<PAGE> 1
________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________
FORM 8-K
________
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JUNE 10, 1998
TROPICAL SPORTSWEAR INT'L CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 000-23161 59-3420305
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4902 WEST WATERS AVENUE
TAMPA, FLORIDA 33634-1302
(Address of Principal Executive Offices)
813-249-4900
(Registrant's telephone number, including area code)
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 10, 1998, Tropical Sportswear Int'l Corporation ("TSI" or the
"Company") completed its acquisition of Farah Incorporated, a Texas corporation
("Farah") pursuant to the terms of that certain Agreement and Plan of Merger
(the "Merger Agreement") dated May 1, 1998, among the Company, Farah and Foxfire
Acquisition Corp., a Texas corporation and a wholly owned subsidiary of the
Company ("Acquiror Sub"). The Merger Agreement provided for the acquisition by
Acquiror Sub of all the outstanding shares of Farah's common stock, no par value
(the "Shares"), through (a) a cash tender offer (the "Offer") for all Shares at
a price of $9 per share (the "Per Share Amount") and (b) a second-step merger
pursuant to which Acquiror Sub would merge with and into Farah (the "Merger")
and all outstanding Shares (other than Shares held in the treasury of Farah,
Shares owned by the Company, Acquiror Sub or any other subsidiary of the Company
and other than Shares held by any dissenting shareholders) would be converted
into the right to receive the Per Share Amount in cash. The Offer expired at
midnight, New York time, on June 5, 1998; the Company accepted all Shares
tendered effective at 12:01 a.m. on June 6, 1998; and the Company delivered
payment for such Shares to the Depositary on June 10, 1998. In addition, on June
10, 1998, the Acquiror Sub was merged with and into Farah pursuant to the
short-form merger provisions of Texas law. Shortly after the completion of the
Merger, Farah amended its Restated Articles of Incorporation to reduce its
authorized capital stock and to change its name to Savane International Corp.
("Savane").
The approximate consideration paid by the Company for the Shares purchased
in the Offer and the Merger was $95.8 million, excluding fees relating to the
transaction. The funds required in connection with the Offer and the Merger
were initially provided through a $100 million bridge financing facility (the
"Bridge Facility") with Prudential Securities Credit Corp. The Company intends
to repay all indebtedness outstanding under the Bridge Facility with the
proceeds of a private placement to institutional investors of $100 million of
senior subordinated notes of the Company currently expected to be completed on
or about June 24, 1998.
Savane is a manufacturer of casual and dress pants, shorts, sportcoats, suit
separates, skirts and shirts, principally marketed under the Savane(R),
Farah(R) and John Henry(R) brands. Savane operates three divisions: Farah
U.S.A., Farah International and Savane Direct. Farah U.S.A. produces branded
and private label casual and dress apparel marketed to retailers throughout
the United States. Farah International manufactures, sources and markets
apparel primarily in the United Kingdom, Australia and New Zealand. Savane
Direct operates 34 United States retail stores. The Company intends to
evaluate Savane's assets in light of the Company's strategic and financial
objectives, and to the extent such assets do not fit with those objectives,
dispose of or discontinue operating such assets. The Company is currently
considering its alternatives with respect to the Farah International and Savane
Direct businesses. In addition, the Company intends to close the remainder of
Savane's sewing operations in San Jose, Costa Rica. There can be no assurance
that any such disposition or closure will be consummated.
<PAGE> 3
On June 22, 1998, the Company sponsored a conference call in which the
Company's shareholders were invited to participate. The purpose of the
conference call was to discuss the acquisition of Savane and the Company's
strategy for its integration. An outline of the content of that conference call,
filed as Exhibit 99.1 hereto, is incorporated herein by reference.
