<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1998
-----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- ---------------------
Commission File Number 0-23161
------------------------------------------------------
TROPICAL SPORTSWEAR INT'L CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-3424305
----------------------------------- -------------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
4902 W. Waters Avenue Tampa, FL 33634-1302
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (813) 249-4900
---------------------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of August 1, 1998 there were 7,600,000 shares of the registrant's Common
Stock outstanding.
1
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TROPICAL SPORTSWEAR INT'L CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
-------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN FORTY THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 69,823 $ 44,249 $152,290 $115,608
Cost of goods sold 51,874 33,737 114,570 88,327
-------- -------- -------- --------
Gross profit 17,949 10,512 37,720 27,281
Selling, general and administrative expenses 10,776 5,272 22,136 14,859
-------- -------- -------- --------
Operating income 7,173 5,240 15,584 12,422
Other expense:
Interest 1,435 819 2,238 2,263
Bridge loan funding fee 500 -- 500 --
Other, net 288 199 667 474
-------- -------- -------- --------
2,223 1,018 3,405 2,737
-------- -------- -------- --------
Income before income taxes 4,950 4,222 12,179 9,685
Provision for income taxes 1,860 1,547 4,531 3,518
-------- -------- -------- --------
Net income $ 3,090 $ 2,675 $ 7,648 $ 6,167
======== ======== ======== ========
Net income per common share:
Basic $ 0.41 $ 0.45 $ 1.02 $ 1.03
======== ======== ======== ========
Diluted $ 0.40 $ 0.44 $ 1.02 $ 1.03
======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 4, SEPTEMBER 27,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,851 $ 116
Accounts receivable 71,234 24,981
Inventories 86,049 21,351
Deferred income taxes 9,865 1,495
Prepaid expenses and other current assets 12,558 812
-------- --------
Total current assets 184,557 48,755
Property and equipment, net 59,262 20,283
Deferred income taxes 1,137 --
Intangible assets, including trademarks and goodwill 42,380 393
Other assets 10,834 227
-------- --------
Total assets $298,170 $ 69,658
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,568 $ 12,828
Accrued expenses 24,184 2,322
Accrued incentive compensation 1,505 1,934
Income taxes payable 1,261 102
Current portion of long-term debt and capital leases 3,714 1,335
Due to Farah shareholders 4,873 --
-------- --------
Total current liabilities 69,105 18,521
Long-term debt and noncurrent portion of capital leases 179,656 24,055
Deferred income taxes 431 431
Other noncurrent liabilities 1,256 --
Shareholders' equity:
Preferred stock -- 3,863
Common stock 76 60
Additional Paid in Capital 17,270 --
Retained earnings 30,376 22,728
-------- --------
Total shareholders' equity 47,722 26,651
-------- --------
Total liabilities and shareholders' equity $298,170 $ 69,658
======== ========
</TABLE>
See accompanying notes.
4
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TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FORTY THIRTY-NINE
WEEKS ENDED WEEKS ENDED
JULY 4, JUNE 28,
1998 1997
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 7,648 $ 6,167
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,314 1,541
Other, net (583) 533
Changes in operating assets and liabilities:
Accounts receivable (12,818) (8,428)
Inventories (678) 3,736
Accounts payable (1,327) (3,780)
Accrued incentive compensation (429) (513)
Other, net (4,942) 1,570
--------- ---------
Net cash (used in) provided by operating activities (10,815) 826
INVESTING ACTIVITIES
Capital expenditures (3,766) (4,407)
Acquisition of Farah, Inc., net of cash acquired (84,179) --
Other, net 121 9
--------- ---------
Net cash used by investing activities (87,824) (4,398)
FINANCING ACTIVITIES:
Proceeds of long-term debt 100,108 4,246
Proceeds from sale of common stock 17,286 --
Retirement of preferred stock (3,863) --
Principal payments of long-term debt (56,094) (2,860)
Net change in capital leases (378) (341)
Net change in long-term revolving credit line borrowings 51,442 2,768
Payment of debt issuance costs (5,127) --
--------- ---------
Net cash provided by financing activities 103,374 3,813
--------- ---------
Net increase in cash 4,735 241
Cash at beginning of period 116 261
--------- ---------
Cash at end of period $ 4,851 $ 502
========= =========
</TABLE>
See accompanying notes
5
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TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 4, 1998, SEPTEMBER 27, 1997 AND JUNE 28, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Tropical Sportswear Int'l Corporation (the "Company") include the accounts of
Tropical Sportswear Int'l Corporation and its subsidiaries including Savane
