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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 26, 2005
PERRY ELLIS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Florida
(State or Other Jurisdiction of Incorporation)
0-21764 | 59-1162998 | |
(Commission File Number) | (IRS Employer Identification No.) | |
3000 N.W. 107th Avenue Miami, Florida | 33172 | |
(Address of Principal Executive Offices) | (Zip Code) |
(305) 592-2830
(Registrant’s Telephone Number, Including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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Item 9.01.Financial Statements and Exhibits.
(a) | Financial Statements of Business Acquired. Tropical Sportswear Int’l Corporation (Debtor-In-Possession as of December 16, 2004) | |||
4 | ||||
Consolidated Balance Sheets as of October 2, 2004 and September 27, 2003 | 5 | |||
6 | ||||
7 | ||||
8 | ||||
9 | ||||
Condensed Consolidated Balance Sheets as of January 1, 2005 (Unaudited) and October 2, 2004 | 24 | |||
25 | ||||
26 | ||||
27 | ||||
(b) | Pro Forma Financial Information | |||
Unaudited Pro Forma Combined Financial Information | ||||
Pro Forma Unaudited Condensed Consolidated Balance Sheet as of January 31, 2005 | 35 | |||
36 | ||||
Notes to Pro Forma Unaudited Condensed Consolidated Financial Information | 37 | |||
(c) | Exhibits. |
Exhibit No. | Description | |
23.1 | Consent of Independent Registered Public Accounting Firm |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
PERRY ELLIS INTERNATIONAL, INC. | ||||
Date: May 12, 2005 | By: | /s/ Rosemary B. Trudeau | ||
Rosemary B. Trudeau | ||||
VP Finance |
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Report of Independent Registered Public Accounting Firm
The Board of Directors
Tropical Sportswear Int’l Corporation
We have audited the accompanying consolidated balance sheets of Tropical Sportswear Int’l Corporation (the “Company”) as of October 2, 2004 and September 27, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended October 2, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tropical Sportswear Int’l Corporation at October 2, 2004 and September 27, 2003, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended October 2, 2004, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 16, the Company has filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy code and has sold substantially all of the Company’s assets. As a result, the Company has not complied with certain covenants of existing loan agreements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management also plans to liquidate all the remaining assets of the Company as further described in Note 16. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Tampa, Florida | /s/ Ernst & Young LLP | |
November 19, 2004, except for Note 16, as to which the date is | Certified Public Accountants |
May 9, 2005
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TROPICAL SPORTSWEAR INT’L CORPORATION
CONSOLIDATED BALANCE SHEETS
October 2, 2004 and September 27, 2003
(In thousands, except share data)
2004 | 2003 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,148 | $ | 4,485 | ||||
Accounts receivable, net | 41,607 | 64,355 | ||||||
Inventories, net | 50,492 | 73,293 | ||||||
Prepaid expenses and other | 12,121 | 11,001 | ||||||
Assets held for sale | 3,685 | 10,366 | ||||||
Total current assets | 112,053 | 163,500 | ||||||
Property and equipment | 54,502 | 66,115 | ||||||
Less accumulated depreciation and amortization | (31,484 | ) | (34,982 | ) | ||||
23,018 | 31,133 | |||||||
Other assets | 4,268 | 6,710 | ||||||
Trademarks, net | 10,985 | 12,936 | ||||||
Total assets | $ | 150,324 | $ | 214,279 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 18,974 | $ | 22,679 | ||||
Accrued expenses and other | 13,610 | 25,843 | ||||||
Revolving credit line | 15,752 | 25,685 | ||||||
Current portion of long-term debt | — | 800 | ||||||
Current portion of obligations under capital leases | 348 | 1,164 | ||||||
Total current liabilities | 48,684 | 76,171 | ||||||
Long-term debt (Note 16) | 100,000 | 107,200 | ||||||
Obligations under capital leases | 128 | 572 | ||||||
Deferred income taxes | 896 | 601 | ||||||
Other | 5,155 | 6,984 | ||||||
Total liabilities | 154,863 | 191,528 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, $100 par value; 10,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, $.01 par value; 50,000,000 shares authorized; 11,062,414 and 11,055,042 shares issued and outstanding in 2004 and 2003, respectively | 111 | 111 | ||||||
Additional paid in capital | 88,589 | 88,575 | ||||||
Accumulated deficit | (87,126 | ) | (58,617 | ) | ||||
Accumulated other comprehensive loss | (6,113 | ) | (7,318 | ) | ||||
Total shareholders’ equity (deficit) | (4,539 | ) | 22,751 | |||||
Total liabilities and shareholders’ equity (deficit) | $ | 150,324 | $ | 214,279 | ||||
See accompanying notes to the consolidated financial statements.
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TROPICAL SPORTSWEAR INT’L CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fiscal Year Ended | ||||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | ||||||||||
Net sales | $ | 310,717 | $ | 386,723 | $ | 463,877 | ||||||
Cost of goods sold | 248,826 | 345,725 | 335,470 | |||||||||
Gross profit | 61,891 | 40,998 | 128,407 | |||||||||
Selling, general and administrative expenses | 66,646 | 85,369 | 97,157 | |||||||||
Other charges, net | 6,929 | 65,289 | 16,130 | |||||||||
Operating income (loss) | (11,684 | ) | (109,660 | ) | 15,120 | |||||||
Other (income) expense: | ||||||||||||
Interest expense | 14,345 | 12,552 | 13,349 | |||||||||
Interest income | (295 | ) | (333 | ) | (394 | ) | ||||||
Loss on extinguishment of debt | 1,692 | — | — | |||||||||
Other, net | 282 | (395 | ) | (1,002 | ) | |||||||
16,024 | 11,824 | 11,953 | ||||||||||
Income (loss) before income taxes and extraordinary item | (27,708 | ) | (121,484 | ) | 3,167 | |||||||
Provision for income taxes | 801 | 9,968 | 1,258 | |||||||||
Income (loss) before extraordinary item | (28,509 | ) | (131,452 | ) | 1,909 | |||||||
Extraordinary item–gain on negative goodwill | — | — | 412 | |||||||||
Net income (loss) | $ | (28,509 | ) | $ | (131,452 | ) | $ | 2,321 | ||||
Basic net income (loss) per share: | ||||||||||||
Income (loss) before extraordinary item | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.22 | ||||
Extraordinary item | — | — | 0.05 | |||||||||
Net income (loss) per share | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.27 | ||||
Diluted net income (loss) per share: | ||||||||||||
Income (loss) before extraordinary item | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.22 | ||||
Extraordinary item | — | — | 0.04 | |||||||||
Net income (loss) per share | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.26 | ||||
See accompanying notes to the consolidated financial statements.
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TROPICAL SPORTSWEAR INT’L CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands)
Common Stock | Additional Capital | Retained (Deficit) | Other | Total | ||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance at September 29, 2001 | 7,697 | $ | 77 | $ | 18,851 | $ | 70,514 | $ | (3,175 | ) | $ | 86,267 | ||||||||
Net income | — | — | — | 2,321 | — | 2,321 | ||||||||||||||
Foreign currency translation adjustment, minimum pension liability and other | — | — | — | — | (1,947 | ) | (1,947 | ) | ||||||||||||
Total comprehensive income | — | — | — | — | — | 374 | ||||||||||||||
Common stock issuance, net | 3,000 | 30 | 63,190 | 63,220 | ||||||||||||||||
Stock option exercises | 343 | 3 | 6,508 | — | — | 6,511 | ||||||||||||||
Balance at September 28, 2002 | 11,040 | 110 | 88,549 | 72,835 | (5,122 | ) | 156,372 | |||||||||||||
Net loss | — | — | — | (131,452 | ) | — | (131,452 | ) | ||||||||||||
Foreign currency translation adjustment, minimum pension liability and other | — | — | — | — | (2,196 | ) | (2,196 | ) | ||||||||||||
Total comprehensive loss | — | — | — | — | — | (133,648 | ) | |||||||||||||
Stock option exercises/awards | 15 | 1 | 26 | — | — | 27 | ||||||||||||||
Balance at September 27, 2003 | 11,055 | 111 | 88,575 | (58,617 | ) | (7,318 | ) | 22,751 | ||||||||||||
Net loss | — | — | — | (28,509 | ) | — | (28,509 | ) | ||||||||||||
Foreign currency translation adjustment, minimum pension liability and other | — | — | — | — | 1,205 | 1,205 | ||||||||||||||
Total comprehensive loss | — | — | — | — | — | (27,304 | ) | |||||||||||||
Stock option exercises | 7 | — | 14 | — | — | 14 | ||||||||||||||
Balance at October 2, 2004 | 11,062 | $ | 111 | $ | 88,589 | $ | (87,126 | ) | $ | (6,113 | ) | $ | (4,539 | ) | ||||||
See accompanying notes to the consolidated financial statements.
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TROPICAL SPORTSWEAR INT’L CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended | ||||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | ||||||||||
Operating activities | ||||||||||||
Net income (loss) | $ | (28,509 | ) | $ | (131,452 | ) | $ | 2,321 | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Impairment of property and equipment | 3,603 | 15,513 | — | |||||||||
Loss on sale of South Pacific division | 3,009 | — | — | |||||||||
Impairment of intangibles | 1,908 | 34,241 | — | |||||||||
Loss on extinguishment of debt | 1,692 | — | — | |||||||||
Gain on sale of building | (3,504 | ) | — | — | ||||||||
Gain on disposal of property and equipment | 1,035 | (282 | ) | (504 | ) | |||||||
Depreciation and amortization | 7,050 | 6,634 | 7,318 | |||||||||
Provision for allowances and doubtful accounts | (2,016 | ) | 1,927 | 1,129 | ||||||||
Provision for excess and slow moving inventory | (7,913 | ) | 8,665 | (3,593 | ) | |||||||
Deferred income taxes | (443 | ) | 11,640 | 3,079 | ||||||||
Income tax benefit from exercise of stock options | — | — | 987 | |||||||||
Extraordinary item-gain on negative goodwill | — | — | (412 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Decrease (increase) in assets: | ||||||||||||
Accounts receivable | 23,133 | 24,727 | (5,230 | ) | ||||||||
Inventories | 28,011 | (7,161 | ) | 1,879 | ||||||||
Prepaid expenses and other assets | 2,878 | 5,124 | 6,468 | |||||||||
(Decrease) increase in liabilities: | ||||||||||||
Accounts payable | (3,154 | ) | (17,663 | ) | 4,925 | |||||||
Accrued expenses and other | (13,086 | ) | 5,667 | (617 | ) | |||||||
Net cash provided by (used in) operating activities | 13,694 | (42,420 | ) | 17,750 | ||||||||
Investing activities | ||||||||||||
Capital expenditures | (3,318 | ) | (16,429 | ) | 11,008 | ) | ||||||
Proceeds from sale of property and equipment | 9,617 | 884 | 570 | |||||||||
Sale (purchase) of marketable securities | — | 11,100 | (11,100 | ) | ||||||||
Net cash provided by (used in) investing activities | 6,299 | (4,445 | ) | (21,538 | ) | |||||||
Financing activities | ||||||||||||
Proceeds from issuance of long-term debt | 2,000 | 8,000 | 88 | |||||||||
Proceeds from exercise of stock options & awards | 14 | 27 | 5,524 | |||||||||
Proceeds from sale of common stock | — | — | 63,220 | |||||||||
Principal payments of long-term debt | (12,394 | ) | (7,865 | ) | (7,302 | ) | ||||||
Principal payments of capital leases | (1,176 | ) | (1,468 | ) | (1,821 | ) | ||||||
Proceeds from revolving credit line borrowings | 288,842 | 254,000 | 298,202 | |||||||||
Payments of revolving credit line borrowings | (298,775 | ) | (228,316 | ) | (330,332 | ) | ||||||
Net cash (used in) provided by financing activities | (21,489 | ) | 24,379 | 27,579 | ||||||||
Effect of exchange rates on cash and cash equivalents | 1,159 | (1,313 | ) | 2,779 | ||||||||
Net increase (decrease) in cash and cash equivalents | (337 | ) | (23,799 | ) | 26,570 | |||||||
Cash and cash equivalents at beginning of year | 4,485 | 28,284 | 1,714 | |||||||||
Cash and cash equivalents at end of year | $ | 4,148 | $ | 4,485 | $ | 28,284 | ||||||
See accompanying notes to the consolidated financial statements.
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TROPICAL SPORTSWEAR INT’L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended October 2, 2004, September 27, 2003, and September 28, 2002
(Tables in thousands, except share and per share amounts)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of Tropical Sportswear Int’l Corporation (the “Company”) that include the accounts of Tropical Sportswear Int’l Corporation and its subsidiaries have been prepared in accordance with generally accepted accounting principles applicable to a going concern which contemplates continuity of operations and realization of assets and liquidation of liabilities in the normal course of business.
On December 16, 2004 (the “Petition Date”), all United States operating subsidiaries of the Company (the “Debtors”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”).
See Note 16 for a discussion of the Company filing a petition for bankruptcy.
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 other European countries, Mexico, Canada, Australia, and New Zealand. The Company subcontracts a substantial portion of the assembly of its products with independent manufacturers in the Caribbean Basin 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 fiscal year ended October 2, 2004 contains 53 weeks. The fiscal years ended September 27, 2003, and September 28, 2002 each contain 52 weeks.
Net Income (Loss) Per Share
Basic and diluted net income (loss) per share are computed as follows:
Fiscal Year Ended | |||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | |||||||||
Numerator for basic and diluted net income (loss) per share: | |||||||||||
Net income (loss) | $ | (28,509 | ) | $ | (131,452 | ) | $ | 2,321 | |||
Denominator for basic net income (loss) per share: | |||||||||||
Weighted average shares of common stock outstanding | 11,057,324 | 11,045,553 | 8,665,155 | ||||||||
Effect of dilutive stock options using the treasury stock method | — | — | 192,344 | ||||||||
Denominator for diluted net income (loss) per share | 11,057,324 | 11,045,553 | 8,857,499 | ||||||||
Net income (loss) per share: | |||||||||||
Basic | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.27 | |||
Diluted | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.26 | |||
At October 2, 2004, September 27, 2003 and September 28, 2002 there were 1.6 million, 1.5 million and 1.0 million stock options, respectively, excluded from the computation of diluted earnings per share because the effect of their inclusion in the calculation would have been anti-dilutive.