Certain of the matters discussed in this report may constitute
forward-looking statements for purposes of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended. All statements,
other than statements of historical facts, included in this report that address
activities, events or developments that TSI expects or anticipates will or may
occur in the future, including the successful implementation of TSI's and
Farah's new management information systems, the amount and nature of future
capital expenditures, business strategies and measures to implement such
strategies, competitive strengths, expansion and growth of TSI's business and
operations, references to future success, the realization of cost savings and
business synergies resulting from the acquisition of Farah and other such
matters are forward-looking statements. Such forward-looking statements may
involve uncertainties and other factors that may cause the actual results and
performance of TSI to be materially different from future results or performance
expressed or implied by such statements. Cautionary statements regarding the
risks associated with such forward-looking statements include, without
limitation, those statements set forth below and elsewhere herein. Among
others, factors that could adversely affect actual results and performance
include failure to successfully integrate Farah's operations into those of the
Company in a timely and efficient manner, the loss of a significant customer,
delays in installing or malfunctions of the Company's or Farah's new management
information systems, disruption in the operations of independent manufacturers,
political or social instability in geographic areas in which the Company's
independent manufacturers operate, changes in import and export regulations and
sudden increases in raw material or labor prices. All written or oral
forward-looking statements attributable to TSI are expressly qualified in their
entirety by the foregoing cautionary statement.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The Unaudited Condensed Consolidated Statements and Audited Consolidated
Financial Statements of Farah Incorporated, filed as Exhibit 99.2 hereto, are
incorporated herein by reference.
(b) Pro Forma Financial Information
The Unaudited Pro Forma Combined Financial Data filed as Exhibit 99.3
hereto, is incorporated herein by reference.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
99.1 Outline of the content of conference call held on
June 22, 1998.
99.2 Unaudited Condensed Consolidated Financial Statements and
Audited Consolidated Financial Statements of Farah
Incorporated.
99.3 Unaudited Pro Forma Combined Financial Data.
</TABLE>
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TROPICAL SPORTSWEAR INT'L CORPORATION
(Registrant)
Date: June 22, 1998 By /s/ N. Larry McPherson
------------------------------------
N. Larry McPherson
Executive Vice President - Finance and
Operations
<PAGE> 1
EXHIBIT 99.1
MONDAY, JUNE 22, 1998
A. We would like to bring everyone up to date on our acquisition of Farah
Corporation.
1. The 2 major reasons why we acquired Farah are brand equity with
significant growth opportunities and opportunity for significant
reductions in operating costs.
2. Farah has done a good job marketing their labels to the retailers. Savane
products are sold to major department stores, and the Company views its
most significant competitor in this area as Levi's Dockers and Slates. We
see this to be an area of opportunity for significant growth.
3. Farah is a significant brand in Wal-Mart's casual pant department. Farah
has granted Wal-Mart a non-exclusive license to sell Farah brand products
produced by other manufacturers, for which Farah receives a royalty.
4. Products bearing the John Henry label, a brand licensed by Farah, are sold
to Sears.
5. The Farah and John Henry brands will be intensified within these two major
retailers.
6. While Farah has a very good track record with the marketing of brands,
this cannot be said for their operations. During the due diligence period,
I [Bill Compton] visited all USA, Mexican, and Costa Rican facilities
owned or leased by Farah.
7. We are determined to focus on the core US business, which represents
76% of the total net sales for Farah's fiscal 1997. That means selling or
winding down the Savane Direct retail operations, which consist of 36
stores mostly in outlet malls. This represents 6% of the total sales. We
do not wish to be in the retail business. If the stores can not be sold,
we will institute a soft landing approach whereby; we will shut down
stores as leases expire. This represents approximately 7 per year, with
the maximum length of any lease being 5 years.
8. Farah International, which represents 18% of total net sales for
Farah's fiscal 1997, will be sold. The 2 major operating companies are in
the United Kingdom and Australia. Our objective will be to sell these
operations and enter into a royalty arrangement with the buyers. While
there is nothing in progress at this time, we have received inquiries from
potential buyers.
Page 1 of 3
<PAGE> 2
B. Another area of opportunity relates to cost savings. In addition to the
due diligence conducted by senior management, outside accountants and legal
counsel, we have established transition teams consisting of approximately
70 Farah and TSI managers and supervisors. Their mission was to identify
cost savings that could be realized within the first year of combined
operations. They have identified at least $23.2 million of annual cost
savings by the end of fiscal 1999.
Due to some "ramp-up" time we expect to reduce expenses by $15.3 million
during the first year; however at that point, the annual rate of savings is
expected be $23.2 million. We do not anticipate that these savings will
require significant capital expenditures. The cost savings program includes
the following items:
1. Move production of 3,120,000 units from Costa Rica to contractors in the
Dominican Republic and Mexico. Approximately half of this has already
been accomplished.