International Corp. ("Savane", formerly known as Farah, Incorporated) which was
acquired on June 10, 1998. These financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The unaudited condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended September 27, 1997. In the opinion of
management, the unaudited condensed consolidated financial statements contain
all necessary adjustments (which include only normal, recurring adjustments)
for a fair presentation of the interim periods presented. Operating results for
the forty weeks ended July 4, 1998 are not necessarily indicative of results
that may be expected for the entire fiscal year ending October 3, 1998.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards Number 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the Statement 128 requirements.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 4, SEPTEMBER 27,
1998 1997
------- -------------
<S> <C> <C>
Raw materials $12,379 $ 2,255
Work in process 18,977 5,617
Finished goods 54,693 13,479
------- -------
$86,049 $21,351
======= =======
</TABLE>
6
<PAGE> 7
3. DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of the following:
<TABLE>
<CAPTION>
JULY 4, SEPTEMBER 27,
1998 1997
-------- ------------
<S> <C> <C>
Revolving credit line $ 63,578 $ 12,135
Equipment loan facility -- 2,354
Real estate loan 9,583 9,754
Senior Subordinated Notes 100,000 --
Capital leases 8,151 1,147
Other 2,058 --
-------- --------
183,370 25,390
Less current maturities 3,714 1,335
-------- --------
$179,656 $ 24,055
======== ========
</TABLE>
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 6) 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 (9.2% at July 4, 1998) and are secured by substantially all of the
Company's domestic assets. The Facility matures in June 2003. Debt issue costs
of $1,358 were incurred to date in connection with the Facility and are
included in other assets. These costs will be amortized to interest expense
over the life of the Facility using the effective interest method. As of July
4, 1998, an additional was $27,851 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 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
$3,769 were incurred to date and are included in other assets. These costs will
be amortized to interest expense over the life of the Notes using the effective
interest method.
4. SHAREHOLDERS' EQUITY
The Company completed an initial public offering (the "Offering") on October
28, 1997. The Company sold 1,600,000 shares of its Common Stock at $12.00 per
share and received net proceeds of $17,286 after deducting underwriters'
discounts and offering expenses. Proceeds from the Offering were used to retire
existing Preferred Stock, reduce amounts outstanding under the Company's
revolving credit facility and for other working capital purposes.
7
<PAGE> 8
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN FORTY THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income $ 3,090 $ 2,675 $ 7,648 $ 6,167
Denominator for basic earnings per share:
Weighted average shares of common
stock outstanding 7,600,000 6,000,000 7,465,000 6,000,000
Effect of dilutive stock options using
the treasury stock method 135,000 15,000 52,000 15,000
---------- ---------- ---------- ----------
Denominator for diluted earnings per
share 7,735,000 6,015,000 7,517,000 6,015,000
========== ========== ========== ==========
Net income per common share:
Basic $ 0.41 $ 0.45 $ 1.02 $ 1.03
========== ========== ========== ----------
Diluted $ 0.40 $ 0.44 $ 1.02 $ 1.03
========== ========== ========== ==========
</TABLE>
6. ACQUISITION OF SAVANE INTERNATIONAL
The Company completed the acquisition of Savane on June 10, 1998. Total
purchase price, including amounts paid for common stock acquired, amounts paid
for the value of outstanding stock options, and fees and expenses amounted to
$98,514. Of the total purchase price, $4,873 remains unpaid and represents
amounts due to holders of Savane common stock that did not submit their shares
during the tender process. The $4,873 will be paid as these shareholders submit
their common stock through a forced merger process.
The acquisition will be accounted for using the purchase method of accounting.
The preliminary fair value of identifiable tangible net assets acquired is
$56,518. Additional appraisals are being obtained and further analysis is
currently being performed which could cause the $56,518 to be adjusted. The
preliminary excess of $41,996 will be allocated to the value of the Savane and
Farah trademarks with the remainder, if any, being allocated to "goodwill". The
value of the trademarks and "goodwill", if any, will be amortized over their
estimated useful lives of 30 years.
The Notes are jointly and severally guaranteed by Tropical'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 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 acquisitions been consummated at the beginning
of the year prior to acquisition.