Stock Option Plan Accounting Policy and Pro Forma Information
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock Based Compensation,” (“Statement No. 123”) requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options 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 No. 123, which also requires that the information be determined as if the Company had 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 fiscal 2004, 2003 and 2002, respectively: risk-free interest rate of 3.9%, 3.9%, and 3.4%; a dividend yield of 0%, 0% and 0%; volatility factor of the expected market price of the Company’s common stock of 1.25, .83 and .49; and a weighted-average expected life of the option of eight years, eight years, and seven years.
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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 fiscal 2004, 2003 and 2002 is (in thousands except for net income (loss) per share information):
1.1.1 Year Ended | ||||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | ||||||||||
Net income (loss) as reported | $ | (28,509 | ) | $ | (131,452 | ) | $ | 2,321 | ||||
Estimated fair value of options | (1,528 | ) | (3,168 | ) | (2,728 | ) | ||||||
Net loss pro forma | $ | (30,037 | ) | $ | (134,620 | ) | $ | (407 | ) | |||
Basic net loss per share as reported | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.27 | ||||
Basic net loss per share pro forma | $ | (2.72 | ) | $ | (12.19 | ) | $ | (0.05 | ) | |||
Diluted net income (loss) per share as reported | $ | (2.58 | ) | $ | (11.90 | ) | $ | 0.26 | ||||
Diluted net loss per share pro forma | $ | (2.72 | ) | $ | (12.19 | ) | $ | (0.05 | ) |
Accumulated Other Comprehensive Income (Loss)
Other comprehensive income for fiscal 2004, composed primarily of a change in the Company’s minimum pension liability of $0.8 million and the adjustment of fair value of a cash flow hedge of $0.4 million, totaled $1.2 million.
Other comprehensive loss for fiscal 2003, composed primarily of foreign currency translations of $0.4 million, the adjustment of fair value of a cash flow hedge of $(0.1) million, and the change in the Company’s minimum pension liability of $1.9 million, totaled $2.2 million.
Other comprehensive loss for fiscal 2002, composed of foreign currency translations of $(0.8) million and the change in the Company’s minimum pension liability of $2.7 million, totaled $1.9 million, (net of income tax benefit of $1.2 million).
Total comprehensive income (loss) amounted to $(27.3) million, $(133.6) million and $0.4 million, for fiscal 2004, 2003 and 2002, respectively.
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, net of provisions for sales returns and allowances. Revenue is recognized when all of the following exist: persuasive evidence of an arrangement, delivery of the product has occurred, the price is fixed or determinable and payment is reasonably assured.
Foreign Currencies
Foreign entities 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 as a component of other comprehensive income (loss).
Advertising and Promotion Costs
Advertising and promotion costs are expensed when the advertising occurs. Advertising and promotion expense was $3.8 million, $4.8 million, and $7.7 million, in fiscal 2004, 2003, and 2002, respectively.
Shipping and Handling Costs
The Company does not typically incur shipping costs to its customers. Inventory handling costs incurred by the Company are included in selling, general and administrative expenses in the accompanying consolidated statements of income, and were less than 1% of net sales in each of the fiscal years presented.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments with original maturities of three months or less.
Accounts Receivables
Trade receivables are recorded at net realizable value or the amount that the Company expects to collect on gross customer trade receivables. A reserve has been established based on historical experience, in addition to a reserve for specific receivables which may not be fully collectible. Items deemed uncollectible are written off against the reserve for allowances and doubtful accounts. The Company utilizes credit insurance to reduce its exposure to uncollectible accounts.
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.
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Trademarks
Trademarks represent the fair value of the Savane® and Farah® trademarks that were acquired with the acquisition of Savane. The trademarks effectively have an indefinite legal life and their value has been amortized through September 29, 2001, on the straight-line basis over a period of 30 years. Effective September 30, 2001, the Company adopted Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” (“Statement No. 142”), and no longer amortizes the remaining value of its trademarks, but tests them for impairment on a periodic basis. In connection with the Company’s acquisition of Duck Head Apparel Company, Inc. (“Duck Head”) in August 2001, the fair value of the Duck Head® trademarks was estimated at approximately $13.3 million. The fair value assigned to the Duck Head trademark in the allocation of the purchase price was reduced to zero as a result of non long-lived assets exceeding the price the Company paid for Duck Head®. Effective June 6, 2003, the Company sold the Duck Head® trademarks.
Excess of Cost Over Fair Value of Net Assets of Acquired Subsidiary
Effective September 30, 2001, the Company adopted Statement No. 142, and ceased amortizing the remaining goodwill from the acquisition of Savane. In connection with the Company’s acquisition of Duck Head, the fair value of Duck Head’s non long-lived assets exceeded the price the Company paid, which in accordance with SFAS No. 142, resulted in an extraordinary gain.
Impairment of Trademarks and the Excess of Cost over Fair Value of Net Assets of Acquired Subsidiary
Impairment of intangibles not subject to amortization is tested annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset, determined through a discounted cash flow valuation method, with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
During the fourth quarter of fiscal 2003, the Company performed its annual test of impairment of its intangibles that included an independent valuation. As a result of this test and the independent valuation, the Company recorded a goodwill impairment charge of $34.2 million in fiscal 2003, resulting in the complete write-off of all goodwill related to the 1998 acquisition of Savane International Corp. This charge was included in other charges in the consolidated statements of operations for fiscal 2003. The Company’s impairment test and independent valuation resulted in no impairment of the value of the Company’s trademarks in fiscal 2003.
During the fourth quarter of fiscal 2004, the Company performed its annual test of impairment of its intangibles that included an independent valuation. As a result of this test and the independent valuation, the Company recorded an impairment charge of approximately $1.9 million related to the value of its trademarks. This charge is included in other charges in the consolidated statement of operations for fiscal 2004.
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. During the fourth quarter of fiscal 2004, the Company recorded an impairment charge of $.2 million for certain equipment. During the fourth quarter of fiscal 2003, the Company completed construction of a new administration building in Tampa, Florida. Subsequent to its completion, the Company determined that it would not occupy its new administration building, therefore, the building was marketed for sale. The Company recorded a charge of $14.3 million in fiscal 2003 to reduce the carrying amount to its fair value less cost to sell. This charge was included in other charges in the consolidated statements of operations for fiscal 2003.
On October 7, 2004, the Company announced plans to consolidate its Santa Teresa, New Mexico distribution function with its existing distribution operation in Tampa, Florida. In connection with this consolidation the Company recorded a charge of $3.2 million in fiscal 2004 to reduce the carrying value of the machinery and equipment located in Santa Teresa. This charge is included in other charges in the consolidated statements of operations for fiscal 2004.
Assets held for sale as of October 2, 2004 consisted of $3.7 million related to the Company’s cutting facility in Tampa, Florida. Assets held for sale as of September 27, 2003 consisted of $6.8 million related to the new administration building in Tampa and land in El Paso, Texas.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Derivative Accounting
The Company adopted the provisions of Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“Statement No. 133”), effective October 1, 2000. Under the terms of Statement No. 133, all derivative instruments are required to be accounted for at fair value and recorded on the consolidated balance sheet. The Company had an interest-rate swap agreement (the “Agreement”) which modified the interest characteristics of a portion of its outstanding debt. The Agreement was designated to hedge the interest payments related to a portion of the principal balance of the Company’s variable rate real estate loan. The Agreement involved the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the Agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates changed was accrued and recognized as an adjustment of interest expense related to the debt. The notional amount of the Agreement was $7.0 million and the Agreement was terminated on September 9, 2003, concurrent with the assignment of the real estate loan to which it was related. The loss on termination of the Agreement was $1.0 million and is being amortized through June 2006, the original maturity date of the real estate loan.
Financial Instruments
The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued expenses, long-term debt and obligations under capital leases and an interest rate swap agreement. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash, accounts receivable, accounts payable and accrued expenses: The carrying amounts reported in the consolidated balance sheets approximate fair value.
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Long-term debt and obligations under capital leases: The carrying amount of the Company’s borrowings under its variable rate long-term debt agreements approximate their fair value. The fair value of the Company’s fixed rate long-term debt and obligations under capital leases is estimated using discounted cash flow analyses, based on the estimated current incremental borrowing rate for similar types of borrowing agreements.
Interest-rate swap agreement: The carrying amount was determined using fair value estimates from third parties. This agreement was terminated in September 2003.
The carrying amounts and fair value of the Company’s long-term debt and obligations under capital leases and interest-rate swap agreement are as follows:
October 2, 2004 | September 27, 2003 | |||||||||||
Carrying Value | Fair Value (1) | Carrying Value | Fair Value | |||||||||
Long-term debt and obligations under capital leases | $ | 116,228 | $ | 122,732 | $ | 135,421 | $ | 148,709 |
(1) | See subsequent event discussion of the Company entering Chapter 11 bankruptcy. |
Reclassifications
Certain amounts in the fiscal 2003 financial statements have been reclassified to conform to the fiscal 2004 presentation.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 132 (revised 2003), “Employers’ Disclosures about Pension and Other Postretirement Benefits (“SFAS No. 132”), an amendment of FASB Statements No. 87, 88 and 106”. This statement added certain disclosure requirements for the major categories of plan assets and expected returns, the accumulated pension benefit obligations, the measurement date used, the benefits expected to be paid to plan participants during the next ten years, the employer’s contributions expected to be paid to the plans during the next fiscal year, and interim disclosure of the components of the benefit costs along with any revisions to the contributions expected to be paid to the plans for the current fiscal year. The annual disclosures are effective for the Company’s fiscal 2004 financial statements. SFAS No. 132 requires additional disclosure only and has no effect on the amounts reported in the Company’s consolidated financial statements.
Statement of Cash Flows
Supplemental cash flow information:
Fiscal Year Ended | |||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | |||||||
Cash paid for: | |||||||||
Interest | $ | 15,370 | $ | 14,258 | $ | 13,320 | |||
Income taxes | 1,132 | 1,233 | 2,766 |
Capital lease obligations of $0, $0, and $750,000 were incurred when the Company entered into leases for new equipment in the years ended October 2, 2004, September 27, 2003, and September 28, 2002, respectively.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
October 2, 2004 | September 27, 2003 | |||||||
Receivable from trade accounts | $ | 46,742 | $ | 71,531 | ||||
Reserve for allowances and doubtful accounts | (5,135 | ) | (7,176 | ) | ||||
$ | 41,607 | $ | 64,355 | |||||
During fiscal 2002, pursuant to two separate factoring agreements, the Company factored substantially all of its accounts receivable. The factoring agreements provided that the factor pay the Company an amount equal to the gross amount of its accounts receivable from customers, reduced by certain offsets, including, among other things, discounts, returns and a commission payable by the Company to the factor. During fiscal 2003, the Company discontinued factoring of its receivables, and maintained credit insurance for those accounts that it deemed necessary. Effective in the first quarter of fiscal 2004, the Company now maintains credit insurance for all customer accounts.
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3. INVENTORIES
Inventories consist of the following:
October 2, 2004 | September 27, 2003 | |||||||
Raw materials and work in process | $ | 20,575 | $ | 13,886 | ||||
Finished goods | 33,959 | 71,479 | ||||||
Reserve for excess and slow moving inventory | (4,042 | ) | (12,072 | ) | ||||
$ | 50,492 | $ | 73,293 | |||||
4. PROPERTIES AND EQUIPMENT
Property and equipment, at cost, consist of the following:
October 2, 2004 | September 27, 2003 | Life (Years) | ||||||
Land | $ | 2,943 | $ | 3,032 | — | |||
Land improvements | 2,035 | 2,035 | 15 | |||||
Buildings and improvements | 22,395 | 12,688 | 3 – 50 | |||||
Machinery and equipment | 23,837 | 43,901 | 3 – 12 | |||||
Leasehold improvement | 849 | 3,959 | 5 – 25 | |||||
Construction in progress | 2,443 | 500 | — | |||||
$ | 54,502 | $ | 66,115 | |||||
During fiscal 2004, 2003 and 2002, the Company capitalized interest cost of $0, $1.0 million and $0, respectively, for buildings and improvements, and machinery and equipment in the process of construction. Total depreciation expense was $5.6 million, $6.6 million, and $7.3 million, for the years ended October 2, 2004, September 27, 2003, and September 28, 2002, respectively.
5. DEBT
Debt consists of the following:
October 2, 2004 | September 27, 2003 | |||||||
Revolving credit line | $ | 15,752 | $ | 25,685 | ||||
Real estate loan | — | 8,000 | ||||||
Senior subordinated notes | 100,000 | 100,000 | ||||||
115,752 | 133,685 | |||||||
Less current maturities | (15,752 | ) | (26,485 | ) | ||||
Long-term debt | $ | 100,000 | $ | 107,200 | ||||
On June 6, 2003, the Company renewed its revolving credit line (the “Facility”). The Facility provided for borrowings of up to $95.0 million, subject to certain borrowing base limitations. Borrowings under the Facility bear variable rates of interest based on LIBOR plus an applicable margin, and were secured by substantially all of the Company’s domestic assets. The Facility was scheduled to mature in June 2006. The Facility contained significant financial and operating covenants if availability under the Facility fell below $20 million. These covenants included a consolidated fixed charge ratio and a ratio of consolidated funded debt to consolidated EBITDA. The Facility also included prohibitions on the Company’s ability to incur certain additional indebtedness or to pay dividends, and restrictions on its ability to make capital expenditures.
On December 15, 2003, the Company paid the semi-annual interest payment of $5.5 million to the holders of its senior subordinated notes. On December 16, 2003, availability under the Facility fell below $20 million, triggering financial covenants which were violated. This caused the Company to be in technical default under the Facility. On January 12, 2004, the Company amended the Facility (the “Amended Facility”) with Fleet Capital, which among other things reduced aggregate borrowings to $70 million. The default under the Facility was waived on January 12, 2004 by the terms of the Amended Facility. Additionally, the Amended Facility contained a $10 million availability reserve base and higher rates of interest than the Facility. The Amended Facility contained monthly financial covenants of minimum EBITDA levels, which began February 2004 and a consolidated fixed charge coverage ratio and consolidated EBIT to consolidated interest expense ratio, which were to begin March 2005. The fiscal minimum EBITDA levels were cumulative month amounts which began in the second quarter of fiscal 2004. The Company was in compliance with the EBITDA covenants during the term of the Amended Facility.
