.
On June 10, 1998, the Company closed on a $100 million interim
financing facility (the Bridge Facility). The net proceeds from the Bridge
Facility were used to acquire Savane and pay related fees and expenses. The
Bridge Facility was repaid on June 24, 1998 as described below. A funding fee of
$500,000 was incurred and amortized to expense over the 14-day life of the loan.
On June 24, 1998, the Company closed on the sale of $100 million of
Senior Subordinated Notes (the Notes) through a private placement. Under the
terms of the indenture agreement underlying the Notes, the Company will pay
semi-annual interest at the rate of 11% for ten years, at which time the entire
principal amount is due. The net proceeds from the Notes were used to repay a
portion of the borrowings outstanding under The Bridge Facility. Debt issue
costs of $4.1 million were incurred and are included in other assets. These
costs are being amortized to interest expense over the life of the Notes using
the effective interest method.
On May 7, 1996, the Company entered into a construction and term loan
agreement. The loan was utilized to purchase the Company's previously leased
operating facility and to finance the construction of a new adjacent cutting
facility. On July 18, 1997, the construction loan was converted to a $9.8
million real estate loan which will mature on May 7, 2006. Principal and
interest at 7.4% are due monthly based on a 19-year amortization.
Other notes payable consists primarily of loans for equipment purchases
with maturities through 2007. Interest rates on the loans range from 8.9% to
10.9%.
The Company's debt agreements contain certain covenants, the most
restrictive of which are as follows: (i) maintenance of consolidated net worth
at specified levels, (ii) achievement of specified adjusted net earnings from
operations, (iii) maintenance of debt service coverage ratio at specified
levels, (iv) limitations on annual capital expenditures, (v) limitations on
liens, and (vi) prohibition of the payment of dividends. The Company is in
compliance with all such covenants.
The scheduled maturities of long-term debt are as follows:
Fiscal Year Amount
- ------------------- ----------------
1999 $ 831
2000 526
2001 421
2002 445
2003 56,479
Thereafter 108,468
6. LEASES
The Company leases administrative facilities, production facilities and
certain equipment under non-cancelable leases.
Future minimum lease payments under operating leases and the present
value of future minimum capital lease payments as of October 3, 1998 are:
Operating Capital
Fiscal Year Leases Leases
- ------------------------------------------------------ ----------------- -----------------
1999 $ 5,197 $2,766
2000 4,485 1,819
2001 3,768 1,185
2002 3,259 1,043
2003 3,120 934
Thereafter 19,889 1,074
---------------- -----------------
Total minimum lease payments $39,718 8,821
=================
Less amount representing interest 1,405
-----------------
Present value of minimum capital lease payments 7,416
Less current installments 2,261
=================
$5,155
=================
Operating lease commitments of approximately $5.2 million related to
the Company's 32 retail outlets have been excluded from the above amounts
because these leases were assumed by the buyer in a November 1998 transaction in
which all of the retail outlets were sold to an unrelated third party.
The following summarizes the Company's assets under capital leases:
October 3, September 27,
1998 1997
----------------- ----------------
Machinery and equipment $6,805 $2,893
Accumulated amortization 4,834 1,588
Amortization of assets under capital leases has been included in
depreciation.
Total rental expense for operating leases for 1998, 1997, and 1996
was $2.4 million, $465,000 and $859,000, respectively.
7. INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109,
"Accounting for Income Taxes (FASB 109)." Deferred income tax assets and
liabilities are provided to reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their reported amounts in
the financial statements.
For financial reporting purposes, income before income taxes includes
the following components:
Year Ended
----------------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
Domestic $18,939 $13,176 $7,916
Costa Rica (1,791) -- --
Other foreign 135 -- --
================= ================ =================
$17,283 $13,176 $7,916
================= ================ =================
The components of the income tax provision (benefit) are as follows:
Year Ended
----------------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
Current:
Federal $4,132 $4,143 $2,713
Costa Rica -- -- --
Other foreign 39 -- --
State 340 378 236
----------------- ---------------- -----------------
4,511 4,521 2,949
Deferred:
Federal 1,962 365 (188)
Foreign -- -- --
State 8 21 (16)
----------------- ---------------- -----------------
1,970 386 (204)
================= ================ =================
$6,481 $4,907 $2,745
================= ================ =================
The reconciliation of income taxes computed at the U.S. Federal
statutory tax rate to the Company's income tax provision is as follows:
Year Ended
---------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
Income tax expense at Federal
statutory rate (35% in 1998,
34% in 1997 and 1996) $6,049 $4,480 $2,691
State taxes, net of Federal
tax benefit 221 348 144
Losses of foreign subsidiaries 628 -- (162)
Amortization of goodwill 154 4 48
Unrepatriated foreign earnings (488) -- --
Other (83) 75 24
---------------- ----------------- -----------------
$6,481 $4,907 $2,745
================ ================= =================
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income taxes. As a result of the
Company's acquisition of Savane, as described in Note 8, the Company has
recorded a U.S. Federal and State deferred tax liability of approximately $4.3
million as of October 3, 1998, in connection with the undistributed earnings of
the Company's foreign subsidiaries. Accordingly, upon distribution of these
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries.