2. Improvements in procedures relating to production planning are
anticipated to improve inventory turn from 2.7 times per annum to 4
times per annum. TSI is now turning inventory 5.2 times per annum. This
improvement, if achieved, should significantly reduce investment in
inventory and greatly reduce closeout sales that historically have
contributed negative gross margin. Interest expense should also be
reduced if the inventory investment is reduced.
3. Farah and TSI have very similar equipment in their respective cutting
facilities; however, Farah has not been able to achieve the efficiencies
that TSI has. By incorporating TSI's procedures in the Farah cutting
facility, we should be able to improve fabric utilization, reduce raw
material inventories from 35 days to 10 days (TSI keeps 5 days of
inventory) and reduce the headcount by approximately 65 (TSI cuts the
same number of units as Farah and employs 68 associates compared to
Farah's 133 associates).
4. Of the 13.3 million units produced by Farah, none are produced in
modular lines. All of TSI production is modular.
5. In fiscal 1997, 4% of Farah's production resulted in irregulars. In
fiscal 1997, TSI irregulars were less than .5%. We have already
identified the two major causes for the high percentage of Farah's
irregulars and are addressing the problem.
6. Other areas of savings relate to the disbanding of Farah's fleet of
trucks and utilizing common carriers, changing terms from FOB
destination to FOB shipping point.
Page 2 of 3
<PAGE> 3
7. There have been significant chargebacks made by customers due to
improper handling of customer orders such as shipping incomplete,
shipping late, improper paperwork, incorrect carton size, etc. A team
has already been established to analyze and correct these problems at
Farah and to negotiate reduction of past chargebacks.
We feel that these improvements can be made within the first year. Some are
expected to be immediate (1st quarter) and some will take longer. A senior
executive in finance has been assigned to monitor these savings throughout the
company and report to corporate on the progress on a weekly basis.
C. Purchase Description
1. The company was purchased for $9.00 per share. With options, the total
purchase price amounted to $95.8 million. Fees and expenses relating
to the transaction, including M & A advisory services, legal and
professional fees, and debt issue costs will amount to approximately
$9 million. The assumed debt amounted to approximately $64 million.
2. The tender offer expired on June 5th and the shares were accepted on
June 6th.
3. The merger was completed on June 10th.
4. Our plan was to issue $125 million of senior subordinated notes and
enter into a new bank facility in the amount of $85 million.
5. The road show was completed on June 16th.
6. The rating agencies gave us a single B3 and a B-, indicating that
Farah's historical poor operating results.
7. The ratings combined with the difficult market increased our interest
rate from the anticipated 9-1/2 % to 11% per annum.
8. Because of the 11% per annum interest rate, we decided to reduce the
debt offering from $125 million to $100 million and decided to
increase our bank line from $85 million to $110 million. Although the
bank rate is a floating rate, it is currently at approximately 9% per
annum.