The cross default provision on the Company’s Real Estate Loan was triggered by the default on the Facility. This default was waived on January 12, 2004 concurrent with the loan Facility. On January 12, 2004, the Real Estate Loan was amended (the “Amended Real Estate Loan”) to increase the loan by $2.0 million, to increase the interest rate, and to increase the quarterly interest payments from $200,000 to $250,000.
On June 17, 2004, the Company entered into a new Loan and Security Agreement (the “New Facility”) with The CIT Group (“CIT”) as Agent, and Fleet Capital continuing to participate as a syndicated lender. The New Facility provides for borrowings of up to $60 million, and matures October 31, 2006. The New Facility provides for increased borrowing availability and reduced rates of interest. The amount that can be borrowed at any given time is based upon a formula that takes into account, among other things, eligible accounts receivable and inventory, which can result in borrowing availability of less than the full amount of the New Facility. The New Facility also contains a $6 million availability reserve base. The Company is only subject to financial covenants when availability is below 20% of the New Facility. If availability falls below 20%, the Company has ten business days to bring availability back up above the 20% threshold. If availability does not increase above the 20% threshold within ten business days, the financial covenants include a quarterly minimum EBITDA level beginning with the third quarter of fiscal 2004, and a quarterly fixed charge coverage ratio beginning with the second quarter of fiscal 2005. The New Facility also includes prohibitions on the Company’s ability to incur certain additional indebtedness or to pay dividends, and restrictions on its ability to make capital expenditures.
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The outstanding balance on the Amended Real Estate Loan of $5.7 million was assumed by CIT and is a fixed asset portion of the New Facility. The fixed asset portion of the New Facility is reduced by $400,000 beginning on September 1, 2004 and on the first day of each third month thereafter.
The New Facility contains both a subjective acceleration clause and a requirement to maintain a lock-box arrangement, whereby remittances from customers reduce borrowings outstanding under the New Facility. In accordance with Emerging Issues Task Force 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement”, outstanding borrowings under the New Facility are classified as short-term. Outstanding borrowings under the Company’s previous Amended Facility were also classified as short-term.
Borrowings under the New Facility bear variable rates of interest based on LIBOR plus an applicable margin (4.4% at October 2, 2004). The outstanding balance on the New Facility was $15.8 million at October 2, 2004 and availability was $16.9 million (after the $6.0 million reserve base).
The Company has $100 million of senior subordinated notes (the “Notes”) outstanding that were issued through a private placement. The Notes are unsecured but are jointly and severally guaranteed by the Company’s domestic subsidiaries (see Note 15). Under the terms of the indenture governing the Notes, the Company is paying semi-annual interest at the rate of 11% through June 2008, 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 a bridge loan that was used to finance the purchase of Savane in June 1998.
In addition to the financial covenants discussed above, the New Facility also contains customary events of default, including nonpayment of principal or interest, violation of covenants, inaccuracy of representations and warranties, cross-defaults to other indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, a material adverse change, and certain changes of control at the Company. The occurrence of an event of default or a material adverse effect on the Company could result in its inability to obtain further borrowings under the New Facility and could also result in the acceleration of its obligations under any or all of its credit agreements, each of which could materially and adversely affect the business.
See Note 16—Subsequent Events for a discussion of bankruptcy and its impact on existing indebtedness.
In June 2002, the Company completed a secondary public offering of 3.0 million shares of common stock. The Company received net proceeds of approximately $63.2 million, of which approximately $32.0 million was used to repay all outstanding borrowings under the Company’s previous revolving credit facility, to pay down a portion of the Real Estate Loan, and to repay certain capital lease obligations. The remaining $31.2 million was used for the payment of the cash portion of the Project Synergy charges (Restructuring of Savane International Corp. – see Note 9), the construction of an administration facility in Tampa, Florida and for working capital and general corporate purposes.
The scheduled maturities of long-term debt are as follows:
Fiscal Year | Amount | ||
2005 | $ | — | |
2006 | 15,752 | ||
2007 | — | ||
2008 | 100,000 | ||
2009 | — | ||
Thereafter | — |
Total accrued interest related to debt as of October 2, 2004 and September 27, 2003 was $3.3 million and $3.4 million, respectively.
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 2, 2004 are as follows:
Fiscal Year | Operating Leases | Capital Leases | |||||
2005 | $ | 2,165 | $ | 368 | |||
2006 | 1,831 | 132 | |||||
2007 | 1,594 | 18 | |||||
2008 | 1,415 | — | |||||
2009 | 1,415 | — | |||||
Thereafter | 2,922 | — | |||||
Total minimum lease payments | $ | 11,342 | 518 | ||||
Less amount representing interest | (42 | ) | |||||
Present value of minimum capital lease payments | 476 | ||||||
Less current installments | (348 | ) | |||||
$ | 128 | ||||||
The following summarizes the Company’s assets under capital leases:
October 2, 2004 | September 27, 2003 | |||||
Machinery and equipment | $ | 1,394 | $ | 8,939 | ||
Accumulated amortization | 1,018 | 5,232 |
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Amortization of assets under capital leases has been included in depreciation. Total rental expense for operating leases for fiscal 2004, 2003, and 2002, was $2.5 million, $4.9 million, and $6.2 million, respectively.
7. INCOME TAXES
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 (loss) before income taxes includes the following components:
Year Ended | ||||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | ||||||||||
Domestic | $ | (29,211 | ) | $ | (120,315 | ) | $ | 2,664 | ||||
Costa Rica | — | 210 | 198 | |||||||||
Australia | (433 | ) | (560 | ) | (1,499 | ) | ||||||
United Kingdom | 2,850 | 2,838 | 2,258 | |||||||||
Mexico | (1,229 | ) | (1,774 | ) | 173 | |||||||
Hong Kong | — | (2,150 | ) | (716 | ) | |||||||
Other | 315 | 267 | 89 | |||||||||
$ | (27,708 | ) | $ | (121,484 | ) | $ | 3,167 | |||||
The components of the income tax provision (benefit) are as follows:
Year Ended | ||||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | (1,968 | ) | $ | (2,283 | ) | ||||
State | (32 | ) | (133 | ) | (267 | ) | ||||||
Australia | — | — | (449 | ) | ||||||||
United Kingdom | 846 | 907 | 243 | |||||||||
Mexico | 293 | 106 | (23 | ) | ||||||||
New Zealand | 104 | 88 | 30 | |||||||||
1,211 | (1,000 | ) | (2,749 | ) | ||||||||
Deferred: | ||||||||||||
Federal | (410 | ) | 10,934 | 3,974 | ||||||||
State | — | (62 | ) | 129 | ||||||||
Other foreign | — | 96 | (96 | ) | ||||||||
(410 | ) | 10,968 | 4,007 | |||||||||
$ | 801 | $ | 9,968 | $ | 1,258 | |||||||
The reconciliation of income tax expense (benefit) computed at the U.S. Federal statutory tax rate to the Company’s income tax provision is as follows:
Year Ended | ||||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | ||||||||||
Income tax expense (benefit) at Federal statutory rate | $ | (9,698 | ) | $ | (42,519 | ) | $ | 1,108 | ||||
State taxes, net of Federal tax benefit | (828 | ) | (2,663 | ) | (299 | ) | ||||||
Income tax of foreign subsidiaries | 718 | 1,510 | 55 | |||||||||
Amortization of goodwill | — | 10,422 | — | |||||||||
Sale of foreign subsidiary | 1,161 | — | — | |||||||||
Meals and entertainment | 44 | 58 | 121 | |||||||||
Increase in valuation allowance | 10,333 | 40,427 | — | |||||||||
Subpart F income | — | — | 204 | |||||||||
Other | (929 | ) | 2,733 | 69 | ||||||||
$ | 801 | $ | 9,968 | $ | 1,258 | |||||||
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. Certain of the Company’s foreign subsidiaries have undistributed accumulated earnings of approximately $17.0 million, as adjusted for U.S. tax purposes at October 2, 2004. No U.S. tax has been provided on the undistributed earnings because the Company intends to indefinitely reinvest such earnings in the foreign operations. The amount of the unrecognized deferred tax liability associated with the undistributed earnings that have not been previously taxed in the U.S. was approximately $3.6 million net of foreign tax credits at October 2, 2004. If earnings are repatriated, foreign tax credits can offset a portion of the U.S. tax on such earnings.
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The temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of October 2, 2004 and September 27, 2003 are presented below:
Year Ended | ||||||||
October 2, 2004 | September 27, 2003 | |||||||
Deferred tax assets: | ||||||||
Accounts receivable | $ | 2,120 | $ | 2,943 | ||||
Inventory | 662 | 4,009 | ||||||
U.S. Federal NOL carryforwards | 46,521 | 26,371 | ||||||
U.S. State NOL carryforwards | 5,964 | 4,158 | ||||||
Tax credits | 588 | 588 | ||||||
Depreciation | — | 145 | ||||||
Accrued exit costs – U.S. | 1,323 | 2,139 | ||||||
Accrued exit costs – foreign | 509 | 553 | ||||||
Other accrued expenses and reserves – U.S. | 4,384 | 11,526 | ||||||
Total deferred tax assets | 62,071 | 52,432 | ||||||
Deferred tax liabilities: | ||||||||
Depreciation | (1,871 | ) | — | |||||
Trademarks | (3,904 | ) | (5,003 | ) | ||||
Other items | (3,274 | ) | (4,463 | ) | ||||
Total deferred tax liabilities | (9,049 | ) | (9,466 | ) | ||||
Net deferred tax asset | 53,022 | 42,966 | ||||||
Valuation allowance | (54,044 | ) | (44,157 | ) | ||||
Deferred tax asset (liability), net of valuation allowance | $ | (1,022 | ) | $ | (1,191 | ) | ||
Classified as follows: | ||||||||
Current asset | $ | — | $ | 45 | ||||
Non-current asset | — | 140 | ||||||
Current liability | (126 | ) | (775 | ) | ||||
Non-current liability | (896 | ) | (601 | ) | ||||
$ | (1,022 | ) | $ | (1,191 | ) | |||
A valuation allowance to reduce the deferred tax assets reported is required 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 fiscal 2004 and fiscal 2003, management determined that respective valuation allowances of $54.0 and $44.2 million, respectively, were necessary to reduce the deferred tax assets relating to certain federal and state net operating loss carryforwards, foreign tax credit carryforwards and other accruals not expected to result in a future realizable benefit.
For domestic purposes, the Company has Federal net operating loss carryforwards for tax purposes of approximately $132 million, which will expire through 2024. 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 $588,000, which carry forward indefinitely.
8. SALE OF DUCK HEAD® TRADEMARKS
On August 9, 2001, the Company completed the acquisition of 100% of the outstanding stock of Duck Head Apparel Company, Inc. (“Duck Head”). The total purchase price, including cash paid for common stock acquired, cash paid for the fair value of outstanding stock options, and cash paid for fees and expenses, amounted to $17.9 million. Cash acquired totaled $5.5 million. The acquisition of Duck Head was made to expand the Company’s portfolio of brands.
The acquisition was accounted for using the purchase method of accounting and the results of operations for Duck Head 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 was $28.2 million. This resulted in an initial excess of the fair value of the net assets acquired over the purchase price of approximately $10.3 million. The Company then reduced the fair value assigned to Duck Head’s long-lived assets, including trademarks and property and equipment from $9.5 million to zero. The remaining $800,000 was recorded as an extraordinary gain in the consolidated statement of income in fiscal 2001. Final adjustments to the purchase price of Duck Head resulted in an additional extraordinary gain, which was recorded in fiscal 2002.
On June 2, 2003, the Company sold its Duck Head® trademarks to Goody’s Family Clothing, Inc. (“Goody’s”) for $4.0 million. The funds from Goody’s were transferred directly to pay down the Company’s revolving credit facility. Under the purchase agreement, the Company continued to sell Duck Head® branded products through the end of fiscal 2003. Goody’s also assumed all licenses associated with the Duck Head® trademarks. In connection with the sale, the Company recorded a net gain of $3.7 million, which is net of expenses related to the sale and a reduction of certain of the remaining assets, including inventory. In connection with the sale of the Duck Head® trademarks, all of the Duck Head® retail outlet stores were closed in September 2003. The cash costs associated with the closure of the retail stores was approximately $0.7 million.
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9. RESTRUCTURING OF SAVANE INTERNATIONAL CORP.
The Company has no remaining accrued liabilities related to the 1998 acquisition of Savane International Corp. The activity in the exit accruals related to this acquisition during fiscal 2004, 2003 and 2002 were as follows:
Year Ended | ||||||||||||
October 2, 2004 | September 27, 2003 | September 28, 2002 | ||||||||||
Beginning balance | $ | 437 | $ | 2,216 | $ | 5,150 | ||||||
Cash payments | — | (1,779 | ) | (484 | ) | |||||||
Non-cash reductions | (437 | ) | — | (2,450 | ) | |||||||
Ending balance | $ | — | $ | 437 | $ | 2,216 | ||||||
The non-cash reduction in fiscal 2004 was included in other expense in the consolidated statements of operations.
On April 18, 2002, the Company announced a plan to consolidate the administrative, cutting and related functions of the Savane division in El Paso, Texas into the Tampa, Florida facility. The Company completed the physical consolidation in the second fiscal quarter ending March 29, 2003. As part of the consolidation, the Company has vacated its El Paso, Texas administration building and terminated the associated lease obligation, and vacated its El Paso, Texas cutting facility.