The temporary differences that give rise to significant portions of the
deferred tax assets and liabilities as of October 3, 1998 and September 28,
1997, respectively, are presented below:
October 3, September 27,
1998 1997
---------------- -----------------
Deferred tax assets:
Inventory $2,801 $ 962
Accounts receivable 257 233
U.S. Federal NOL carryforwards 6,924 --
Foreign NOL carryforwards 1,862 --
Tax credits 857 --
Accrued exit costs - U.S. 3,697 --
Accrued exit costs - foreign 2,174 --
Other accrued expenses and reserves 3,115 351
Deferred tax liabilities:
Depreciation (2,177) (431)
Unrepatriated foreign earnings (4,291) --
Trademarks (5,514 --
Other items (2,859) (51)
---------------- -----------------
Net deferred tax asset 6,846 1,064
Valuation allowance (2,591) --
================ =================
Deferred tax asset, net of valuation allowance $4,255 $1,064
================ =================
Classified as follows:
Current asset $9,372 $1,495
Non-current liability (5,117) (431)
================ =================
$4,255 $1,064
================ =================
SFAS 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
For the fiscal year ended October 3, 1998, management determined that a
valuation allowance of $2.6 million was necessary to reduce the deferred tax
assets relating to certain foreign net operating loss carryforwards, capital
loss carryforwards, foreign tax credit carryforwards and other accruals not
expected to result in a future realizable benefit.
At October 3, 1998, the Company's United Kingdom subsidiary had a
foreign operating loss of $4.5 million which carries forward indefinitely. For
domestic purposes, the Company has Federal net operating loss carryforwards for
tax purposes of approximately $18.4 million which will expire as follows: $6.8
million in 2009, $3.3 million in 2011, and $8.3 million in 2017. The net
operating loss carryforwards will be subject to certain tax law provisions that
limit the utilization of net operating losses that were generated in
pre-acquisition years and were acquired through changes in ownership. These
limitations were considered during management's evaluation of the need for a
valuation allowance. The Company has AMT credit carryforwards of $298,000 which
carry forward indefinitely. In addition, the Company has foreign tax credit
carryforwards of approximately $559,000 to offset future U.S. taxes on
repatriated foreign income. These foreign tax credit carryforwards expire in
2001.
8. ACQUISITION OF SAVANE INTERNATIONAL CORP.
The Company completed the acquisition of Savane on June 10, 1998. Total
purchase price, including cash paid for common stock acquired, cash paid for the
fair value of outstanding stock options, and fees and expenses incurred to date
amounted to $89.8 million.
The acquisition has been accounted for using the purchase method of
accounting and the Savane results of operations have been included in the
consolidated statements of income since the acquisition date. The preliminary
fair value of identifiable tangible and intangible net assets acquired is $54.7
million. Additional exit activity and further analysis is currently being
performed which could cause this amount to be adjusted. The preliminary purchase
price in excess of net assets acquired of $35.1 million will be allocated to
goodwill.
The goodwill, is being amortized over a period of 30 years.
Subsequent to the acquisition, the Company began performing a thorough
analysis of Savane's operations and developed a plan to exit certain activities
and terminate certain personnel. The major activities to date include, among
other things, elimination of redundant personnel, closure of two manufacturing
facilities in Costa Rica, closure of a manufacturing facility and an inventory
consolidation warehouse in Mexico, closure of a storage facility in Texas, and
the disposal of certain equipment and other non-operating assets. As of October
3, 1998, the Company has accrued approximately $3.3 million related to exit
costs which primarily consist of estimates lease termination costs and related
expenses. Management continues to evaluate certain acquired facilities and other
long-lived assets for compatibility with the Company's long range business
plans. Any additional exit costs or changes in the carrying value of assets will
increase or decrease goodwill until the Company's exit activities are finalized
by June 1999.
The two manufacturing facilities in Costa Rica, including other movable
assets, are included in other assets. The Company has valued these assets held
for sale at estimated net realizable value based on local market conditions and
expects to dispose of these assets in Fiscal 2000.
The unaudited pro forma results presented below include the effects of
the acquisition as if it had been consummated at the beginning of the year prior
to acquisition. The unaudited pro forma financial information below is not
necessarily indicative of either future results of operations or results that
might have been achieved had the acquisition been consummated at the beginning
of the year prior to acquisition.