<TABLE>
<CAPTION>
FORTY WEEKS THIRTY-NINE
ENDED WEEKS ENDED
JULY 4, JUNE 28,
1998 1997
----------- ------------
<S> <C> <C>
Net sales $335,598 $324,374
Net income (loss) (3,666) 1,198
Earnings (loss) per share (0.49) 0.20
</TABLE>
8
<PAGE> 9
7. SUPPLEMENTAL COMBINING CONDENSED FINANCIAL
The following is the supplemental combining condensed balance sheet as of July
4, 1998 and the supplemental combining condensed statement of operations and
cash flows for the forty weeks ended July 4, 1998. The only intercompany
eliminations are the normal intercompany sales, borrowings and investments in
wholly-owned subsidiaries. Separate complete financial statements of the
guarantor subsidiaries are not presented because management has determined
that they are not material to investors.
9
<PAGE> 10
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FORTY WEEKS ENDED JULY 4, 1998
7. SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED JULY 4, 1998
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 51,108 $ 16,577 $ 3,077 $ (939) $ 69,823
Gross profit 13,235 4,096 618 -- 17,949
Operating income (loss) 6,980 301 (108) -- 7,173
Interest, income taxes and other, net 3,247 944 (50) (58) 4,083
Net income (loss) 3,733 (643) (58) 58 3,090
<CAPTION>
FORTY WEEKS ENDED JULY 4, 1998
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 133,416 $ 16,860 $ 3,077 $ (1,063) $ 152,290
Gross profit 32,937 4,166 617 -- 37,720
Operating income (loss) 15,385 308 (109) -- 15,584
Interest, income taxes and other, net 7,552 493 (51) (58) 7,936
Net income (loss) 7,833 (185) (58) 58 7,648
<CAPTION>
THIRTEEN WEEKS ENDED JUNE 28, 1997
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 44,270 $ 90 $ -- $ (111) $ 44,249
Gross profit 10,586 37 -- (111) 10,512
Operating income (loss) 5,228 12 -- -- 5,240
Interest, income taxes and other, net 2,560 5 -- -- 2,565
Net income (loss) 2,668 7 -- -- 2,675
<CAPTION>
THIRTY-NINE WEEKS ENDED JUNE 28, 1997
------------------------------------------------------------------------------
STATEMENT OF OPERATIONS PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 115,504 $ 228 $ -- $ (124) $ 115,608
Gross profit 27,328 77 -- (124) 27,281
Operating income (loss) 12,419 3 -- -- 12,422
Interest, income taxes and other, net 6,253 2 -- -- 6,255
Net income (loss) 6,166 1 -- -- 6,167
AS OF JULY 4, 1998
------------------------------------------------------------------------------
<CAPTION>
BALANCE SHEET PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash $ 440 $ 1,143 $ 3,268 $ -- $ 4,851
Accounts receivable, net 37,343 27,979 6,318 (406) 71,234
Inventories 23,963 50,159 11,927 -- 86,049
Other current assets 61,369 19,813 740 (59,499) 22,423
-------- ---------- --------- --------- ---------
Total current assets 123,115 99,094 22,253 (59,905) 184,557
Property, plant and equipment, net 21,641 28,463 9,158 -- 59,262
Investment in subsidiaries and other
assets 121,905 98,016 (6,824) (158,746) 54,351
-------- ---------- -------- --------- ---------
Total asset $266,661 $ 225,573 $ 24,587 $(218,651) $ 298,170
======== ========== ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt and
capital leases $ 652 $ 2,751 $ 311 $ -- $ 3,714
Accounts payable and accrued
liabilities 25,656 30,746 9,418 (429) 65,391
-------- ---------- -------- --------- ---------
Total current liabilities 26,308 33,497 9,729 (429) 69,105
Long-term debt and noncurrent portion of
capital leases 173,254 9,831 2,919 (6,348) 179,656
Other noncurrent liabilities 19,377 60,627 106 (78,423) 1,687
Stockholders' equity 47,722 121,618 11,833 (133,451) 47,722
-------- ---------- -------- --------- ---------
Total liabilities and
stockholders' equity $266,661 $ 225,563 $ 24,587 $(218,651) $ 298,170
======== ========== ======== ========= =========
</TABLE>
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TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
FORTY WEEKS ENDED JULY 4, 1998
7. SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FORTY WEEKS ENDED JULY 4, 1998
------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash used by operating activities $ (1,098) $ (8,818) $ (957) $ 58 $ (10,815)
Net cash used by investing activities (97,018) 5,673 3,372 149 (87,824)
Net cash provided by financing activities 98,446 4,282 853 (207) 103,374
Net increase in cash 330 1,137 3,268 -- 4,735
Cash, beginning of period 110 6 -- -- 116
Cash, end of period 440 1,143 3,268 -- 4,851
<CAPTION>