As a result of these initiatives (internally referred to as “Project Synergy”), the Company recorded a pre-tax charge totaling approximately $16.1 million in fiscal 2002 for severance ($3.1 million), relocation (recognized as incurred) ($2.5 million), lease terminations ($2.8 million), asset write-downs ($5.7 million) and other related costs ($2.0 million) included in other charges in the accompanying statements of operations. As of October 2, 2004, the Company has approximately $219,000 remaining of the accrual, related to lease termination costs. The activity in the exit accruals related to Project Synergy during fiscal 2004 and 2003 were as follows:
Year Ended October 2, 2004 | Year Ended September 27, 2003 | |||||||
Beginning balance | $ | 2,739 | $ | 4,295 | ||||
Non-cash additions | — | 1,986 | ||||||
Non-cash reductions | (645 | ) | (2,490 | ) | ||||
Cash payments | (1,875 | ) | (1,052 | ) | ||||
Ending balance | $ | 219 | $ | 2,739 | ||||
Fiscal 2003 non-cash additions related primarily to reserves for lease terminations. Fiscal 2003 non-cash reductions primarily related to reserves for severance and other related costs.
The non-cash reduction in fiscal 2004 and 2003 was included in other expense in the consolidated statements of operations.
On October 7, 2004, the Company announced plans to consolidate its Santa Teresa, New Mexico distribution function with its existing distribution operation in Tampa, Florida. The consolidation process was completed at the end of December 2004. The Company is currently in negotiations with the landlord of the New Mexico facility and with union representatives to determine disposition of the New Mexico lease and severance arrangements.
In connection with this consolidation the Company recorded a charge of $3.2 million in fiscal 2004 to reduce the carrying value of the machinery and equipment located in Santa Teresa, New Mexico. This charge is included in other charges in the consolidated statements of operations for 2004.
10. COMMITMENTS AND CONTINGENCIES
In May 2003, the Company transitioned the Victorinox® apparel division to Swiss Army Brands, Inc. (“Swiss Army”). In connection with the transition, Swiss Army disputed certain aspects of the transition agreement and did not pay the Company approximately $4.8 million, which the Company believed was due under the transition agreement. On June 3, 2003, the Company filed a declaratory judgment action against Swiss Army, seeking judicial interpretation of the agreement. The Company and Swiss Army agreed to mediation in an attempt to resolve the issue, which resulted in an impasse. On October 15, 2004 the Company and Swiss Army signed a Settlement Agreement under which Swiss Army paid the Company $3.5 million on November 15, 2004. Cash proceeds from this settlement were used to repay borrowings under the Company’s revolving credit line. In connection with this settlement, the Company recorded a charge of approximately $778,000 to reduce its receivable from Swiss Army. This charge is included in the consolidated statement of operations for fiscal 2004.
Two lawsuits seeking class action status were filed on September 16, 2003 and October 2, 2003, in the U.S. District Court for the Middle District of Florida, Tampa Division (the “District Court”), on behalf of all persons who purchased or otherwise acquired the securities of the Company during the period from April 17, 2002 through January 20, 2003 (the “Class Period”). The lawsuits name the Company and certain current and former officers and directors of the Company as defendants. The lawsuits make a number of allegations against the defendants, including allegations that during the Class Period, the defendants materially misled the investing public by publicly issuing false and misleading statements and omitting to disclose material facts concerning the Company’s operations and performance and the retail market for its goods. On December 15, 2003, the two cases were consolidated whereby one of the cases was administratively closed. On March 1, 2004, a consolidated amended complaint was filed adding additional current company directors as defendants. The consolidated amended complaint also added claims under Section 11 and Section 15 of the Securities Act of 1933, on behalf of all persons who purchased or otherwise acquired the Company’s stock in connection with the Company’s June 2002 secondary offering, as well as all persons who purchased or otherwise acquired the Company’s common stock during the period from June 27, 2001 through January 14, 2004. The claims allege that the prospectus issued in connection with secondary offering contained false and misleading statements, and that the director defendants are responsible therefore, both for having signed the prospectus and as “controlling persons” of the Company. On August 31, 2004, the plaintiffs dismissed all claims against the current company directors with prejudice. On December 16, 2004, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division, which stayed the lawsuit against the Company. See Note 16 – Subsequent Events, for further information regarding this case.
As of October 2, 2004, the Company had approximately $9.4 million of outstanding trade letters of credit with various expiration dates through March 2005.
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On October 30, 2003, a purported shareholder sent to the Company a shareholder derivative demand pursuant to Florida Statute Section 607.07401 demanding, among other things, that the Company institute litigation against current and former officers and directors Michael Kagan, Eloy Vallina-Laguera and William Compton. The demand contends that the Company should attempt to recover from these officers and directors their proceeds of certain stock sales in July 2002. The Company is taking appropriate action in response to the demand.
Other than the items noted above, the Company is subject to various claims and lawsuits arising in the normal course of business. See Note 16 – Subsequent Events.
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company has a 401(k) profit sharing plan 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 fiscal 2004, 2003, and 2002, the Company recorded expenses of $232,000, $509,000, and $681,000, respectively, related to the plan.
Certain non-U.S. employees participate in defined contribution plans with varying vesting and contribution provisions. For fiscal 2004, 2003 and 2002, the Company recorded expenses of $256,000, $255,000 and $229,000, respectively, related to these plans.
Defined Benefit Plan
Under the defined benefit plan, which covers certain Savane distribution center associates, the basic monthly pension payable to a participant upon normal retirement equals the product of the participant’s monthly benefit rate times the number of years of credited service. Assets of the defined benefit plan are invested primarily in U.S. government obligations, corporate bonds, and equity securities.
The Company employs a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely-accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness.
The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments.
The Company’s policy is to fund accrued pension cost when such costs are deductible for tax purposes. Net periodic pension cost for the years ended October 2, 2004 and September 27, 2003, included the following components:
October 2, 2004 | September 27, 2003 | |||||||
Service cost-benefits earned during the period | $ | 31 | $ | 38 | ||||
Interest cost on projected benefit obligation | 613 | 573 | ||||||
Estimated return on plan assets | (494 | ) | (508 | ) | ||||
Net amortization and deferral | 385 | 295 | ||||||
Net periodic pension cost | $ | 535 | $ | 398 | ||||
The following table sets forth the funded status of the defined benefit plan:
October 2, 2004 | September 27, 2003 | |||||||
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION: | ||||||||
Accumulated benefit obligation | $ | 10,057 | $ | 10,667 | ||||
Projected benefit obligation | 10,057 | 10,667 | ||||||
Plan assets at market value | 6,616 | 6,267 | ||||||
Funded status | (3,441 | ) | (4,400 | ) | ||||
Amounts recognized in the consolidated balance sheets consist of: | ||||||||
Accrued benefit liability | $ | (3,441 | ) | $ | (4,400 | ) | ||
Accumulated other comprehensive expense | 5,077 | 5,885 | ||||||
Net amount recognized | $ | 1,636 | $ | 1,485 | ||||
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The following table provides a reconciliation of beginning and ending balances of the benefit obligation of the defined benefit plan:
October 2, 2004 | September 27, 2003 | |||||||
CHANGE IN BENEFIT OBLIGATION: | ||||||||
Projected benefit obligation, beginning of year | $ | 10,667 | $ | 8,868 | ||||
Service cost | 31 | 38 | ||||||
Interest cost | 613 | 573 | ||||||
Benefits paid | (870 | ) | (913 | ) | ||||
Actuarial (gain) loss | (384 | ) | 2,101 | |||||
Projected benefit obligation, end of year | $ | 10,057 | $ | 10,667 | ||||
The following table provides a reconciliation of the beginning and ending balances of the fair value of plan assets of the defined benefit plan:
October 2, 2004 | September 27, 2003 | |||||||
CHANGE IN PLAN ASSETS: | ||||||||
Plan assets at fair value, beginning of year | $ | 6,267 | $ | 6,358 | ||||
Actual return on plan assets | 532 | 822 | ||||||
Company contribution | 687 | — | ||||||
Benefits paid | (870 | ) | (913 | ) | ||||
Plan assets at fair value, end of year | $ | 6,616 | $ | 6,267 | ||||
Plan assets were approximately allocated to 45% equity securities, 47% debt securities, and 8% money market funds in 2004. Plan assets were approximately allocated to 51% equity securities, 47% debt securities, and 2% money market funds in 2003.
In determining the benefit obligations and service cost of the Company’s defined benefit plan, a weighted average discount rate of 5.75% and 6.00% was used for fiscal 2004 and fiscal 2003, respectively, and an expected long-term rate of return on plan assets of 8.00% and 8.50%, respectively was used for fiscal 2004 and fiscal 2003. Measurements are determined as of the plan’s calendar year end.
See Note 16 – Subsequent Events.
12. STOCK OPTION PLANS
The Company has adopted various stock option plans, which combined reserve 3,560,000 shares of the Company’s common stock for future issuance. The per share exercise price of each stock option granted under these plans will be equal to the quoted fair market value of the stock on the date of grant.
A summary of the Company’s stock option activity, and related information follows:
Fiscal 2004 | Fiscal 2003 | Fiscal 2002 | ||||||||||||||||
Options | Weighted Average Exercise Price Per Share | Options | Weighted Average Exercise Price Per Share | Options | Weighted Average Exercise Price Per Share | |||||||||||||
Outstanding – beginning of Year | 1,555,594 | $ | 11.92 | 1,239,557 | $ | 17.98 | 1,471,996 | $ | 16.52 | |||||||||
Granted | 707,050 | 1.55 | 841,909 | 5.53 | 279,580 | 22.89 | ||||||||||||
Exercised | (7,372 | ) | 1.53 | (1,250 | ) | 5.05 | (343,120 | ) | 16.07 | |||||||||
Canceled/expired | (708,831 | ) | 11.18 | (524,622 | ) | 16.01 | (168,899 | ) | 17.23 | |||||||||
Outstanding-end of year | 1,546,441 | $ | 7.56 | 1,555,594 | $ | 11.92 | 1,239,557 | $ | 17.98 | |||||||||
Weighted-average fair value of options granted during the year | $ | 1.27 | $ | 4.67 | $ | 17.98 |
The exercise price range of outstanding and exercisable options as of October 2, 2004 follows:
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Outstanding Options | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Exercisable Options | Weighted Average Exercise Price | |||||||
$ 1.08 - $ 1.26 | 31,050 | 9.54 | $ | 1.72 | 10,393 | $ | 1.17 | |||||
$ 1.53 - $ 1.53 | 561,169 | 9.38 | $ | 1.53 | 239,682 | $ | 1.53 | |||||
$ 2.11 – $ 5.42 | 465,400 | 8.54 | $ | 5.11 | 316,254 | $ | 5.07 | |||||
$ 7.11 - $27.75 | 488,822 | 5.56 | $ | 17.23 | 460,846 | $ | 17.08 | |||||
$ 1.08 - $27.75 | 1,546,441 | 7.92 | $ | 7.56 | 1,027,175 | $ | 9.59 | |||||
The weighted-average remaining contractual life of the outstanding options is eight years. The initial term for options is generally ten years. The vesting period is three years for 604,673 options, two years for 629,518 options, one year for 50,000 options and 262,250 options were immediately vested.
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13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations:
Net Sales | Gross Profit | Net Income | Net Income (Loss) Per Share – | Net Income (Loss) Per Share – | |||||||||||||||
Year Ended October 2, 2004 (a) | |||||||||||||||||||
First Quarter | $ | 77,327 | $ | 11,411 | $ | (10,431 | ) | $ | (0.94 | ) | $ | (0.94 | ) | ||||||
Second Quarter | 93,823 | 22,449 | 3,969 | 0.36 | 0.36 | ||||||||||||||
Third Quarter | 74,818 | 15,836 | (5,787 | ) | (0.52 | ) | (0.52 | ) | |||||||||||
Fourth Quarter | 64,749 | 12,195 | (16,260 | ) | (1.47 | ) | (1.47 | ) | |||||||||||
Year Ended September 27, 2003 (b) | |||||||||||||||||||
First Quarter | $ | 99,041 | $ | 20,794 | $ | (5,018 | ) | $ | (0.45 | ) | $ | (0.45 | ) | ||||||
Second Quarter | 112,725 | 23,029 | 638 | 0.06 | 0.06 | ||||||||||||||
Third Quarter | 96,732 | 9,026 | (30,564 | ) | (2.75 | ) | (2.75 | ) | |||||||||||
Fourth Quarter | 78,225 | (11,851 | ) | (96,508 | ) | (8.73 | ) | (8.73 | ) |
(a) | Includes the effect of certain pre-tax charges in fiscal 2004. |
(b) | Includes the effect of certain pre-tax charges in fiscal 2003. |
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has one reportable segment, the design, sourcing and marketing of sportswear apparel. The information for this segment is the information used by the Company’s chief operating decision-maker to evaluate operating performance. International sales represented approximately 15.3%, 12.4%, and 10.5% of net sales for fiscal 2004, 2003 and 2002, respectively. Net sales for Europe represented approximately 11.5%, 7.9% and 6.1% in fiscal 2004, 2003, and 2002 respectively. Long-term assets of international operations represented approximately 2.7%, 4.1% and 2.3% of the Company’s long-term assets at October 2, 2004, September 27, 2003 and September 28, 2002, respectively.
In fiscal 2004, Wal-Mart and Sam’s accounted for approximately 25.0% and 18.6%, respectively, of consolidated net sales. In fiscal 2003, Wal-Mart, Sam’s, and Kohl’s accounted for approximately 20.8%, 15.8% and 10.5%, respectively, of consolidated net sales. In fiscal 2002, Wal-Mart, Sam’s and Kohl’s accounted for approximately 14.7%, 13.4% and 9.9%, respectively, of consolidated net sales.
15. SUPPLEMENTAL COMBINED CONDENSED FINANCIAL INFORMATION
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 statement of operations and cash flows for the three years ended October 2, 2004, and the supplemental combined condensed balance sheets as of October 2, 2004 and September 27, 2003. 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 believes that they are not material to investors.