Page 3 of 3
<PAGE> 1
EXHIBIT 99.2
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
QUARTERS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Net sales................................................... $ 59,044 $ 61,938
Cost of sales............................................... 43,140 44,230
----------- -----------
Gross profit................................................ 15,904 17,708
Selling, general and administrative expenses................ (14,420) (16,046)
Royalty income.............................................. 345 45
Termination of foreign operations........................... (3,980) (2,462)
Relocation expenses......................................... (792) --
Production conversion expenses.............................. -- (272)
----------- -----------
Operating loss............................................ (2,943) (1,027)
Other income (expense):
Interest expense.......................................... (1,199) (707)
Interest income........................................... 30 191
Foreign currency transaction gains........................ 156 111
Other, net................................................ (83) 42
----------- -----------
(1,096) (363)
Loss before for income taxes................................ (4,039) (1,390)
Income tax provision (benefit).............................. (969) 565
----------- -----------
Net loss.......................................... (3,070) (1,955)
Retained earnings:
Beginning................................................. 8,586 8,316
----------- -----------
Ending.................................................... $ 5,516 $ 6,361
=========== ===========
Net loss per share -- basic and diluted........... $ (0.30) $ (0.19)
=========== ===========
Weighted average shares of common stock outstanding -- basic
and diluted............................................... 10,278,239 10,191,103
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE> 2
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, 1998 AND NOVEMBER 2, 1997
<TABLE>
<CAPTION>
FEBRUARY 1, NOVEMBER 2,
1998 1997
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 3,351 $ 2,332
Trade receivables, net.................................... 29,144 43,053
Inventories:
Raw materials.......................................... 16,053 12,339
Work in process........................................ 16,756 18,457
Finished goods......................................... 45,059 43,996
-------- --------
Total inventories................................. 77,868 74,792
Other current assets...................................... 10,079 10,851
-------- --------
Total current assets.............................. 120,442 131,028
Property, plant and equipment, net.......................... 34,249 36,033
Other non-current assets.................................... 12,403 8,531
-------- --------
$167,094 $175,592
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 33,982 $ 35,572
Current installments of long-term debt.................... 5,647 5,301
Trade payables............................................ 17,587 20,600
Other current liabilities................................. 11,949 13,492
-------- --------
Total current liabilities......................... 69,165 74,965
Long-term debt, excluding current installments.............. 15,083 13,771
Other non-current liabilities............................... 2,845 2,957
Deferred gain on sale of building........................... 677 1,185
Shareholders' equity:
Common stock, no par value, $.01 stated value, 20,000,000
shares authorized; issued 10,315,264 in 1998 and
1997................................................... 46,026 46,026
Additional paid-in capital................................ 30,627 30,627
Cumulative foreign currency translation adjustment........ (2,736) (2,416)
Retained earnings......................................... 5,516 8,586
-------- --------
79,433 82,823
Less: Treasury stock, 36,275 shares in 1998 and 1997, at
cost................................................... 109 109
-------- --------
Total shareholders' equity........................ 79,324 82,714
-------- --------
$167,094 $175,592
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-24
<PAGE> 3
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net loss.................................................... $(3,070) $(1,955)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization............................. 1,684 1,256
Amortization of deferred gain on building sale............ (508) (508)
Amortization of deferred gain on subsidiary sale.......... -- (784)
Writedown of property, plant and equipment................ 2,856 1,360
Loss on sale of assets.................................... 10 --
Deferred income taxes..................................... (1,086) 421
Decrease (increase) in:
Trade receivables......................................... 13,909 8,094
Inventories............................................... (3,076) (4,272)
Other current assets...................................... (31) 337
Increase (decrease) in:
Trade payables............................................ (3,013) (1,442)
Other current liabilities................................. (1,542) (1,863)
------- -------
Net cash from operating activities................ 6,133 644
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (1,643) (1,837)
------- -------
Net cash used in investing activities............. (1,643) (1,837)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net increase (decrease) in short-term debt.................. (1,590) 2,587
Repayment of long-term debt................................. (1,506) (366)
Proceeds from sale of common stock.......................... -- 491
Other....................................................... (307) (1,013)
------- -------
Net cash from (used in) financing activities...... (3,403) 1,699
------- -------
Effect of exchange rate changes on cash..................... (68) (121)
------- -------
Net increase in cash.............................. 1,019 385
Cash, beginning of quarter........................ 2,332 3,777
------- -------
Cash, end of quarter.............................. $ 3,351 $ 4,162
======= =======
Supplemental cash flow disclosures:
Interest paid............................................. $ 1,243 $ 611
Income taxes paid......................................... 84 161
Assets acquired through direct financing loans or capital
leases................................................. 3,163 809
Property, plant and equipment held for sale and
transferred to other non-current assets................ 2,063 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-25
<PAGE> 4
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The attached condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. As a result, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
Farah believes that the disclosures made are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes included in Farah's 1997 Annual Report on Form 10-K.
2. The foregoing financial information reflects all adjustments (which consist
only of normal recurring adjustments) which are, in the opinion of
management, necessary to present a fair statement of the financial position
and the results of operations and cash flows for the interim periods. Certain
prior year amounts have been reclassified to conform with the fiscal 1998
presentation.