THIRTY-NINE WEEKS ENDED JUNE 28, 1997
------------------------------------------------------------------------------
CASH FLOWS PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash used by operating activities $ 871 $ (45) $ -- $ -- $ 826
Net cash used by investing activities (4,396) (2) -- -- (4,388)
Net cash used by financing activities 3,813 -- -- -- 3,813
Net increase in cash 288 (47) -- -- 241
Cash, beginning of period 209 52 -- -- 261
Cash, end of period 497 5 -- -- 502
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
in the Company's consolidated statements of income expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN FORTY THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 74.3 76.2 75.2 76.4
------------- ------------ ------------ --------------
Gross profit 25.7 23.8 24.8 23.6
Selling, general and administrative
expenses 15.4 11.9 14.5 12.9
------------- ------------ ------------ --------------
Operating income 10.3 11.9 10.3 10.7
Interest expense 2.1 1.9 1.5 1.9
Bridge loan funding fee 0.7 -- 0.3 --
Other, net 0.4 0.5 0.5 0.4
------------- ------------ ------------ --------------
Income before income taxes 7.1 9.5 8.0 8.4
Provision for income taxes 2.7 3.5 3.0 3.1
------------- ------------ ------------ --------------
Net income 4.4 6.0 5.0 5.3
============= ============ ============ ==============
</TABLE>
Thirteen weeks ended July 4, 1998 compared to the thirteen weeks ended
June 28, 1997
Net Sales. Net sales increased 57.9% to $69.8 million for the third
quarter of fiscal 1998 from $44.2 million in the comparable prior year quarter.
This increase was primarily due to an increase in units sold and higher average
selling prices caused in part by the inclusion of Savane's operating activity
from June 10, 1998, the date of the acquisition.
Gross Profit. Gross profit increased 70.7% to $17.9 million, or 25.7%
of net sales for the third quarter of fiscal 1998, from $10.5 million, or 23.8%
of net sales, for the comparable prior-year quarter. The dollar increase was
primarily due to the increase in sales volume caused in part by the inclusion of
Savane's operating activities from the date of the acquisition. The increase in
the gross profit percentage was primarily due to a change in mix of products to
those yielding higher average selling prices and margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 104.4% to $10.8 million, or 15.4% of net
sales, for the third quarter of fiscal 1998, from $5.3 million, or 11.9% of net
sales, for the comparable prior year quarter. The dollar increase was primarily
due to an increase in overall volume as a result, in part, of including the
operations of Savane from the date of the acquisition. The increase in selling,
general and administrative expenses as a percent of net sales was primarily due
to higher advertising and other brand support related expenses caused by the
inclusion of Savane's operations from the date of the acquisition.
Interest Expense. Interest expense increased to $1.4 million for the
third quarter of fiscal 1998, from $819,000 for the comparable prior year
quarter. 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
Senior Subordinated Notes, the proceeds from 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 Senior Subordinated Notes. This fee was incurred to
originate the bridge financing.
Income Taxes. The Company's effective income tax rate for the third
quarter of fiscal 1998 was 37.6% compared to 36.6% in the comparable prior year
quarter. These rates are based on the Company's expected effective annual tax
rate. The increase is due to the Company receiving the remaining benefit, in
fiscal 1997, of previously non-deductible losses from a foreign subsidiary.
Additionally, in fiscal 1998, more of the Company's income is expected to be
taxed at a higher statutory rate.
12
<PAGE> 13
Net Income. As a result of the above factors, net income increased
15.5% to $3.1 million for the third quarter of fiscal 1998 from $2.7 million
for the comparable prior-year quarter.
Forty weeks ended July 4, 1998 compared to the thirty-nine ended June 28, 1997
Net Sales. Net sales increased 31.7% to $152.3 million for the forty
weeks ended July 4, 1998 from $115.6 million for the comparable prior year
period. This increase was primarily due to an increase in units sold and higher
average selling prices caused in part by the inclusion of Savane's operating
activity from June 10, 1998, the date of the acquisition.