October 3, September 27,
1998 1997
---------------- -----------------
Net sales $448,795 $425,411
Net income (loss) (3,184) (898)
Earnings (loss) per share $(0.42) $(0.15)
9. COMMITMENTS AND CONTINGENCIES
As of October 3, 1998, the Company had approximately $12.8 million of
outstanding trade letters of credit with various expiration dates through
February 1999.
On March 21, 1997, Levi Straus & Co. brought suit against the Company
in United States District Court for the Northern District of California. The
complaint alleges, among other things, that several marks in the Company's
family of Flyers(TM) trademarks and certain trade dress used in the labeling and
packaging of the Company's Flyers(TM) and Bay to Bay(R) products infringe upon
certain of plaintiff's proprietary trademark and trade dress rights in violation
of federal Lanham Act and California law. The complaint seeks injunctive relief,
as well as treble damages and attorneys' fees. Levi Strauss & Co. has also filed
opposition proceedings in the United States Patent and Trademark Office against
the Company's trademark applications for two marks in the Flyers(TM) family of
marks. These opposition proceedings have been suspended pending resolution of
the litigation. In addition, plaintiff had indicated that it believes that
certain trade dress used in the labeling and packaging of the Company's Bill
Blass(R) brand dress slacks also infringes upon certain of plaintiff's
proprietary trade dress rights. In an attempt to limit the Company's liability,
if any, with respect to such alleged infringement, the Company has unilaterally
altered the trademark and trade dress which are currently the subjects of this
litigation. The Company previously reported that the parties appeared to be very
close to finalizing a settlement agreement; however, a final settlement
agreement was not ultimately agreed upon and the parties have re-commenced
litigation activities. The parties are continuing settlement discussions while
the litigation ensues. The Company intends to vigorously defend these claims,
but remains open to reasonable settlement terms. Given the vagaries of
litigation, the Company cannot predict the outcome of this suit. If the
plaintiff prevails, the outcome could have a material adverse effect on the
Company's business, results of operations or financial condition.
The Company is not involved in any other legal proceedings which the
Company believes could reasonably be expected to have a material adverse effect
on the Company's business, financial position or results of operations.
10. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company has two separate 401(k) profit sharing plans under which
all domestic employees are eligible to participate. Employee contributions are
voluntary and subject to Internal Revenue Service limitations. The Company
matches, based on annually determined factors, employee contributions provided
the employee completes certain levels of service annually and is employed as of
December 31 of each plan year. For 1998, 1997, and 1996, the Company, recorded
expenses of $264,000, $114,000, and $112,000, respectively, related to these
plans.
Defined Benefit Plan
Under the defined benefit plan which covers certain Savane cutting and
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 for the year ended
October 3, 1998, included the following components:
1998
----------------
Service cost-benefits earned during the period $ 36
Interest cost on projected benefit obligation 516
Actual return on plan assets (711)
Net amortization and deferral 61
================
Net periodic pension cost $98
================
The following table sets forth the funded status at October 3, 1998 of
the defined benefit plan:
1998
-----------------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Accumulated benefit obligation $8,258
Projected benefit obligation $8,258
Plan assets at market value 8,335
-----------------
Funded status 77
Unrecognized transition liability being recognized over
average future service of plan participants 274
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 1,517
-----------------
Prepaid expense $1,868
=================
In determining the benefit obligations and service cost of the
Company's defined benefit plan in 1998, a weighted average discount rate and an
expected long-term rate of return on plan assets of 7.0% and 9.5%, respectively,
were used.
This plan is associated with Savane and was assumed in the acquisition
of Savane on June 10, 1998.
11. STOCK OPTION PLANS
In December 1996 and January 1997, the Board of Directors granted to
key members of management, non-qualified options to purchase 60,750 shares of
common stock of the Company at an exercise price of $10.50 per share, its
estimated fair value at the date of grant.
The Board of Directors has adopted two stock option plans, which became
effective on October 28, 1997. The Employee Stock Option Plan (the Employee
Plan) and the Non-Employee Director Stock Option Plan (the Director Plan)
reserve 700,000 shares of common stock for future issuance under the plans. The
per share exercise price of each stock option granted under the plans will be
equal to the quoted fair market value of the stock on the date of grant.
All options granted have 10-year terms and vest and become fully
exercisable at the end of three years of continued employment.