3. During the first quarter of fiscal 1998, Farah decided to close its finishing
facility in Cartago, Costa Rica and reduce sewing operations in Farah's San
Jose, Costa Rica facility. Farah recorded a pre-tax charge of $4.0 million in
the first quarter of fiscal 1998 on the write-down of its Costa Rican assets
to expected realizable value and the accrual of severance payments and other
closing expenses. This amount has been classified as "Termination of foreign
operations" in the Condensed Consolidated Statement of Operations and
Retained Earnings. The reduction of activity in Costa Rica will result in the
termination of approximately 680 production and 20 administrative employees
at the two facilities. Farah expects the reduction in activity and the
termination of the employees to occur prior to the end of fiscal 1998. Farah
will hold the Cartago facility for sale, as well as some of the manufacturing
equipment in both locations. These assets have a book value of $2.1 million,
after a write-down for impairment, and are included in "Other non-current
assets" on Farah's February 1, 1998 Condensed Consolidated Balance Sheet.
Farah is uncertain as to the timing of the disposal of the Costa Rican assets
held for sale.
4. Farah completed the move of its inventory to its new distribution center in
March 1998. In moving to the new distribution center, Farah incurred
duplicate operating costs, moving expenses, costs associated with testing and
modification of systems and procedures, and professional fees of $792,000 in
the first quarter of fiscal 1998.
5. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share."
SFAS 128 superseded APB Opinion No. 15, "Earnings Per Share." SFAS 128
requires dual presentation of basic and diluted earnings per share for
entities with complex capital structures. SFAS 128 is effective for interim
and annual periods ending after December 15, 1997. Farah has implemented SFAS
128 for the first quarter of fiscal 1998. The first quarter of fiscal 1997
has been restated to conform with the presentation required by SFAS 128. The
implementation of this standard did not have a material impact on Farah's
calculation of earnings per share for the first quarter of fiscal 1997 or
1998.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by including the
potential dilutive effect of securities or contracts that are convertible to
common stock such as options and convertible debt. Because Farah experienced
net losses in the first quarter of fiscal 1998 and the first quarter of
fiscal 1997, the inclusion of the potential common shares would be
antidilutive. Therefore, the first quarter fiscal 1998 and first quarter
fiscal 1997 calculations of basic net loss per share were identical to the
calculations of diluted net loss per share; and no reconciliation of the
basic and diluted loss per share calculations is presented.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display
of comprehensive income and its components. This statement will require
additional disclosures and Farah intends to adopt it in fiscal 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related information." This Statement requires
that public business enterprises report certain information about operating
F-26
<PAGE> 5
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
segments in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods issued to shareholders. It
also requires that public business enterprises report certain information
about their product and services, the geographic areas in which they operate,
and their major customers. Upon adoption of this pronouncement, additional
disclosures will be required by Farah. This statement is effective for fiscal
years beginning after December 15, 1997. Earlier application is encouraged.
Farah intends to adopt this statement for fiscal 1998 year-end disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (SFAS 132), "Employers Disclosure
About Pension and Other Postretirement Benefits." SFAS 132 revises employers
disclosures about pensions and other post-retirement benefit plans. This
statement is effective for fiscal years beginning after December 15, 1997,
although earlier application is encouraged. Farah intends to adopt this
statement in fiscal 1998 year-end disclosures.
6. On January 5, 1997, a fire occurred at Farah's leased garment manufacturing
plant in Galway, Ireland, in which certain inventory and manufacturing
equipment owned by Farah were either destroyed or damaged. As a result of the
fire and its related impact, Farah recorded a charge (after tax and net of
insurance proceeds) of $2.5 million in the first quarter of fiscal 1997. This
amount has been classified as "Termination of foreign operations" in the
first quarter fiscal 1997 Condensed Consolidated Statement of Operations and
Retained Earnings. Farah recognized an additional pre-tax loss of $2.6
million in the fourth quarter of fiscal 1997 in connection with the closure
of its Irish facilities.