Gross Profit. Gross profit increased 38.3% to $37.7 million, or 24.8%
of net sales for the forty weeks ended July 4, 1998 from $27.3 million, or
23.6% of net sales, for the comparable prior year period. The dollar increase
was primarily due to the increase in sales volume caused in part by the
inclusion of Savane's operations from the date of the acquisition. The increase
in the gross profit percentage was primarily due to a change in mix of products
to those yielding higher average selling prices and margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 49.0% to $22.1 million, or 14.5% of net
sales, for the forty weeks ended July 4, 1998 from $14.9 million, or 12.9% of
net sales for the comparable prior year period. The dollar increase was
primarily due to an increase in overall volume as a result, in part, of
including the operations of Savane from the date of the acquisition. The
increase in selling, general and administrative expenses as a percent of net
sales was primarily due to higher advertising and other brand support related
expenses caused by the inclusion of Savane's operations from the date of the
acquisition.
Interest Expense. Interest expense decreased slightly to $2.2 million
for the forty weeks ended July 4, 1998, from $2.3 million for the comparable
prior year period. The decreased was due to a reduction in outstanding
borrowings as a result of using proceeds from the Company's initial public
offering in October 1997 to repay outstanding borrowings at that time, offset
in part by the additional borrowings incurred as a result of the acquisition of
Savane on June 10, 1998.
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 Senior Subordinated Notes. This fee was
incurred to originate the bridge financing.
Income Taxes. The Company's effective income tax rate for the forty
weeks ended July 4, 1998 was 37.2% compared to 36.3% in the comparable prior
year period. These rates are based on the Company's expected effective annual
tax rate. The increase is due to the Company receiving the remaining benefit,
in fiscal 1997, of previously non-deductible losses from a foreign subsidiary.
Additionally, in fiscal 1998, more of the Company's income is expected to be
taxed at a higher statutory rate.
Net Income. As a result of the above factors, net income increased
24.0% to $7.6 million for the forty weeks ended July 4, 1998, from $6.2 million
for the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
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 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 (9.2%
at July 4, 1998) and are secured by substantially all of the Company's domestic
assets. The Facility matures in June 2003. As of July 4, 1998, an additional
$27,851 was available for borrowings under the Facility.
13
<PAGE> 14
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 Senior Subordinated 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
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.
On October 28, 1997 the Company completed its initial public offering, which
yielded net proceeds of $17,286. The Company used $3,863 of the proceeds to
retire its Preferred Stock with the remainder being used to reduce amounts
outstanding under its revolving credit facility and for other working capital
purposes.
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.
During the forty weeks ended July 4, 1998, the Company used $10.8 million of
cash in its operating activities, primarily due to seasonal increases in
inventories of $12.8 million and the payment of $5.9 million to Savane's former
lender as a deposit on outstanding letters of credit. These uses were offset,
in part, by net income of $7.6 million, which included non-cash expenses of
$2.3 million.
Capital expenditures totaled $3.8 million for the first three quarters of
fiscal 1998 and are expected to approximate $7.0 million for the entire fiscal
year. The expenditures to date and expenditures expected for the remainder of
the fiscal year primarily relate to the upgrade or replacement of the Company's
existing computer systems.
The Company believes that its existing working capital, the Facility, and
internally generated funds are adequate for its working capital needs for the
remainder of the fiscal year.
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.
The new or upgraded management information systems which TSI began implementing
in the second quarter of fiscal 1998 will, among other things, address problems
resulting from the Year 2000 Issue. The Year 2000 Issue impacts TSI's main
operating system which includes subsystems related to customer analysis, order
processing, planning, procurement, production and sales. While the new
management information system, which is Year 2000 compliant, will not be
operational until approximately the third quarter of fiscal 1999, TSI plans to
have all existing systems Year 2000 compliant by the first quarter of fiscal
1999 and plans to spend up to $500,000 for this portion of its systems upgrade.
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. Savane
will utilize both internal and external resources to reprogram or replace and
test the software for Year 2000 modifications. The Company plans to complete
the inventory management and order processing portions of Savane's Year 2000
project no later than December 31, 1998 and plans to complete the remainder of
the project by June 30, 1999. Savane incurred $1.0 million in costs
attributable to Year 2000 compliance in
14
<PAGE> 15
fiscal 1997 and expects to incur an additional $2.6 million in fiscal 1998
(including the pre and post acquisition periods). The majority of these costs
have been and will continue to be capitalized, as they relate to software
purchases and development.