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, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123 (Statement 123), "Accounting for Stock Based Compensation,"
requires 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 equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1997, respectively: risk-free interest rate of 4.1% and
5.7%; a dividend yield of 0% and 0%; volatility factor of the expected market
price of the Company's common stock of .92 and .78; and a weighted-average
expected life of the option of 5 years and 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for 1998 and 1997 is (in thousands except for earnings per
share information):
October 3, September 27,
1998 1997
----------------- -----------------
Pro forma net income $10,235 $8,230
Pro forma earnings per share $1.36 $1.37
A summary of the Company's stock option activity, and related
information follows:
1998 1997
------------------------------------ ------------------------------------
Weighted Average Weighted Average
Exercise Price Exercise Price
Options Per Share Options Per Share
----------- --------------------- ----------- ---------------------
Outstanding-beginning of year 61,000 $10.50 -- N/A
Granted 452,000 13.84 61,000 $10.50
Exercised -- -- -- N/A
Canceled/expired (26,000) 11.88 -- N/A
=========== ===================== =========== =====================
Outstanding-end of year 487,000 $13.53 61,000 $10.50
=========== ===================== =========== =====================
Weighted-average fair value of
Options granted during the year $5.17 $4.13
Outstanding Exercisable Exercise Price
Options Options Range Per Share
- ----------------- -------------- -------------------
64,000 19,000 $10.25 - $10.50
225,000 -- $12.00
128,000 -- $13.20 - $14.00
70,000 15,000 $19.63 - $23.38
================= ==============
487,000 34,000
================= ==============
The weighted-average remaining contractual life of the outstanding
options is nine years.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for October 3, 1998 and September 27, 1997:
Net Income Per
Net Gross Net Common Share -
Sales Profit Income Diluted
------------ ------------- ------------ --------------------
October 3, 1998
First Quarter $35,094 $8,070 $1,305 $0.18
Second Quarter 47,373 11,701 3,253 0.43
Third Quarter 69,823 17,949 3,090 0.40
Fourth Quarter 111,686 31,169 3,154 0.41
September 27, 1997
First Quarter $30,727 $6,745 $ 919 $0.15
Second Quarter 40,632 10,024 2,573 0.43
Third Quarter 44,249 10,512 2,675 0.45
Fourth Quarter 36,084 8,774 2,102 0.35
13. GEOGRAPHIC SEGMENT INFORMATION
The Company is engaged in one business segment. This includes the
design, manufacture, distribution and sale of men's, young men's, boys', and
women's apparel in the United States and certain foreign countries, principally
in Europe and the South Pacific. The following table presents information
regarding geographic segments for 1998, 1997, and 1996. Transfers between the
United States and foreign areas are recorded at normal selling prices. Operating
profit is total revenue less operating expenses. In computing operating profit,
general corporate expenses, interest expense and income taxes have been
excluded.
1998 1997 1996
----------------- ----------------- -----------------
NET SALES:
United States to unaffiliated customers $251,250 $151,692 $117,355
Transfers between areas -- -- --
----------------- ----------------- -----------------
Total United States 251,250 151,692 117,355
Europe 8,612 -- --
South Pacific 4,114 -- --
Adjustments and eliminations -- -- --
================= ================= =================
Total $263,976 $151,692 $117,355
================= ================= =================
OPERATING PROFIT (LOSS):
United States $25,455 $16,612 $11,034
Europe (15) -- --
South Pacific 245 -- --
Adjustments and eliminations -- -- --
----------------- ----------------- -----------------
Total 25,685 16,612 11,034
General corporate expenses 1,536 537 620
Interest expense, net 6,866 2,899 2,498
================= ================= =================
Income (loss) before income taxes $17,283 $13,176 $7,916
================= ================= =================
IDENTIFIABLE ASSETS:
United States $272,663 $69,658 $63,415
Europe 11,227 -- --
Far East and the South Pacific 19,791 -- --
Adjustments and eliminations (6,205) -- --
================= ================= =================
Total $297,476 $69,658 $63,415
================= ================= =================
Included in the Company's consolidated balance sheet at October 3, 1998
were net assets located in Mexico and Costa Rica totaling approximately $5.0
million and $5.6 million, respectively.
In 1998, two customers accounted for approximately 24% and 11% of sales
in the United States. In fiscal 1997, three customers accounted for
approximately 29%, 19% and 11% of sales in the United States. In fiscal 1996,
three customers accounted for approximately 26%, 17%, and 14% of sales in the
United States.
14. SUPPLEMENTAL COMBINED CONDENSED FINANCIAL
The Notes (see Note 5) are jointly and severally guaranteed by the
Company's domestic subsidiaries. The 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 facility and capital lease
obligations.
The following is the supplemental combined condensed balance sheet as
of October 3, 1998 and the supplemental combined condensed statement of
operations and cash flows for the year ended October 3, 1998. The only
intercompany eliminations are the normal intercompany sales, borrowing and
investments in wholly-owned subsidiaries. Separate complete financial statements
of the guarantor subsidiaries are not presented because management has
determined that they are not material to investors.