Year Ended October 2, 2004 | ||||||||||||||||||||
Statements of Operations
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 153,061 | $ | 111,243 | $ | 46,980 | $ | (567 | ) | $ | 310,717 | |||||||||
Gross profit | 29,332 | 15,624 | 17,229 | (294 | ) | 61,891 | ||||||||||||||
Operating income (loss) | (2,691 | ) | (10,622 | ) | 1,629 | (11,684 | ) | |||||||||||||
Interest, income taxes and other, net | 7,945 | 7,512 | 1,368 | — | 16,825 | |||||||||||||||
Equity in loss of subsidiaries | (17,873 | ) | — | — | 17,873 | — | ||||||||||||||
Net income (loss) | (28,509 | ) | (18,134 | ) | 261 | 17,873 | (28,509 | ) | ||||||||||||
Year Ended September 27, 2003 | ||||||||||||||||||||
Statements of Operations
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 192,433 | $ | 148,393 | $ | 48,064 | $ | (2,167 | ) | $ | 386,723 | |||||||||
Gross profit | 24,373 | 2,735 | 14,221 | (331 | ) | 40,998 | ||||||||||||||
Operating income (loss) | (44,154 | ) | (65,671 | ) | 165 | — | (109,660 | ) | ||||||||||||
Interest, income taxes and other, net | 11,020 | 8,338 | 2,434 | — | 21,792 | |||||||||||||||
Equity in loss of subsidiaries | (76,278 | ) | — | — | 76,278 | — | ||||||||||||||
Net loss | (131,452 | ) | (74,009 | ) | (2,269 | ) | 76,278 | (131,452 | ) |
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Year Ended September 28, 2002 | ||||||||||||||||||||
Statements of Operations
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 204,653 | $ | 211,519 | $ | 48,689 | $ | (984 | ) | $ | 463,877 | |||||||||
Gross profit | 50,525 | 61,414 | 16,468 | — | 128,407 | |||||||||||||||
Operating income (loss) | 18,899 | (3,989 | ) | 210 | — | 15,120 | ||||||||||||||
Interest, income taxes and other, net | 8,065 | 4,889 | (276 | ) | 121 | 12,799 | ||||||||||||||
Equity in loss of subsidiaries | (8,392 | ) | — | — | 8,392 | — | ||||||||||||||
Net income (loss) | 2,442 | (8,878 | ) | 486 | 8,271 | 2,321 | ||||||||||||||
October 2, 2004 | ||||||||||||||||||||
Balance Sheets
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 194 | $ | 330 | $ | 3,624 | $ | — | $ | 4,148 | ||||||||||
Accounts receivable | 23,727 | 13,437 | 4,443 | — | 41,607 | |||||||||||||||
Inventories | 26,656 | 17,570 | 6,266 | — | 50,492 | |||||||||||||||
Other current assets | 6,459 | 5,350 | 3,997 | — | 15,806 | |||||||||||||||
Total current assets | 57,036 | 36,687 | 18,330 | — | 112,053 | |||||||||||||||
Property and equipment, net | 21,795 | 183 | 1,040 | — | 23,018 | |||||||||||||||
Other assets | 58,841 | 3,196 | (8,840 | ) | (37,944 | ) | 15,253 | |||||||||||||
Total assets | $ | 137,672 | $ | 40,066 | $ | 10,530 | $ | (37,944 | ) | $ | 150,324 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 26,069 | $ | 399 | $ | 6,116 | — | $ | 32,584 | |||||||||||
Current portion of long-term debt and capital lease obligations | 16,014 | 86 | — | — | 16,100 | |||||||||||||||
Total current liabilities | 42,083 | 485 | 6,116 | — | 48,684 | |||||||||||||||
Long-term debt and noncurrent portion of capital lease obligations | 100,128 | — | — | — | 100,128 | |||||||||||||||
Other noncurrent liabilities | — | 5,155 | 896 | — | 6,051 | |||||||||||||||
Shareholders’ equity (deficit) | (4,539 | ) | 34,426 | 3,518 | (37,944 | ) | (4,539 | ) | ||||||||||||
Total liabilities and shareholders’ equity | $ | 137,672 | $ | 40,066 | $ | 10,530 | $ | (37,944 | ) | $ | 150,324 | |||||||||
September 27, 2003 | ||||||||||||||||||||
Balance Sheets
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 218 | $ | 440 | $ | 3,827 | $ | — | $ | 4,485 | ||||||||||
Accounts receivable | 33,740 | 22,174 | 8,441 | — | 64,355 | |||||||||||||||
Inventories | 31,945 | 30,818 | 10,530 | — | 73,293 | |||||||||||||||
Other current assets | 13,472 | 4,903 | 2,992 | — | 21,367 | |||||||||||||||
Total current assets | 79,375 | 58,335 | 25,790 | — | 163,500 | |||||||||||||||
Property and equipment, net | 23,858 | 5,318 | 1,957 | — | 31,133 | |||||||||||||||
Other assets | 92,392 | 6,706 | (14,071 | ) | (65,381 | ) | 19,646 | |||||||||||||
Total assets | $ | 195,625 | $ | 70,359 | $ | 13,676 | $ | (65,381 | ) | $ | 214,279 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 38,036 | $ | 5,480 | $ | 5,006 | — | $ | 48,522 | |||||||||||
Current portion of revolving credit line, long-term debt and capital lease obligations | 26,738 | 892 | 19 | — | 27,649 | |||||||||||||||
Total current liabilities | 64,774 | 6,372 | 5,025 | — | 76,171 | |||||||||||||||
Long-term debt and noncurrent portion of capital lease obligations | 107,590 | 87 | 95 | — | 107,772 | |||||||||||||||
Other noncurrent liabilities | 510 | 6,968 | 107 | — | 7,585 | |||||||||||||||
Shareholders’ equity | 22,751 | 56,932 | 8,449 | (65,381 | ) | 22,751 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 195,625 | $ | 70,359 | $ | 13,676 | $ | (65,381 | ) | $ | 214,279 | |||||||||
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Year Ended October 2, 2004 | |||||||||||||||||||
Statements of Cash Flows
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Net cash provided by (used in) operating activities | $ | 15,412 | $ | (3,653 | ) | $ | 1,935 | $ | — | $ | 13,694 | ||||||||
Net cash provided by (used in) investing activities | 5,838 | 722 | (261 | ) | — | 6,299 | |||||||||||||
Net cash used in financing activities | (20,467 | ) | (978 | ) | (44 | ) | — | (21,489 | ) | ||||||||||
Other | (807 | ) | 3,799 | (1,833 | ) | — | 1,159 | ||||||||||||
Net decrease in cash | (24 | ) | (110 | ) | (203 | ) | — | (337 | ) | ||||||||||
Cash, beginning of year | 218 | 440 | 3,827 | — | 4,485 | ||||||||||||||
Cash, end of year | 194 | 330 | 3,624 | — | 4,148 | ||||||||||||||
Year Ended September 27, 2003 | |||||||||||||||||||
Statements of Cash Flows
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Net cash provided by (used in) operating activities | $ | (45,650 | ) | $ | 3,472 | $ | (242 | ) | $ | — | $ | (42,420 | ) | ||||||
Net cash provided by (used in) investing activities | (4,010 | ) | (497 | ) | 62 | — | (4,445 | ) | |||||||||||
Net cash provided by (used in) financing activities | 25,600 | 2,099 | (3,320 | ) | — | 24,379 | |||||||||||||
Other | 4 | (4,801 | ) | 3,484 | — | (1,313 | ) | ||||||||||||
Net increase (decrease) in cash | (24,056 | ) | 273 | (16 | ) | — | (23,799 | ) | |||||||||||
Cash and cash equivalents, beginning of year | 24,274 | 167 | 3,843 | — | 28,284 | ||||||||||||||
Cash, end of year | 218 | 440 | 3,827 | — | 4,485 | ||||||||||||||
Year Ended September 28, 2002 | |||||||||||||||||||
Statements of Cash Flows
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Net cash provided by (used in) operating activities | $ | 15,424 | $ | 282 | $ | 2,044 | $ | — | $ | 17,750 | |||||||||
Net cash provided by (used in) investing activities | (20,238 | ) | (1,088 | ) | (212 | ) | — | (21,538 | ) | ||||||||||
Net cash provided by (used in) financing activities | 29,294 | (1,418 | ) | (297 | ) | — | 27,579 | ||||||||||||
Other | (396 | ) | 2,142 | 1,033 | — | 2,779 | |||||||||||||
Net increase (decrease) in cash | 24,084 | (82 | ) | 2,568 | — | 26,570 | |||||||||||||
Cash, beginning of year | 190 | 249 | 1,275 | — | 1,714 | ||||||||||||||
Cash and cash equivalents, end of year | 24,274 | 167 | 3,843 | — | 28,284 |
16. SUBSEQUENT EVENTS
On October 7, 2004, the Company announced plans to consolidate its Santa Teresa, New Mexico distribution function with its existing distribution operation in Tampa, Florida. The consolidation placed the Company’s distribution in closer proximity to its contractors and its customer base in an effort to improve service and enhance efficiencies. To help ensure a smooth transition out of the Santa Teresa distribution center, and to accommodate for additional capacity requirements in Tampa, the Company has upgraded its distribution center technology and equipment. The consolidation process was completed at the end of December 2004. In connection with the consolidation process, the Company reduced its distribution center personnel by approximately 100 associates.
On November 2004, the Company sold its cutting facility building in Tampa, Florida for net cash proceeds of approximately $4.7 million, which were used to pay down borrowings under the revolving credit line. The Company recorded a gain of approximately $0.8 million in conjunction with the sale.
On December 16, 2004, all United States operating subsidiaries of the Company (the “Debtors”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division. On the same day, the Company entered into an Asset Purchase Agreement with Perry Ellis International (“PEI”), pursuant to Section 363 of the United States Bankruptcy Code. Under the Asset Purchase Agreement, PEI agreed to purchase substantially all of the Company’s assets as well as the outstanding capital stock of the Company’s European subsidiary, Farah Manufacturing (U.K.) Limited, and to assume certain operating liabilities. Also on the same day, the Company secured a $50 million Post Petition Loan and Security Agreement (“DIP Credit Facility”) with The CIT Group/Commercial Services, Inc. to be used to finance working capital needs. Existing indebtedness on the New Facility was repaid as collection of accounts receivable were received. The New Facility was fully repaid in January 2005.
As a result of the Chapter 11 filing, the Company did not pay its December 15, 2004 interest payment on its Notes. The Notes are in default.
As discussed in Note 10 – Commitments and Contingencies, the Company is the defendant in a class action lawsuit that was filed in 2003. On January 6, 2005, the plaintiffs dismissed all claims against one of the Company’s officers without prejudice. The motions to dismiss filed by the remaining defendants were denied by the District Court on April 4, 2005. The Company is reviewing these lawsuits with its attorneys and intends to vigorously defend them. Because these cases are in the early stages of litigation, the Company is unable to form a reasonable estimate of potential loss, if any, and have not established any reserves related to these cases.
On February 10, 2005, pursuant to Section 363 of the Bankruptcy Code, the Bankruptcy Court approved the sale of substantially all of the Company’s assets to PEI in accordance with the terms of the Asset Purchase Agreement and the legal name of Tropical Sportswear Int’l Corporation was changed to TSLC I, Inc.
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Effective February 26, 2005, the Company and PEI closed the transactions contemplated by the Asset Purchase Agreement. Pursuant to the Asset Purchase Agreement, PEI purchased substantially all of the Company’s accounts receivable, inventories, trademarks, property and equipment, and certain other assets, including the outstanding capital stock of the Company’s European subsidiary, Farah Manufacturing (U.K.) Limited, and assumed certain of the Company’s operating liabilities associated with the purchased assets, for $88.5 million in cash. The purchase price is subject to adjustment based on a post-closing accounting of the closing date accounts receivable and inventories.
In connection with the closing of the transactions contemplated by the Asset Purchase Agreement, effective February 28, 2005, the DIP Credit Facility was terminated and the Company repaid approximately $15.9 million which represented the total indebtedness owing by the Company under the DIP Credit Facility and the pre-petition Loan, from the proceeds of the purchase price paid by PEI.
On March 17, 2005, the Company filed a Joint Disclosure Statement in Support of Debtors’ Joint Chapter 11 Plan of Liquidation (the “Disclosure Statement”) and a Joint Chapter 11 Plan of Liquidation (the “Plan”). Under the Plan, the remaining assets of the Debtors will be liquidated and the remaining proceeds from the sale will be distributed to its creditors. It is anticipated that no proceeds will be available for distribution to any holders of the Company’s equity securities.
By Order dated April 8, 2005, the Bankruptcy Court approved the Disclosure Statement, as amended on April 7, 2005, and set the hearing on confirmation of the Plan, as amended, for May 18, 2005.
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TROPICAL SPORTSWEAR INT’L CORPORATION
(DEBTOR-IN-POSSESSION AS OF DECEMBER 16, 2004)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
January 1, 2005 | October 2, 2004 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 2,014 | $ | 4,148 | ||||
Accounts receivable, net | 38,685 | 41,607 | ||||||
Inventories, net | 48,766 | 50,492 | ||||||
Prepaid expenses and other current assets | 7,351 | 12,121 | ||||||
Assets held for sale | — | 3,685 | ||||||
Total current assets | 96,816 | 112,053 | ||||||
Property and equipment, net | 23,535 | 23,018 | ||||||
Trademarks, net | 10,976 | 10,985 | ||||||
Other assets | 3,965 | 4,268 | ||||||
Total assets | $ | 135,292 | $ | 150,324 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 12,001 | $ | 32,584 | ||||
Revolving credit line | 9,135 | 15,752 | ||||||
DIP credit facility | 1,687 | — | ||||||
Current portion of capital leases | 250 | 348 | ||||||
Current liabilities subject to compromise | 114,000 | — | ||||||
Total current liabilities | 137,073 | 48,684 | ||||||
Long-term debt and capital leases | 77 | 100,128 | ||||||
Other non-current liabilities | 2,462 | 6,051 | ||||||
Long-term liabilities subject to compromise | 3,601 | — | ||||||
Total liabilities | 143,213 | 154,863 | ||||||
Shareholders’ Equity: | ||||||||
Preferred stock | — | — | ||||||
Common stock | 111 | 111 | ||||||
Additional paid in capital | 88,589 | 88,589 | ||||||
Retained deficit | (91,406 | ) | (87,126 | ) | ||||
Accumulated other comprehensive loss | (5,215 | ) | (6,113 | ) | ||||
Total shareholders’ equity | (7,921 | ) | (4,539 | ) | ||||
Total liabilities and shareholders’ equity | $ | 135,292 | $ | 150,324 | ||||
See accompanying notes.