7. Pursuant to a definitive merger agreement dated May 1, 1998, Foxfire
Acquisition Corp., a company formed by Tropical Sportswear Int'l corporation
("Tropical") in contemplation of the acquisition (the "Acquisition") of Farah
Incorporated, will, subject to conditions, acquire all of the issued and
outstanding capital stock of Farah Incorporated. The Acquisition will be
financed through senior subordinated notes of Tropical (the "Notes"). The
Notes will be jointly and severally guaranteed by Tropical's and Farah
Incorporated's domestic subsidiaries. The wholly-owned foreign subsidiaries
of Farah Incorporated will not be guarantors with respect to the Notes and
are not anticipated to have any credit arrangements senior to the Notes
except for their local overdraft facility and capital lease obligations.
Proceeds from the Notes will be used to repay amounts outstanding under Farah
Incorporated's Credit Agreement and to redeem the 8.5% convertible
subordinated debentures.
The following are the supplemental combining condensed balance sheets as of
February 1, 1998 and November 2, 1997 and the supplemental combining
condensed statements of operations and of cash flows for the quarters ended
February 1, 1998 and February 2, 1997. The only intercompany eliminations are
the normal intercompany eliminations with regards to intercompany sales and
Farah Incorporated's investment in wholly-owned subsidiaries. Separate
complete financial statements of the guarantor subsidiaries are not presented
because management has determined that they are not material to investors.
F-27
<PAGE> 6
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED FEBRUARY 1, 1998
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ -- $49,220 $14,095 $(4,271) $59,044
Cost of sales........................ -- 36,645 10,766 (4,271) 43,140
------- ------- ------- ------- -------
Gross profit.................... -- 12,575 3,329 -- 15,904
Selling, general and administrative
expenses........................... -- (10,862) (3,213) -- (14,075)
Termination of foreign operations.... -- (1,651) (2,329) -- (3,980)
Production conversion expenses....... -- (792) -- -- (792)
------- ------- ------- ------- -------
Operating loss.................. -- (730) (2,213) -- (2,943)
Interest, net........................ (35) (1,080) (54) -- (1,169)
Other, net........................... -- (144) 217 -- 73
Equity in loss from subsidiaries..... (3,035) -- -- 3,035 --
------- ------- ------- ------- -------
Loss before income taxes............. (3,070) (1,954) (2,050) 3,035 (4,039)
Income tax provision (benefit)....... -- (1,165) 196 -- (969)
------- ------- ------- ------- -------
Net loss........................ $(3,070) $ (789) $(2,246) $ 3,035 $(3,070)
======= ======= ======= ======= =======
</TABLE>
F-28
<PAGE> 7
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED FEBRUARY 2, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ -- $51,521 $13,495 $(3,078) $61,938
Cost of sales........................ -- 37,108 10,200 (3,078) 44,230
------- ------- ------- ------- -------
Gross profit.................... -- 14,413 3,295 -- 17,708
Selling, general and administrative
expenses........................... -- (12,497) (3,504) -- (16,001)
Termination of foreign operations.... -- -- (2,462) -- (2,462)
Production conversion expenses....... -- (272) -- -- (272)
------- ------- ------- ------- -------
Operating income (loss)......... -- 1,644 (2,671) -- (1,027)
Interest, net........................ (35) (485) 4 -- (516)
Other, net........................... -- 81 72 -- 153
Equity in loss from subsidiaries..... (1,920) -- -- 1,920 --
------- ------- ------- ------- -------
Income (loss) before income taxes.... (1,955) 1,240 (2,595) 1,920 (1,390)
Income tax benefit................... -- 422 143 -- 565
------- ------- ------- ------- -------
Net income (loss)............... $(1,955) $ 818 $(2,738) $ 1,920 $(1,955)
======= ======= ======= ======= =======
</TABLE>
F-29
<PAGE> 8
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 1, 1998
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash................................... $ -- $ 541 $ 2,810 $ -- $ 3,351
Accounts receivable, net............... -- 23,194 5,957 (7) 29,144
Inventories............................ -- 64,412 13,456 -- 77,868
Other current assets................... -- 9,650 429 -- 10,079
------- -------- ------- -------- --------
Total current assets......... -- 97,797 22,652 (7) 120,442
------- -------- ------- -------- --------
Property, plant and equipment, net..... -- 27,670 6,579 -- 34,249