1998
-----------------------------------------------------------------------------
Non-
Statement of Operations Parent Guarantor Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------ -------------- -------------
Net sales $174,839 $76,694 $15,690 ($3,247) $263,976
Gross profit 41,595 24,572 2,722 -- 68,889
Operating income (loss) 18,133 9,319 (1,767) -- 25,685
Interest, income taxes and other, net 9,070 6,686 (77) (796) 14,883
Net income (loss) 9,063 2,633 (1,690) 796 10,802
1997
-----------------------------------------------------------------------------
Non-
Statement of Operations Parent Guarantor Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------ ------------- --------------
Net sales $151,555 $324 $ -- $ (187) $151,692
Gross profit 36,124 118 -- (187) 36,055
Operating income (loss) 16,582 30 -- -- 16,612
Interest, income taxes and other, net 8,330 13 -- -- 8,343
Net income (loss) 8,252 17 -- -- 8,269
1996
-----------------------------------------------------------------------------
Non-
Statement of Operations Parent Guarantor Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------ ------------- --------------
Net sales $117,273 $192 $ -- $ (110) $117,355
Gross profit 26,309 24 -- (110) 26,223
Operating income (loss) 11,112 (78) -- -- 11,034
Interest, income taxes and other, net 5,893 (30) -- -- 5,863
Net income (loss) 5,219 (48) -- -- 5,171
As of October 3, 1998
----------------------------------------------------------------------------
Non-Guarantor
Balance Sheet Parent Guarantor Subsidiaries
Only Subsidiaries Eliminations Consolidated
--------- ------------- ------------ ------------- -------------
ASSETS
Cash $ 120 $ 631 $ 1,346 $ -- $ 2,097
Accounts receivable, net 31,655 35,120 6,362 (782) 72,355
Inventories 26,354 46,717 11,028 -- 84,099
Other current assets 3,205 11,534 777 (470) 15,046
--------- ------------- ------------ ------------- -------------
Total current assets 61,334 94,002 19,513 (1,252) 173,597
Property, plant and equipment, net 22,584 22,288 7,125 -- 51,997
Investment in subsidiaries and other assets 175,100 109,078 (2,909) (209,387) 71,882
--------- ------------- ------------ ------------- -------------
Total asset $259,018 $225,368 $23,729 $(210,639) $297,476
========= ============= ============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current installments of long-term debt and
capital leases $ 587 $ 2,505 $ -- $ -- $ 3,092
Accounts payable and accrued liabilities 24,422 33,410 6,529 (1,253) 63,108
--------- ------------- ------------ ------------- -------------
Total current liabilities 25,009 35,915 6,529 (1,253) 66,200
Long-term debt and noncurrent installments
of capital leases 184,488 62,334 2,267 (77,595) 171,494
Other noncurrent liabilities 384 8,154 280 -- 8,818
Stockholders' equity 49,137 118,965 14,653 (131,791) 50,964
========= ============= ============ ============= =============
Total liabilities and stockholders' $259,018 $225,368 $23,729 $(210,639) $297,476
equity
========= ============= ============ ============= =============
As of September 27, 1997
----------------------------------------------------------------------------
Non-Guarantor
Balance Sheet Parent Guarantor Subsidiaries
Only Subsidiaries Eliminations Consolidated
--------- ------------- ------------ ------------- -------------
ASSETS
Cash $ 65 $ 51 $ -- $ -- $ 116
Accounts receivable, net 24,979 2 -- -- 24,981
Inventories 21,312 39 -- -- 21,351
Other current assets 2,273 34 -- -- 2,307
--------- ------------- ------------ ------------- -------------
Total current assets 48,629 126 -- -- 48,755
Property, plant and equipment, net 20,259 24 -- -- 20,283
Investment in subsidiaries and other assets 620 -- -- -- 620
--------- ------------- ------------ ------------- -------------
Total asset $69,508 $ 150 $ -- $ -- $69,658
========= ============= ============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current installments of long-term debt and
capital leases $1,335 $ -- $ -- $ -- $1,335
Accounts payable and accrued liabilities 16,976 210 -- -- 17,186
--------- ------------- ------------ ------------- -------------
Total current liabilities 18,311 210 -- -- 18,521
Long-term debt and noncurrent installments
of capital leases 24,055 -- -- -- 24,055
Other noncurrent liabilities 431 -- -- -- 431
Stockholders' equity 26,711 (60) -- -- 26,651
========= ============= ============ ============= =============
Total liabilities and stockholders' $69,508 $150 $ -- $ -- $69,658
equity
========= ============= ============ ============= =============
1998
-----------------------------------------------------------------------------
Non-
Statement of Cash Flows Parent Guarantor Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------ -------------- -------------
Net cash used by operating activities $ 2,117 $(1,396) $(3,119) $ 796 $ (1,602)
Net cash used by investing activities (104,120) (1,106) (211) 9,327 (96,110)