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TROPICAL SPORTSWEAR INT’L CORPORATION
(DEBTOR-IN-POSSESSION AS OF DECEMBER 16, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
Thirteen Weeks Ended January 1, 2005 | Fourteen Weeks Ended January 3, 2004 | |||||||
Net sales | $ | 67,871 | $ | 77,327 | ||||
Cost of goods sold | 54,144 | 65,916 | ||||||
Gross profit | 13,727 | 11,411 | ||||||
Selling, general and administrative expenses | 15,287 | 17,913 | ||||||
Reorganization expense | 467 | — | ||||||
Operating loss | (2,027 | ) | (6,502 | ) | ||||
Other (income) expense: | ||||||||
Interest expense, net | 2,847 | 3,438 | ||||||
Other, net | (897 | ) | 227 | |||||
1,950 | 3,665 | |||||||
Loss before income taxes | (3,977 | ) | (10,167 | ) | ||||
Provision for income taxes | 303 | 264 | ||||||
Net loss | (4,280 | ) | (10,431 | ) | ||||
Foreign currency translation and other | 898 | 1,367 | ||||||
Comprehensive loss | $ | (3,382 | ) | $ | (9,064 | ) | ||
Net loss per common share: | ||||||||
Basic | $ | (0.39 | ) | $ | (0.94 | ) | ||
Diluted | $ | (0.39 | ) | $ | (0.94 | ) | ||
See accompanying notes.
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TROPICAL SPORTSWEAR INT’L CORPORATION
(DEBTOR-IN-POSSESSION AS OF DECEMBER 16, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Thirteen Weeks Ended January 1, | Fourteen Weeks Ended | |||||||
Net loss | $ | (4,280 | ) | $ | (10,431 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 1,246 | 1,496 | ||||||
Deferred income taxes and other | 30 | (80 | ) | |||||
Gain on sale of cutting facility | (846 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 2,922 | 22,843 | ||||||
Inventories | 1,726 | 6,909 | ||||||
Prepaid expenses and other current assets | 4,822 | 2,462 | ||||||
Accounts payable and accrued expenses | (24,269 | ) | (16,756 | ) | ||||
Liabilities subject to compromise | 17,601 | — | ||||||
Net cash provided by (used in) operating activities | (1,048 | ) | 6,443 | |||||
INVESTING ACTIVITIES | ||||||||
Capital expenditures | (1,430 | ) | (452 | ) | ||||
Proceeds from sale of property and equipment | 4,712 | 59 | ||||||
Net cash provided by (used in) investing activities | 3,282 | (393 | ) | |||||
FINANCING ACTIVITIES: | ||||||||
Net change in debt and capital leases | (176 | ) | (711 | ) | ||||
Proceeds from DIP credit facility borrowings | 1,687 | — | ||||||
Proceeds from revolving credit line borrowings | 68,353 | 84,786 | ||||||
Payments of revolving credit line borrowings | (74,971 | ) | (87,830 | ) | ||||
Net cash used in financing activities | (5,107 | ) | (3,755 | ) | ||||
Effect of exchange rates on cash and cash equivalents | 739 | 1,194 | ||||||
Net increase (decrease) in cash and cash equivalents | (2,134 | ) | 3,489 | |||||
Cash and cash equivalents at beginning of period | 4,148 | 4,485 | ||||||
Cash and cash equivalents at end of period | $ | 2,014 | $ | 7,974 | ||||
See accompanying notes.
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TROPICAL SPORTSWEAR INT’L CORPORATION
(DEBTOR-IN-POSSESSION AS OF DECEMBER 16, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Thirteen weeks ended January 1, 2005
(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”) that include the accounts of Tropical Sportswear Int’l Corporation and its subsidiaries have been prepared in accordance with generally accepted accounting principles applicable to a going concern which contemplates continuity of operations and realization of assets and liquidation of liabilities in the normal course of business.
On December 16, 2004 (the “Petition Date”), all United States operating subsidiaries of the Company (the “Debtors”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division (the “Bankruptcy Court”).
As a result of the Company’s recurring losses, the Chapter 11 Case and circumstances relating to these events, including the Company’s debt structure and current economic conditions, realization of assets and liquidation of liabilities are subject to significant uncertainty. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. In the event a plan of reorganization is developed and is approved by the Bankruptcy Court, continuation of the Company’s business thereafter will be dependent on the Company’s ability to achieve successful future operations.
In connection with the Chapter 11 Case, the Company is required to report in accordance with Statement of Position 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”) for financial statements for the period beginning December 16, 2004 and thereafter. SOP 90-7 requires that pre-petition liabilities that are subject to compromise be segregated in the Company’s consolidated balance sheet as liabilities subject to compromise and requires the identification of all transactions and events that are directly associated with the reorganization of the Company in the consolidated statement of operations. The liabilities are recorded in the amounts reflected on the Debtor’s books and records and are not necessarily the amount that the liabilities will ultimately be allowed by the Bankruptcy Court. In addition, the amounts reported on the consolidated balance sheet could materially change as a result of a plan of reorganization, as such reported amounts currently do not give effect to adjustments to the carrying value of the underlying assets or amounts of liabilities that may ultimately result.
These financial statements do not include all information and footnotes required by generally accepted accounting principles. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s annual financial statements for the year ended October 2, 2004. 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.
2. PROCEEDINGS UNDER CHAPTER 11
As previously noted (see Note 1), the Debtors have operated under Chapter 11 of the Bankruptcy Code since December 16, 2004.
In the Chapter 11 Cases, substantially all liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization to be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Under Chapter 11, certain claims against the Debtors in existence prior to the filing of the petition for relief under the federal bankruptcy laws are stayed while the Debtor continues business operations as Debtor-in-possession. These claims are reflected in the January 1, 2005, balance sheet as “liabilities subject to compromise.”
The liabilities subject to compromise consist of:
Senior subordinated notes | $ | 105,500 | |
Trade payables | 8,500 | ||
Other non-current liabilities | 3,601 | ||
Total liabilities subject to compromise | $ | 117,601 | |
Additional claims (liabilities subject to compromise) may arise subsequent to the Petition Date resulting from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor’s assets (“secured claims”) also are stayed, although the holders of such claims have the right to move the Bankruptcy Court for relief from the stay. Secured claims are secured primarily by liens on the Debtor’s property, plant, and equipment.
Under the Bankruptcy Code, the Debtors may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts and other executory pre-petition contracts, subject to Bankruptcy Court approval. As a result of the Chapter 11 Case, no payments of principal or interest payments will be made on unsecured pre-petition debt until approved by the Bankruptcy Court.
Reorganization costs are directly associated with the Company’s Chapter 11 Case. Reorganization costs related to professional fees for the period of December 16, 2004 through January 1, 2005 were approximately $467,000.
On the Petition Date, the Company entered into an Asset Purchase Agreement with Perry Ellis International (“PEI”), pursuant to Section 363 of the United States Bankruptcy Code. Under the Asset Purchase Agreement, PEI agreed to purchase substantially all of the Company’s assets as well as the outstanding capital stock of the Company’s European subsidiary, Farah Manufacturing (U.K.) Limited, and to assume certain operating liabilities. Also on the same day, the Company secured a $50 million Post Petition Loan and Security Agreement (“DIP Credit Facility”) with The CIT Group/Commercial Services, Inc. to be used to finance working capital needs.
3. STOCK OPTION PLAN ACCOUNTING POLICY AND PRO FORMA INFORMATION
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement 123, “Accounting for Stock Based Compensation,” (Statement No. 123) requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equal the market price of the underlying stock on the date of grant, no compensation expense is recognized.
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For purposes of Statement No. 123, as amended by FASB Statement No. 148 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information is as follows (in thousands except for net income (loss) per share information):
Thirteen January 1, | Fourteen Weeks ended 2004 | |||||||
Net loss | $ | (4,280 | ) | $ | (10,431 | ) | ||
Pro forma compensation expense, net of tax | (272 | ) | (360 | ) | ||||
Pro forma net loss | $ | (4,552 | ) | $ | (10,791 | ) | ||
Basic net income (loss) per share as reported | $ | (0.39 | ) | $ | (0.94 | ) | ||
Basic net income (loss) per share pro forma | $ | (0.41 | ) | $ | (0.98 | ) | ||
Diluted net income (loss) per share as reported | $ | (0.39 | ) | $ | (0.94 | ) | ||
Diluted net income (loss) per share pro forma | $ | (0.41 | ) | $ | (0.98 | ) |
4. INVENTORIES
Inventories consist of the following:
January 1, 2005 | October 2, 2004 | |||||||
Raw materials and work in process | $ | 14,643 | $ | 20,575 | ||||
Finished goods | 37,758 | 33,959 | ||||||
Reserve for excess and slow moving inventory | (3,635 | ) | (4,042 | ) | ||||
$ | 48,766 | $ | 50,492 | |||||
5. DEBT AND CAPITAL LEASES
Debt and capital leases consist of the following:
January 1, 2005 | October 2, 2004 | |||||
Revolving credit line | $ | 9,135 | 15,752 | |||
DIP credit facility | 1,687 | — | ||||
Senior subordinated notes | — | 100,000 | ||||
Other | 327 | 476 | ||||
Debt subject to compromise | 100,000 | — | ||||
111,149 | 116,228 | |||||
Less current maturities | 111,072 | 16,100 | ||||
Long-term | $ | 77 | $ | 100,128 | ||
On December 15, 2003, the Company paid the semi-annual interest payment of $5.5 million to the holders of its senior subordinated notes. On December 16, 2003, availability under the Facility fell below $20 million, triggering the violation of financial covenants. This caused the Company to be in technical default under the Facility. On January 12, 2004, the Company amended the Facility (the “Amended Facility”) with Fleet Capital, which among other things reduced aggregate borrowings to $70 million. The default under the Facility was waived on January 12, 2004 by the terms of the Amended Facility. Additionally, the Amended Facility contained a $10 million availability reserve base and higher rates of interest than the Facility. The Amended Facility contained monthly financial covenants of minimum EBITDA levels, which began February 2004 and a consolidated fixed charge coverage ratio and consolidated EBIT to consolidated interest expense ratio, which were to begin March 2005. The fiscal minimum EBITDA levels were cumulative month amounts which began in the second quarter of fiscal 2004. The Company was in compliance with the EBITDA covenants during the term of the Amended Facility.
The cross default provision on the Company’s Real Estate Loan was triggered by the default on the Facility. This default was waived on January 12, 2004 concurrent with the Amended Facility. On January 12, 2004, the Real Estate Loan was amended (the “Amended Real Estate Loan”) to increase the loan by $2.0 million, to increase the interest rate, and to increase the quarterly interest payments from $200,000 to $250,000.
On June 17, 2004, the Company entered into a new Loan and Security Agreement (the “New Facility”) with The CIT Group (“CIT”) as Agent, and Fleet Capital continuing to participate as a syndicated lender. The New Facility provides for borrowings of up to $60 million, and matures October 31, 2006. The New Facility provides for increased borrowing availability and reduced rates of interest. The amount that can be borrowed at any given time is based upon a formula that takes into account, among other things, eligible accounts receivable and inventory, which can result in borrowing availability of less than the full amount of the New Facility. The New Facility also contains a $6 million availability reserve base. The Company is only subject to financial covenants when availability is below 20% of the New Facility. If availability falls below 20%, the Company has ten business days to bring availability back up above the 20% threshold. If availability does not increase above the 20% threshold within ten business days, the financial covenants include a quarterly minimum EBITDA level beginning with the third quarter of fiscal 2004, and a quarterly fixed charge coverage ratio beginning with the second quarter of fiscal 2005. The New Facility also includes prohibitions on the Company’s ability to incur certain additional indebtedness or to pay dividends, and restrictions on its ability to make capital expenditures.
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The outstanding balance on the Amended Real Estate Loan of $5.7 million was assumed by CIT and is a fixed asset portion of the New Facility. The fixed asset portion of the New Facility was reduced by $400,000 on September 1, 2004, and will be reduced by $400,000 on the first day of each third month thereafter.
On December 16, 2004, all United States operating subsidiaries of the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division. On the same day, the Company secured a $50 million Post Petition Loan and Security Agreement (“DIP Credit Facility”) with The CIT Group/Commercial Services, Inc. to be used to finance working capital needs. The DIP Credit Facility balance at January 1, 2005 was $1.7 million.
As a result of the Company filing for bankruptcy and not making the December Notes interest payment, the Notes are in default. Accordingly, they are classified as a current liability subject to compromise on the accompanying balance sheet.
6. LOSS PER SHARE
Basic and diluted net loss per share are computed as follows:
Thirteen Weeks ended January 1, 2005 | Fourteen Weeks ended January 3, 2004 | |||||||
Numerator for basic and diluted net loss per share: | ||||||||
Net loss | $ | (4,280 | ) | $ | (10,431 | ) | ||
Denominator for basic net loss per share: | ||||||||
Weighted average shares of common stock outstanding | 11,062 | 11,055 | ||||||
Effect of dilutive stock options using the treasury stock method | — | — | ||||||
Denominator for diluted net loss per share | 11,062 | 11,055 | ||||||
Net loss per common share: | ||||||||
Basic | $ | (0.39 | ) | $ | (0.94 | ) | ||
Diluted | $ | (0.39 | ) | $ | (0.94 | ) |
For both periods presented, all stock options have been excluded from the computation of diluted earnings per share because the effect of their inclusion would have been anti-dilutive.
7. RESTRUCTURING AND SALE OF ASSETS
On April 18, 2002, the Company announced a plan to consolidate the administrative, cutting and related functions of the Savane division in El Paso, Texas into the Tampa, Florida facility. The Company completed the physical consolidation in the second fiscal quarter ending March 2003. As part of the consolidation, the Company vacated its El Paso, Texas administration building and terminated the associated lease obligation, and vacated its El Paso, Texas cutting facility.