The Company and Farah are currently communicating with all significant
suppliers and large customers to determine the extent to which the Company and
Farah are vulnerable to those third parties' failure to remediate their own
Year 2000 Issues. The Company believes that the modifications and conversions
that it and Farah are making and plan to make will allow it to mitigate
problems resulting from the Year 2000 Issue. However, if such modifications and
conversions are not made or are not completed timely, the Year 2000 Issue could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
Portions of this report may contain forward-looking statements that involve a
number of risks and uncertainties. In addition to other factors discussed
herein, among the factors that could cause actual results to differ materially
are the following: economic and business conditions in the U.S. and abroad; the
level of demand for apparel products and success of planned marketing programs;
the intensity of competition and the pricing pressures that may result; changes
in labor and import and export regulations; the ability of the Company to
timely and effectively manage production levels and sourcing; the ability of
the Company to access the credit market to finance capital expenditures;
currency fluctuations; the integration of the operations of Savane with those
of the Company; and other risk factors listed from time to time in the
Company's SEC reports and other announcements.
15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 1. 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 compliant
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 compliant 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 oppositions proceeding 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. Although the litigation
is still pending, the parties appear to be very close to finalizing a
settlement agreement. The contemplated settlement agreement will not result in
the payment of any sum to the plaintiff. Moreover, 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.
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 alleges 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 seeks
compensatory damages and pre-judgement interest, punitive damages and the costs
of suit. Although the outcome of the litigation cannot be determined at this
time, the Company would consider reasonable settlement opportunities. The
Company is vigorously defending the lawsuit. The Company does not believe that
this litigation is having a material adverse effect on its business, results of
operations, or financial condition.
On December 30, 1997, the Company brought suit against Bremen Trouser's 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 tortious
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 have sought
unspecified damages and other non-monetary relief. The Company's state claim
has been removed to the Untied States District Court for the Middle District of
Florida and consolidated with Pincus and Bremen's complaint. Pincus has taken
the position that the Pincus License Agreement gives it the authority to
resolve disputes between the Company and Pincus' other licensees, and it claims
to have resolved the dispute which is the subject of the litigation in favor of
Bremen. Although the outcome of the litigation cannot be determined at this
time, the Company intends to vigorously pursue the litigation. The Company does
not believe that this litigation will have material adverse effect on its
business, results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith
Exhibit 27.2 Financial data schedule as of July 4, 1998
(filed for SEC purposes only)
(b) Reports on Form 8-K
The Registrant filed a Form 8-K on May 1, 1998 to report, among
other things, that the Company had entered into an agreement
and plan of merger with Farah Incorporated. The filing
disclosed the terms of the offer and the anticipated means of
financing the acquisition.
The Registrant filed a Form 8-K on May 8, 1998 to report the
Company had commenced the tender offer process for the
outstanding shares of Farah Incorporated and described the
terms and conditions of the tender offer.
The Registrant filed a Form 8-K on June 2, 1998 to report that
it had issued a press release which described its intention to
offer up to $125 of Senior Subordinated Notes and an interim
$100 million Bridge Financing Facility relating to the
acquisition of Farah Incorporated.
The Registrant filed a Form 8-K on June 10, 1998 to report,
among other things, that it had completed the acquisition of
Farah Incorporated, had closed on a $100 million Bridge
Financing Facility and that a conference call was sponsored by
the company on June 22, 1998 to discuss the acquisition.
The Registrant filed a Form 8-K on June 26, 1998 to report that
it had completed the sale of $100 million of Senior
Subordinated Notes in a private placement transaction and that
the proceeds were used to repay the Bridge Financing Facility.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TROPICAL SPORTSWEAR INT'L CORPORATION
-------------------------------------
(Registrant)
/s/ N. Larry McPherson
----------------------------------------
N. Larry McPherson
Executive Vice President,
and Treasurer
(in the dual capacity of duly authorized
officer and principal accounting officer)
August 17, 1998
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FORTY WEEKS ENDED JULY 4, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> JUL-04-1998
<CASH> 4,851
<SECURITIES> 0
<RECEIVABLES> 72,966
<ALLOWANCES> 1,732
<INVENTORY> 86,049
<CURRENT-ASSETS> 184,557
<PP&E> 66,385
<DEPRECIATION> 7,123
<TOTAL-ASSETS> 298,170
<CURRENT-LIABILITIES> 69,105
<BONDS> 183,370
0
0
<COMMON> 76
<OTHER-SE> 47,646
<TOTAL-LIABILITY-AND-EQUITY> 298,170
<SALES> 152,290
<TOTAL-REVENUES> 152,290
<CGS> 114,570
<TOTAL-COSTS> 114,570
<OTHER-EXPENSES> 25,541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,238
<INCOME-PRETAX> 12,179
<INCOME-TAX> 4,531
<INCOME-CONTINUING> 7,648
<DISCONTINUED> 0
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<EPS-PRIMARY> 1.02
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