Net cash provided (used) by financing 101,999 (2,761) 1,251 (796) 99,693
activities
Net increase (decrease) in cash (4) (5,263) (2,079) 9,327 1,981
Cash, beginning of year 124 5,893 3,426 (9,327) 116
Cash, end of year 120 630 1,347 -- 2,097
1997
-----------------------------------------------------------------------------
Non-
Statement of Cash Flows Parent Guarantor Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------ -------------- -------------
Net cash provided by operating activities $ 6,995 $ (44) $ -- $ -- $ 6,951
Net cash used by investing activities (5,082) (2) -- -- (5,084)
Net cash used by financing activities (2,012) -- -- -- (2,012)
Net decrease in cash (99) (46) -- -- (145)
Cash, beginning of year 209 52 -- -- 261
Cash, end of year 110 6 -- -- 116
1996
-----------------------------------------------------------------------------
Non-
Statement of Cash Flows Parent Guarantor Guarantor
Only Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------ -------------- -------------
Net cash provided by operating activities $ 12,510 $41 $ -- $ -- $ 12,551
Net cash used by investing activities (9,885) -- -- -- (9,885)
Net cash used by financing activities (2,473) -- -- -- (2,473)
Net decrease in cash 152 41 -- -- 193
Cash, beginning of year 58 10 -- -- 68
Cash, end of year 210 51 -- -- 261
TROPICAL SPORTSWEAR INT'L CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Reserve for returns and allowances and bad debts:
Additions
------------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Period Expenses Accounts(1) Deductions of Period
------------- ------------ -------------- ------------- ------------
Year Ended:
September 28, 1996 $482 $3,022 --- $2,980 $524
==== ====== === ====== ====
September 27, 1997 $524 $2,457 --- $2,334 $647
==== ====== === ====== ====
October 3, 1998 $647 $4,697 $985 $5,043 $1,286
==== ====== ==== ====== ======
Reserve for excess and slow-moving inventory:
Additions
------------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Period Expenses Accounts(1) Deductions of Period
------------- ------------ -------------- ------------- ------------
Year Ended:
September 28, 1996 $1,780 $798 --- $378 $2,200
====== ==== === ==== ======
September 27, 1997 $2,200 $756 --- $756 $2,200
====== ==== === ==== ======
October 3, 1998 $2,200 $800 $11,336 $5,192 $9,144
====== ==== ======= ====== ======
Deferred tax asset valuation allowance:
Additions
------------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
of Period Expenses Accounts(1) Deductions of Period
------------- ------------ -------------- ------------- ------------
Year Ended:
September 28, 1996 --- --- --- --- ---
====== ==== === ==== ======
September 27, 1997 --- --- --- --- ---
====== ==== === ==== ======
October 3, 1998 --- --- $2,591 --- $2,591
====== ==== ======= ====== ======
(1) Represents balance acquired as a result of the acquisition of Savane International Corp. on June 10, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Tampa,
and State of Florida, on this 23rd day of December, 1998.
TROPICAL SPORTSWEAR INT'L CORPORATION
(Registrant)
By: /s/ William W. Compton
William W. Compton
Principal Executive Officer
By: /s/ Michael Kagan
Michael Kagan
Principal Financial Officer
By: /s/ N. Larry McPherson
N. Larry McPherson
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below constitutes and appoints William W. Compton and Michael
Kagan and each of them individually, his true and lawful attorney-in-fact and
agent, with full power of substitution and revocation, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this report and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them , full power and
authority to do and perform each and every act and this requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
Signature Title Date
/s/ William W. Compton Chairman of the Board December 23, 1998
William W. Compton Chief Executive Officer
and Director
/s/ Richard J. Domino President December 23, 1998
Richard J. Domino
/s/ Michael Kagan Executive Vice President, December 23, 1998
Michael Kagan Chief Financial Officer,
and Secretary and Director
/s/ Jesus Alvarez-Morodo Director December 23, 1998
Jesus Alvarez-Morodo
/s/ Eloy S. Vallina-Laguera Director December 23, 1998
Eloy S. Vallina-Laguera
/s/ Leslie J. Gillock Director December 23, 1998
Leslie J. Gillock
/s/ Donald H. Livingstone Director December 23, 1998
Donald H. Livingstone
/s/ Leon H. Reinhart Director December 23, 1998
Leon H. Reinhart
/s/ Richard C. Allender Director December 23, 1998
Richard C. Allender
/s/ Charles J. Smith Director December 23, 1998
Charles J. Smith
Index to Exhibits
Exhibit
Number Description
1.1 Purchase Agreement dated June 18, 1998 between Tropical
Sportswear Int'l Corporation and Prudential Securities
Incorporated (incorporated by reference to Exhibit 1.1 to
Tropical Sportswear Int'l Corporation's Registration Statement
on Form S-4 filed August 20, 1998).