As a result of these initiatives (internally referred to as “Project Synergy”), the Company recorded a pre-tax charge totaling approximately $16.1 million in fiscal 2002 for severance ($3.1 million), relocation (recognized as incurred) ($2.5 million), lease terminations ($2.8 million), asset write-downs ($5.7 million) and other related costs ($2.0 million) included in other charges in the accompanying statements of operations. As of January 1, 2005, the Company had no remaining accruals related to lease termination costs. The activity in the exit accruals related to Project Synergy during the thirteen weeks ended January 1, 2005 and the fourteen weeks ended January 3, 2004 were as follows:
Thirteen Weeks ended January 1, 2005 | Fourteen Weeks ended January 3, 2004 | ||||||
Beginning balance | $ | — | $ | 2,739 | |||
Cash payments | — | (1,908 | ) | ||||
Ending balance | $ | — | $ | 831 | |||
On October 7, 2004, the Company announced plans to consolidate its Santa Teresa, New Mexico distribution function with its existing distribution operation in Tampa, Florida. The consolidation placed the Company’s distribution in closer proximity to its contractors and its customer base in an effort to improve service and enhance efficiencies. To help ensure a smooth transition out of the Santa Teresa distribution center, and to accommodate for additional capacity requirements in Tampa, the Company has upgraded its distribution center technology and equipment. The consolidation process was completed at the end of December 2004. In connection with the consolidation process, the Company reduced distribution center personnel by approximately 100 associates.
In November 2004, the Company sold its cutting facility building in Tampa, Florida for net cash proceeds of approximately $4.7 million, which were used to pay down borrowings under the New Facility.
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8. DEFINED BENEFIT PLAN
Under the Company’s defined benefit plan, which covers certain Savane distribution center associates, the basic monthly pension payable to a participant upon normal retirement equals the product of the participant’s monthly benefit rate times the number of years of credited service. Assets of the defined benefit plan are invested primarily in U.S. government obligations, corporate bonds, and equity securities.
The Company’s policy is to fund accrued pension cost when such costs are deductible for tax purposes. Net periodic pension cost, included the following components:
Thirteen weeks ended January 1, | Fourteen weeks January 3, | |||||||
Service cost | $ | 7 | $ | 8 | ||||
Interest cost | 139 | 153 | ||||||
Expected return on plan assets | (124 | ) | (123 | ) | ||||
Amortization of unrecognized transition obligation (asset) | — | — | ||||||
Amortization of prior service cost | — | — | ||||||
Amortization of loss (gain) | 82 | 96 | ||||||
Net periodic benefit cost | $ | 104 | $ | 134 | ||||
9. SUPPLEMENTAL COMBINING CONDENSED FINANCIAL STATEMENTS
The Company’s Senior Subordinated Notes, due 2008 (the “Notes”) are jointly and severally guaranteed fully and unconditionally by the Company’s domestic subsidiaries which are 100% owned by Tropical Sportswear Int’l Corporation (the “Parent”). The Company’s wholly-owned foreign subsidiaries are not guarantors with respect to the Notes and do not have any credit arrangements senior to the Notes except for their local overdraft facilities and capital lease obligations.
The following is the unaudited supplemental combining condensed statement of operations for the thirteen weeks ended January 1, 2005 and the fourteen weeks ended January 3, 2004, the supplemental combining condensed balance sheet as of January 1, 2005 and October 2, 2004, and the supplemental combining condensed statement of cash flows for the thirteen weeks ended January 1, 2005, and the fourteen weeks ended January 3, 2004. The only intercompany eliminations are the normal intercompany sales, borrowings and investments in wholly-owned subsidiaries. Separate complete financial statements of the guarantor subsidiaries are not presented because management believes that they are not material to investors.
Thirteen Weeks Ended January 1, 2005 | |||||||||||||||||||
Statement of Operations
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | 58,403 | $ | — | $ | 9,468 | $ | — | $ | 67,871 | |||||||||
Gross profit | 9,988 | — | 3,739 | — | 13,727 | ||||||||||||||
Operating income (loss) | (1,655 | ) | (1,305 | ) | 933 | — | (2,027 | ) | |||||||||||
Interest, income taxes and other, net | 3,392 | (1,307 | ) | 168 | — | 2,253 | |||||||||||||
Net income (loss) | (5,047 | ) | 2 | 765 | — | (4,280 | ) | ||||||||||||
Fourteen Weeks Ended January 3, 2004 | |||||||||||||||||||
Statement of Operations
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | 31,204 | $ | 32,952 | $ | 13,341 | $ | (170 | ) | $ | 77,327 | ||||||||
Gross profit | 5,564 | 1,476 | 4,466 | (95 | ) | 11,411 | |||||||||||||
Operating income (loss) | (3,714 | ) | (3,170 | ) | 382 | — | (6,502 | ) | |||||||||||
Interest, income taxes and other, net | 1,086 | 2,718 | 125 | — | 3,929 | ||||||||||||||
Net income (loss) | (4,800 | ) | (5,888 | ) | 257 | — | (10,431 | ) |
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As of January 1, 2005 | ||||||||||||||||||||
Balance Sheet
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 336 | $ | 220 | $ | 1,458 | $ | — | $ | 2,014 | ||||||||||
Accounts receivable, net | 34,071 | (54 | ) | 4,668 | — | 38,685 | ||||||||||||||
Inventories | 41,934 | — | 6,832 | — | 48,766 | |||||||||||||||
Other current assets | 4,243 | 423 | 2,685 | — | 7,351 | |||||||||||||||
Total current assets | 80,584 | 589 | 15,643 | — | 96,816 | |||||||||||||||
Property and equipment, net | 22,302 | 178 | 1,055 | — | 23,535 | |||||||||||||||
Other assets | 23,145 | 37,367 | (3,970 | ) | (41,601 | ) | 14,941 | |||||||||||||
Total assets | $ | 126,031 | $ | 38,134 | $ | 12,728 | $ | (41,601 | ) | $ | 135,292 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities | $ | 7,345 | $ | (1,084 | ) | $ | 5,740 | $ | — | $ | 12,001 | |||||||||
Current liabilities subject to compromise | 114,000 | — | — | — | 114,000 | |||||||||||||||
Current portion of revolving credit line, long-term debt and capital leases | 11,072 | — | — | — | 11,072 | |||||||||||||||
Total current liabilities | 132,417 | (1,084 | ) | 5,740 | — | 137,073 | ||||||||||||||
Long-term debt and noncurrent portion of capital leases | 77 | — | — | — | 77 | |||||||||||||||
Other noncurrent liabilities | 1,458 | 941 | 63 | — | 2,462 | |||||||||||||||
Long term liabilities subject to compromise | — | 3,601 | — | — | 3,601 | |||||||||||||||
Stockholders’ equity | (7,921 | ) | 34,676 | 6,925 | (41,601 | ) | (7,921 | ) | ||||||||||||
Total liabilities and stockholders’ equity | $ | 126,031 | $ | 38,134 | $ | 12,728 | $ | (41,601 | ) | $ | 135,292 | |||||||||
As of October 2, 2004 | ||||||||||||||||||||
Balance Sheet
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 194 | $ | 330 | $ | 3,624 | $ | — | $ | 4,148 | ||||||||||
Accounts receivable, net | 23,727 | 13,437 | 4,443 | — | 41,607 | |||||||||||||||
Inventories | 26,656 | 17,570 | 6,266 | — | 50,492 | |||||||||||||||
Other current assets | 6,459 | 5,350 | 3,997 | — | 15,806 | |||||||||||||||
Total current assets | 57,036 | 36,687 | 18,330 | — | 112,053 | |||||||||||||||
Property and equipment, net | 21,795 | 183 | 1,040 | — | 23,018 | |||||||||||||||
Other assets | 58,841 | 3,196 | (8,840 | ) | (37,944 | ) | 15,253 | |||||||||||||
Total assets | $ | 137,672 | $ | 40,066 | $ | 10,530 | $ | (37,944 | ) | $ | 150,324 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
Accounts payable and accrued liabilities | $ | 26,069 | $ | 399 | $ | 6,116 | — | $ | 32,584 | |||||||||||
Current portion of revolving credit line, long-term debt and capital leases | 16,014 | 86 | — | — | 16,100 | |||||||||||||||
Total current liabilities | 42,083 | 485 | 6,116 | — | 48,684 | |||||||||||||||
Long-term debt and noncurrent portion of capital leases | 100,128 | — | — | — | 100,128 | |||||||||||||||
Other noncurrent liabilities | — | 5,155 | 896 | — | 6,051 | |||||||||||||||
Stockholders’ equity | (4,539 | ) | 34,426 | 3,518 | (37,944 | ) | (4,539 | ) | ||||||||||||
Total liabilities and stockholders’ equity | $ | 137,672 | $ | 40,066 | $ | 10,530 | $ | (37,944 | ) | $ | 150,324 | |||||||||
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Thirteen Weeks Ended January 1, 2005 | |||||||||||||||||||
Statement of Cash Flows
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Net cash provided by (used in) operating activities | $ | 1,854 | $ | (28 | ) | (2,874 | ) | — | $ | (1,048 | ) | ||||||||
Net cash provided by (used in) investing activities | 3,309 | 4 | (31 | ) | — | 3,282 | |||||||||||||
Net cash provided by (used in) financing activities | (5,020 | ) | (87 | ) | — | — | (5,107 | ) | |||||||||||
Other | — | — | 739 | — | 739 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 142 | (110 | ) | (2,166 | ) | — | (2,134 | ) | |||||||||||
Cash and cash equivalents, beginning of period | 194 | 330 | 3,624 | — | 4,148 | ||||||||||||||
Cash and cash equivalents, end of period | 336 | 220 | 1,458 | — | 2,014 | ||||||||||||||
Fourteen Weeks Ended January 3, 2004 | |||||||||||||||||||
Statement of Cash Flows
| Parent Only | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | ||||||||||||||
Net cash provided by (used in) operating activities | $ | 4,405 | $ | 764 | 2,974 | $ | (1,700 | ) | $ | 6,443 | |||||||||
Net cash provided by (used in) investing activities | (311 | ) | 15 | (97 | ) | — | (393 | ) | |||||||||||
Net cash provided by (used in) financing activities | (3,521 | ) | (207 | ) | (27 | ) | — | (3,755 | ) | ||||||||||
Other | 92 | — | (598 | ) | 1,700 | 1,194 | |||||||||||||
Net increase in cash and cash equivalents | 665 | 572 | 2,252 | — | 3,489 | ||||||||||||||
Cash and cash equivalents, beginning of period | 218 | 440 | 3,827 | — | 4,485 | ||||||||||||||
Cash and cash equivalents, end of period | 883 | 1,012 | 6,079 | — | 7,974 |
10. LEGAL PROCEEDINGS
In May 2003, the Company transitioned the Victorinox® apparel division to Swiss Army Brands, Inc. (“Swiss Army”). In connection with the transition, Swiss Army disputed certain aspects of the transition agreement and did not pay the Company approximately $4.8 million, which the Company believed was due under the transition agreement. On June 3, 2003, the Company filed a declaratory judgment action against Swiss Army, seeking judicial interpretation of the agreement. The Company and Swiss Army agreed to mediation in an attempt to resolve the issue, which resulted in an impasse. On October 15, 2004 the Company and Swiss Army signed a Settlement Agreement under which Swiss Army paid the Company $3.5 million on November 15, 2004. Cash proceeds from this settlement were used to repay borrowings under the Company’s revolving credit line. In connection with this settlement, the Company recorded a charge of approximately $778,000 to reduce its receivable from Swiss Army. This charge is included in the consolidated statement of operations for fiscal 2004.
Two lawsuits seeking class action status were filed on September 16, 2003 and October 2, 2003, in the U.S. District Court for the Middle District of Florida, Tampa Division (the “District Court”), on behalf of all persons who purchased or otherwise acquired the securities of the Company during the period from April 17, 2002 through January 20, 2003 (the “Class Period”). The lawsuits name the Company and certain current and former officers and directors of the Company as defendants. The lawsuits make a number of allegations against the defendants, including allegations that during the Class Period, the defendants materially misled the investing public by publicly issuing false and misleading statements and omitting to disclose material facts concerning the Company’s operations and performance and the retail market for its goods. On December 15, 2003, the two cases were consolidated whereby one of the cases was administratively closed. On March 1, 2004, a consolidated amended complaint was filed adding additional current company directors as defendants. The consolidated amended complaint also added claims under Section 11 and Section 15 of the Securities Act of 1933, on behalf of all persons who purchased or otherwise acquired the Company’s stock in connection with the Company’s June 2002 secondary offering, as well as all persons who purchased or otherwise acquired the Company’s common stock during the period from June 27, 2001 through January 14, 2004. The claims allege that the prospectus issued in connection with secondary offering contained false and misleading statements, and that the director defendants are responsible therefore, both for having signed the prospectus and as “controlling persons” of the Company. On August 31, 2004, the plaintiffs dismissed all claims against the current Company directors with prejudice. On December 16, 2004, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division, which stayed the lawsuit against the Company. On January 6, 2005, the plaintiffs dismissed all claims against one of the Company’s officers without prejudice. The motions to dismiss filed by the remaining defendants were denied by the District Court on April 4, 2005. The Company is reviewing these lawsuits with its attorneys and intends to vigorously defend them. Because these cases are in the early stages of litigation, the Company is unable to form a reasonable estimate of potential loss, if any, and have not established any reserves related to these cases.
On October 30, 2003, a purported shareholder sent to the Company a shareholder derivative demand pursuant to Florida Statute Section 607.07401 demanding, among other things, that the Company institute litigation against current and former officers and directors Michael Kagan, Eloy Vallina-Laguera and William Compton. The demand contends that the Company should attempt to recover from these officers and directors their proceeds of certain stock sales in July 2002. The Company is taking appropriate action in response to the demand.
Other than the items noted above, the Company is subject to various claims and lawsuits arising in the normal course of business. See following Note 11 – Bankruptcy & Subsequent Events.
11. BANKRUPTCY & SUBSEQUENT EVENTS
On December 16, 2004, the United States operating subsidiaries of the Company (the “Debtors”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division. On the same day, the Company entered into an Asset Purchase Agreement with Perry Ellis International (“PEI”), pursuant to Section 363 of the United States Bankruptcy Code. Under the Asset Purchase Agreement, PEI agreed to purchase substantially all of the Company’s assets as well as the outstanding capital stock of the Company’s European subsidiary, Farah Manufacturing (U.K.) Limited, and to assume certain operating liabilities. Also on the same day, the Company secured a $50 million Post Petition Loan and Security Agreement (“DIP Credit Facility”) with The CIT Group/Commercial Services, Inc. to be used to finance working capital needs.
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As a result of the Chapter 11 filing, the Company did not pay its $5.5 million December 15, 2004 interest payment on the Notes.