2.1 Agreement and Plan of Merger dated May 1, 1998 among Tropical
Sportswear Int'l Corporation, Foxfire Acquisition Corp. and
Farah Incorporated (incorporated by reference to Exhibit
(c)(1) to Tropical Sportswear Int'l Corporation's Schedule
14D-1 filed May 8, 1998).
2.2 Agreement and Plan of Merger dated as of August 15, 1997
between Tropical Sportswear Int'l Corporation and Apparel
International Group, Inc.(incorporated by reference to Exhibit
2.1 to Tropical Sportswear Int'l Corporation's Annual Report
on Form 10-K405 filed December 23, 1997).
2.3 Agreement and Plan of Merger dated as of October 23, 1997
among Tropical Sportswear Int'l Corporation, Tropical
Acquisition Corporation and Tropical Sportswear International
Corporation (incorporated by reference to Exhibit 2.2 to
Tropical Sportswear Int'l Corporation's Annual
Report on Form 10-K405 filed December 23, 1997).
2.4 Asset Purchase Agreement dated May 20, 1996 among Farah
Incorporated, Farah U.S.A, Inc., Galey & Lord, Inc. and Galey
& Lord Industries Inc. (incorporated by reference to Exhibit
10.57 to Farah Incorporated's Quarterly Report on Form 10-Q
filed May 5, 1996).
3.1 Amended and Restated Articles of Incorporation of Tropical
Sportswear Int'l Corporation (filed herewith).
3.2 Amended and Restated By-Laws of Tropical Sportswear Int'l
Corporation (incorporated by reference to Exhibit 3.2 to
Tropical Sportswear Int'l Corporation's Registration Statement
on Form S-1 filed August 15, 1997).
4.1 Specimen Certificate for the Common Stock of Tropical
Sportswear Int'l Corporation (incorporated by reference to
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. (incorporated by
reference to 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 Exchange and Registration Rights Agreement dated as of June
24, 1998 between Tropical Sportswear Int'l Corporation and
Prudential Securities Incorporated (incorporated by reference
to Exhibit 4.3 to Tropical Sportswear Int'l Corporation's Form
S-4 filed August 20, 1998).
4.4 Indenture dated as of June 24, 1998 among Tropical Sportswear
Int'l Corporation, the Subsidiary Guarantors named therein,
and SunTrust Bank, Atlanta, as trustee (incorporated by
reference to Exhibit 4.4 to Tropical Sportswear Int'l
Corporation's Form S-4 filed August 20, 1998).
4.5 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) (incorporated by
reference to Exhibit 99.1 of Tropical Sportswear Int'l
Corporation's Form 8-K dated November 13, 1998).
10.1 Construction and Term Loan Agreement dated as of May 7, 1996
between Tropical Sportswear Int'l Corporation and SouthTrust
Bank of Alabama, National Association, as amended by Amendment
Nos. 1, 2, 3, 4, 5 and 6 (incorporated by reference to Exhibit
10.2 to Tropical Sportswear Int'l Corporation's Registration
Statement on Form S-1 filed August 15, 1997 and to Exhibit
10.2.1 to Tropical Sportswear Int'l Corporation's Quarterly
Report on Form 10-Q filed February 11, 1998).
10.2 Retail - Domestic Collection Factoring Agreement dated
October 1, 1995, between Heller Financial, Inc. and Tropical
Sportswear Int'l Corporation (incorporated by reference to
Exhibit 10.3 of Tropical Sportswear Int'l Corporation's
Registration Statement on Form S-1 filed August 15, 1997).
Index to Exhibits (continued)
Exhibit
Number Description
10.3 Factoring Agreement dated as of June 9, 1998 between
NationsBanc Commercial Corporation and Farah Incorporated
(incorporated by reference to Exhibit 10.3 to Tropical
Sportswear Int'l Corporation's Registration Statement on Form
S-4 filed August 20, 1998).
10.4 Loan and Security Agreement dated June 10, 1998 (the "Loan and
Security Agreement") among Tropical Sportswear Int'l
Corporation, Tropical Sportswear Company, Inc., Savane
International Corp. and Apparel Network Corporation, as
borrowers, the Lenders named therein and Fleet Capital
Corporation, as agent (incorporated by reference to Exhibit
10.4 to Tropical Sportswear Int'l Corporation's Registration
Statement on Form S-4 filed August 20, 1998).
10.5 First Amendment to the Loan and Security Agreement dated
July 9, 1998 (incorporated by reference to Exhibit 10.5 to
Tropical Sportswear Int'l Corporation's Registration Statement
on Form S-4 filed August 20, 1998).