On February 10, 2005, pursuant to Section 363 of the Bankruptcy Code, the Bankruptcy Court approved the sale of substantially all of the Company’s assets to PEI in accordance with the terms of the Asset Purchase Agreement and the legal name of Tropical Sportswear Int’l Corporation was changed to TSLC 1, Inc.
Effective February 26, 2005, the Company and PEI closed the transactions contemplated by the Asset Purchase Agreement. Pursuant to the Asset Purchase Agreement, PEI purchased substantially all of the Company’s accounts receivable, inventories, trademarks, property and equipment, and certain other assets, including the outstanding capital stock of the Company’s European subsidiary, Farah Manufacturing (U.K.) Limited, and assumed certain of the Company’s operating liabilities associated with the purchased assets, for $88.5 million in cash. The purchase price is subject to adjustment based on a post-closing accounting of the closing date accounts receivable and inventories.
In connection with the closing of the transactions contemplated by the Asset Purchase Agreement, effective February 28, 2005, the DIP Credit Facility was terminated and the Company repaid approximately $15.9 million which represented the total indebtedness owing by the Company under the DIP Credit Facility and the pre-petition Loan, from the proceeds of the purchase price paid by PEI.
On March 17, 2005, the Company filed a Joint Disclosure Statement in Support of Debtors’ Joint Chapter 11 Plan of Liquidation (the “Disclosure Statement”) and a Joint Chapter 11 Plan of Liquidation (the “Plan”). Under the Plan, the remaining assets of the Debtors will be liquidated and the remaining proceeds from the sale will be distributed to its creditors. It is anticipated that no proceeds will be available for distribution to any holders of the Company’s equity securities.
By Order dated April 8, 2005, the Bankruptcy Court approved the Disclosure Statement, as amended on April 7, 2005, and set the hearing on confirmation of the Plan, as amended, for May 18, 2005.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On February 26, 2005, Perry Ellis International, Inc. (“PEI”) consummated the acquisition of certain domestic operating assets of Tropical Sportswear Int’l Corporation (“Tropical”), as well as the outstanding capital stock of Tropical’s U.K. subsidiary, pursuant to Section 363 of the U.S. Bankruptcy Code. The $88.5 million purchase price is subject to adjustment based on a post-closing date valuation of Tropical’s domestic accounts receivable and inventory. Such valuation is pending at this time and Management expects this will result in a downward adjustment to the overall purchase price.
The following Pro Forma Unaudited Condensed Consolidated Balance Sheet at January 31, 2005 for PEI and January 1, 2005 for Tropical, and the Pro Forma Unaudited Condensed Consolidated Statements of Operations for the year ended January 31, 2005 for PEI and the twelve months ended January 1, 2005 for Tropical, give effect to the purchase based on the assumptions set forth below. The Pro Forma Unaudited Condensed Consolidated Financial Statements give effect to the purchase using purchase accounting in accordance with accounting principles generally accepted in the United States. The Pro Forma Unaudited Condensed Consolidated Statements of Operations assumes the purchase was consummated as of February 1, 2004 in the case of PEI and as of January 4, 2004 in the case of Tropical. The Pro Forma Unaudited Condensed Consolidated Balance Sheet assumes the purchase was consummated on January 31, 2005 for PEI and January 1, 2005 for Tropical.
Purchase adjustments reflect the application of the purchase method of accounting by PEI, including adjustments to reflect the difference between historical carrying values and estimated fair values for tangible assets and liabilities acquired and the estimated value of identifiable and other intangible assets. Estimated fair values are preliminary and subject to potential future modification.
The pro forma financial information should be read in conjunction with, and is qualified in its entirety by, the historical financial statements, including the notes thereto, of PEI and Tropical filed herewith and incorporated by reference in this document and the more detailed pro forma financial information, including the notes thereto, appearing elsewhere in this document. See PEI’s Form 10-K for the year ended January 31, 2005 filed with the Securities and Exchange Commission on April 18, 2005, and “Pro Forma Unaudited Condensed Consolidated Financial Information”. Although Management believes that the pro forma financial information is useful in illustrating the financial characteristics of the combined company under one set of assumptions, it does not reflect the impact of possible revenue enhancements, expense efficiencies and asset dispositions, among other factors, that may result as a consequence of the purchase and, accordingly, does not attempt to predict or suggest and is not indicative of any future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies actually been combined as of the beginning of the period presented.
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PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
January 31, 2005
(amounts in thousands)
PEI 2005 | Tropical 2005 | Pro Forma Adjustments | Pro Forma Adjusted | |||||||||||
ASSETS | ||||||||||||||
Current Assets: | ||||||||||||||
Cash and cash equivalents | $ | 5,398 | $ | 2,014 | $ | (560 | )1 | $ | 6,852 | |||||
Accounts receivable, net | 134,918 | 38,685 | 54 | 1 | 172,496 | |||||||||
339 | 3 | |||||||||||||
(1,500 | )2 | |||||||||||||
Inventories, net | 115,321 | 48,766 | (14,500 | )2 | 149,587 | |||||||||
Deferred income taxes | 12,564 | — | — | 12,564 | ||||||||||
Prepaid income taxes | 2,354 | — | — | 2,354 | ||||||||||
Other current assets | 7,748 | 7,351 | (6,958 | )1 | 5,179 | |||||||||
(2,962 | )2 | |||||||||||||
Total current assets | 278,303 | 96,816 | (26,087 | ) | 349,032 | |||||||||
Property and equipment, net | 48,978 | 23,535 | 192 | 3 | 62,496 | |||||||||
(10,209 | )2 | |||||||||||||
Intangible assets, net | 160,885 | 10,976 | 4,823 | 2 | 176,684 | |||||||||
Deferred income taxes | 10,216 | — | — | 10,216 | ||||||||||
Other assets | 16,578 | 3,965 | (3,965 | )1 | 16,578 | |||||||||
TOTAL | $ | 514,960 | $ | 135,292 | $ | (35,246 | ) | $ | 615,006 | |||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||||||||
Current Liabilities: | ||||||||||||||
Accounts payable | $ | 47,492 | $ | 2,636 | $ | (1,083 | )1 | $ | 49,045 | |||||
Accrued expenses | 13,913 | 9,365 | (6,962 | )1 | 21,316 | |||||||||
5,000 | 2 | |||||||||||||
Accrued interest payable | 4,800 | — | — | 4,800 | ||||||||||
Current portion - real estate mortgage | 140 | — | — | 140 | ||||||||||
Revolving line of credit and DIP credit facility | — | 10,822 | (10,822 | )1 | — | |||||||||
Unearned revenues | 1,036 | 1,036 | ||||||||||||
Current liabilities subject to compromise | — | 114,000 | (114,000 | )1 | ||||||||||
Other current liabilities | 3,119 | 250 | 5,000 | 2 | 8,369 | |||||||||
Total current liabilities | 70,500 | 137,073 | (122,867 | ) | 84,706 | |||||||||
Senior subordinated notes payable, net | 151,518 | — | — | 151,518 | ||||||||||
Long term liabilities subject to compromise | — | 3,601 | (3,601 | )1 | — | |||||||||
Senior secured notes payable, net | 58,828 | — | — | 58,828 | ||||||||||
Senior credit facility | 10,771 | — | 85,700 | 2 | 96,471 | |||||||||
Real estate mortgage | 11,393 | — | — | 11,393 | ||||||||||
Deferred income taxes | — | 855 | (792 | )1 | 63 | |||||||||
Deferred pension obligation | 15,617 | — | — | 15,617 | ||||||||||
Other non-current liabilities | — | 1,607 | (1,607 | )1 | — | |||||||||
Lease payable long term | 381 | 77 | — | 458 | ||||||||||
Total long-term liabilities | 248,508 | 6,140 | 79,700 | 334,348 | ||||||||||
Total liabilities | 319,008 | 143,213 | (43,167 | ) | 419,054 | |||||||||
Minority Interest | 1,384 | — | — | 1,384 | ||||||||||
Stockholders’ Equity: | ||||||||||||||
Preferred stock | — | — | — | — | ||||||||||
Common stock | 95 | 111 | (87 | )1 | 95 | |||||||||
(24 | )4 | |||||||||||||
Additional paid-in-capital | 87,544 | 88,589 | (87,272 | )1 | 87,544 | |||||||||
(1,317 | )4 | |||||||||||||
Retained earnings(deficit) | 106,297 | (91,406 | ) | 97,210 | 1 | 106,297 | ||||||||
(5,804 | )4 | |||||||||||||
Accumulated other comprehensive income | 632 | (5,215 | ) | 7,400 | 1 | 632 | ||||||||
(2,185 | )4 | |||||||||||||
Total stockholders’ equity | 194,568 | (7,921 | ) | 7,921 | 194,568 | |||||||||
TOTAL | $ | 514,960 | $ | 135,292 | $ | (35,246 | ) | $ | 615,006 | |||||
See accompanying notes to pro forma unaudited condensed consolidated financial statements.
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PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Year Ended January 31, 2005
(amounts in thousands, except per share data)
PEI Year Ended January 31, | Tropical Year Ended January 1, 2005 | Pro Forma Adjustments | Pro Forma Adjusted | |||||||||||
Revenues | ||||||||||||||
Net sales | $ | 633,774 | $ | 301,261 | $ | (7,127 | )5 | $ | 928,247 | |||||
339 | 6 | |||||||||||||
Royalty income | 22,807 | — | — | 22,807 | ||||||||||
Total revenues | 656,581 | 301,261 | (6,788 | ) | 951,054 | |||||||||
Cost of sales | 448,531 | 237,054 | (4,588 | )5 | 680,997 | |||||||||
Gross profit | 208,050 | 64,207 | (2,200 | ) | 270,057 | |||||||||
Operating expenses | ||||||||||||||
Selling, general and administrative expenses | 153,282 | 63,512 | (8,062 | )5 | 208,541 | |||||||||
(191 | )6 | |||||||||||||
Reorganization expense | — | 467 | (467 | )5 | — | |||||||||
Depreciation and amortization | 6,557 | 6,642 | — | 13,199 | ||||||||||
Total operating expenses | 159,839 | 70,621 | (8,720 | ) | 221,740 | |||||||||
Operating income | 48,211 | (6,414 | ) | 6,520 | 48,317 | |||||||||
Interest expense | 14,575 | 15,104 | (15,403 | )5 | 19,144 | |||||||||
4,868 | 7 | |||||||||||||
Income before minority interest and income tax provision | 33,636 | (21,518 | ) | 17,055 | 29,173 | |||||||||
Minority interest | 467 | — | — | 467 | ||||||||||
Income tax provision | 12,207 | 840 | (69 | )5 | 12,978 | |||||||||
Net income | $ | 20,962 | $ | (22,358 | ) | $ | 17,124 | $ | 15,728 | |||||
Net income per share | ||||||||||||||
Basic | $ | 2.30 | $ | 1.72 | ||||||||||
Diluted | $ | 2.15 | $ | 1.62 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||
Basic | 9,123 | 9,123 | ||||||||||||
Diluted | 9,732 | 9,732 |
See accompanying notes to pro forma unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Overview
Purchase
For purposes of this pro forma presentation an aggregate purchase price of approximately $93.7 million has been used, which represents the sum of (i) $88.5 million paid in cash, (ii) $162,000 in acquisition costs previously paid, and (iii) estimated acquisition costs of $5.0 million. The $88.5 million in cash paid at closing remains subject to adjustment based on a final valuation of the closing date accounts receivable and inventory purchased by PEI. Once final, such adjustments are expected to reduce, as applicable, total acquisition costs. The excess of the fair value of the net assets acquired over the purchase price will reduce the fair value of the long-term assets acquired of (i) property and equipment and (ii) intangible assets.
Following is a summary of the purchase price allocation (in thousands):
Cash and cash equivalents | $ | 1,454 | ||
Accounts receivable | 37,578 | |||
Inventories | 34,266 | |||
Prepaid expenses and other current assets | 393 | |||
Property and equipment | 13,518 | |||
Intangible assets | 15,799 | |||
Accounts payable and accrued expenses | (8,956 | ) | ||
Other liabilities | (327 | ) | ||
Deferred income taxes | (63 | ) | ||
Purchase price | $ | 93,662 | ||
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Following is a summary of the pro forma adjustments:
Adjustments to the Pro Forma Condensed Consolidated Balance Sheet:
(1) | To adjust for assets not purchased, and liabilities and equity not assumed. |
(2) | To adjust the assets purchased and liabilities assumed to fair value based on the purchase price allocation of $93.7 million ($85.7 million increase in Senior Credit Facility, $3.0 million previously paid included in other current assets as of January 31, 2005, and the accrual of $5.0 million in estimated acquisition costs), including the allocation of the total net excess fair value of assets purchased and liabilities assumed over the purchase price of $26.4 million. |
The following is a summary of the estimated adjustments based on the purchase price allocation (in thousands):
To reflect the write down of accounts receivable to fair value | $ | (1,500 | ) | |
To reflect the write down of inventories to fair value | (14,500 | ) | ||
To reflect the write down and allocation of the excess fair value over the purchase price to property and equipment | (10,209 | ) | ||
To reflect the write up and allocation of the excess fair value over the purchase price to intangible assets | 4,823 | |||
To reflect fair value of purchase commitments assumed | (5,000 | ) | ||
$ | (26,386 | ) | ||
(3) | To reverse the impairment charges on accounts receivable and property and equipment taken by Tropical, that have been reflected through the purchase price allocation in (2) above. |
(4) | To eliminate the equity of Tropical’s U. K. subsidiary, for which the total outstanding capital stock was purchased. Total equity at January 1, 2005 totaled $9.3 million. |
Adjustments to the Pro Forma Condensed Consolidated Statement of Operations:
(5) | To eliminate the operations of Tropical that were not acquired by PEI in the acquisition. |
(6) | To reverse the impairment charges included in the operations of Tropical that would have been adjusted in the initial purchase price allocation. |
(7) | To record additional interest expense on the $88.5 million that was borrowed by PEI on its Senior Credit Facility to consummate the acquisition based on an estimated rate of 5.5% for the period of one year. Total estimated interest expense amounted to approximately $4.9 million. |
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EXHIBIT INDEX
Exhibit No. | Description | |
23.1 | Consent of Independent Registered Public Accounting Firm |
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