10.6 Employment Agreement effective November 3, 1997 between
William W. Compton and Tropical Sportswear Int'l Corporation
(incorporated by reference to Exhibit 10.4 to Tropical
Sportswear Int'l Corporation's Annual Report on Form 10-K405
filed December 23, 1997).
10.7 Employment Agreement effective November 3, 1997 between
Michael Kagan and Tropical Sportswear Int'l Corporation
(incorporated by reference to Exhibit 10.5 to Tropical
Sportswear Int'l Corporation's Annual Report on Form 10-K405
filed December 27, 1997).
10.8 Employment Agreement effective November 3, 1997 between
Richard J. Domino and Tropical Sportswear Int'l Corporation
(incorporated by reference to Exhibit 10.6 to Tropical
Sportswear Int'l Corporation's Annual Report on Form 10-K405
filed December 27, 1997).
10.9 Employment Agreement dated May 1, 1998 between Richard C.
Allender and Tropical Sportswear Int'l Corporation
(incorporated by reference to Exhibit (c)(5) to Tropical
Sportswear Int'l Corporation's Schedule 14D-1 filed May 8,
1998).
10.10 Employment Agreement dated June 9, 1998 between Russell G.
Gibson and Farah Incorporated (incorporated by reference to
Exhibit 10.11 to Tropical Sportswear Int'l Corporation's Form
S-4 filed August 20, 1998).
10.11 Employment Agreement dated June 9, 1998 between Gary J.
Kernaghan and Farah Incorporated (incorporated by reference
to Exhibit 10.12 to Tropical Sportswear Int'l Corporation's
Form S-4 filed August 20, 1998)
10.12 Employment Agreement dated June 9, 1998 between Polly
Vaughn and Farah Incorporated (incorporated by reference to
Exhibit 10.13 to Tropical Sportswear Int'l Corporation's Form
S-4 filed August 20, 1998).
10.13 Employment Agreement dated June 9, 1998 between Michael R.
Mitchell and Farah Incorporated (incorporated by reference
to Exhibit 10.14 to Tropical Sportswear Int'l Corporation's
Form S-4 filed August 20, 1998).
10.14 Employment Agreement dated June 9, 1998 between Gilbert
Martinez and Farah Incorporated (incorporated by reference
to Exhibit 10.15 to Tropical Sportswear Int'l Corporation's
Form S-4 filed August 20, 1998).
10.15 Employment Agreement dated June 9, 1998 between Jackie L.
Boatman and Farah Incorporated (incorporated by reference to
Exhibit 10.16 to Tropical Sportswear Int'l Corporation's Form
S-4 filed August 20, 1998).
10.16 Employee Stock Option Plan of Tropical Sportswear Int'l
Corporation (incorporated by reference to Exhibit 10.7 to
Tropical Sportswear Int'l Corporation's Registration Statement
on Form S-1 filed August 15, 1997).
10.17 Non-Employee Director Stock Option Plan of Tropical Sportswear
Int'l Corporation (incorporated by reference to Exhibit 10.8
to Tropical Sportswear Int'l Corporation's Registration
Statement on Form S-1 filed August 15, 1997).
10.18 Amended and Restated Farah Savings and Retirement Plan as of
January 1, 1991 (incorporated by reference to Exhibit 10.125
to Farah Incorporated's Annual Report on Form 10-K filed
November 6, 1992).
Index to Exhibits (continued)
Exhibit
Number Description
10.19 Addendum to Amended and Restated Farah Savings and Retirement
Plan dated August 22, 1997 (incorporated by reference to
Exhibit 10.20 to Tropical Sportswear Int'l Corporation's Form
S-4 filed August 20, 1998).
10.20 Amended and Restated Farah U.S.A. Bargaining Unit Pension
Plan dated December 31, 1994, effective as of January 1,
1990 (incorporated by reference to Exhibit 10.21 to Tropical
Sportswear Int'l Corporation's Form S-4 filed August 20,
1998).
10.21 Amendment to the Amended and Restated Farah U.S.A. Bargaining
Unit Pension Plan dated December 13, 1995 (incorporated by
reference to Exhibit 10.22 to Tropical Sportswear Int'l
Corporation's Form S-4 filed August 20, 1998).
10.22 Apparel International Group, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.9 to Tropical
Sportswear Int'l Corporation's Registration Statement on Form
S-1 filed August 15, 1997).
11.1 Statement Regarding Computation of Per Share Earnings (filed
herewith).
21.1 Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21.1 to Tropical Sportswear Int'l Corporation's
Form S-4 filed August 20, 1998).
23.1 Consent of Ernst & Young LLP (filed herewith).
24.1 Power of Attorney (included in Part IV of the Form 10-K).
27.1 Financial Data Schedule (filed herewith).