Other assets, net...................... 80,987 (40,914) (294) (27,376) 12,403
------- -------- ------- -------- --------
Total assets................. $80,987 $ 84,553 $28,937 $(27,383) $167,094
======= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
installments of long-term debt.... $ -- $ 35,710 $ 3,919 $ -- $ 39,629
Accounts payable..................... -- 13,898 3,696 (7) 17,587
Accrued compensation and other
current liabilities............... -- 7,464 4,485 -- 11,949
------- -------- ------- -------- --------
Total current liabilities.... -- 57,072 12,100 (7) 69,165
------- -------- ------- -------- --------
Long-term debt and capital lease
obligations.......................... 1,663 13,342 78 -- 15,083
Other noncurrent liabilities........... -- 6,105 211 (3,471) 2,845
Deferred gain on sale of building...... -- 677 -- -- 677
Stockholders' equity................... 79,324 7,357 16,548 (23,905) 79,324
------- -------- ------- -------- --------
Total liabilities and
stockholders' equity....... $80,987 $ 84,553 $28,937 $(27,383) $167,094
======= ======== ======= ======== ========
</TABLE>
F-30
<PAGE> 9
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 2, 1997
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash................................. $ -- $ 536 $ 1,796 $ -- $ 2,332
Accounts receivable, net............. -- 36,078 7,490 (515) 43,053
Inventories.......................... -- 60,404 14,388 -- 74,792
Other current assets................. -- 10,371 480 -- 10,851
------- -------- ------- -------- --------
Total current assets....... -- 107,389 24,154 (515) 131,028
------- -------- ------- -------- --------
Property, plant and equipment, net... -- 28,756 7,277 -- 36,033
Other assets, net.................... 84,377 (44,758) (239) (30,849) 8,531
------- -------- ------- -------- --------
Total assets............... $84,377 $ 91,387 $31,192 $(31,364) $175,592
======= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
installments of long-term
debt............................ $ -- $ 36,880 $ 3,993 $ -- $ 40,873
Accounts payable................... -- 16,471 4,644 (515) 20,600
Accrued compensation and other
current liabilities............. -- 10,607 2,885 -- 13,492
------- -------- ------- -------- --------
Total current
liabilities.............. -- 63,958 11,522 (515) 74,965
------- -------- ------- -------- --------
Long-term debt and capital lease
obligations........................ 1,663 12,017 91 -- 13,771
Other noncurrent liabilities......... -- 6,159 385 (3,587) 2,957
Deferred gain on sale of building.... -- 1,185 -- -- 1,185
Stockholders' equity................. 82,714 8,068 19,194 (27,262) 82,714
------- -------- ------- -------- --------
Total liabilities and
stockholders' equity..... $84,377 $ 91,387 $31,192 $(31,364) $175,592
======= ======== ======= ======== ========
</TABLE>
F-31
<PAGE> 10
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED FEBRUARY 1, 1998
<TABLE>
<CAPTION>
PARENT-ONLY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ---------- -------------- ------------ ------------
(DATA IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net loss............................ $(3,070) $ (789) $(2,246) $ 3,035 $(3,070)
Adjustments to reconcile net loss to
net cash from (used in) operating
activities:
Depreciation and amortization.... -- 1,526 158 -- 1,684
Other adjustments................ -- 1,272 -- -- 1,272
Changes in operating assets and
liabilities.................... -- 3,079 3,168 -- 6,247
------- ------- ------- ------- -------
Net cash from (used in)
operating activities...... (3,070) 5,088 1,080 3,035 6,133
------- ------- ------- ------- -------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property, plant and
equipment........................ -- (1,493) (150) -- (1,643)
------- ------- ------- ------- -------
Net cash used in investing
activities................ -- (1,493) (150) -- (1,643)
------- ------- ------- ------- -------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net change in debt.................. -- (3,010) (86) -- (3,096)
Net change in equity................ (252) 78 (332) 254 (252)
Other............................... 3,390 (658) 570 (3,357) (55)
------- ------- ------- ------- -------
Net cash from (used in)
financing activities...... 3,138 (3,590) 152 (3,103) (3,403)
------- ------- ------- ------- -------
Effect of exchange rate changes on
cash................................ (68) -- (68) 68 (68)
------- ------- ------- ------- -------
Net increase in cash.................. -- 5 1,014 -- 1,019
Cash, beginning of period............. -- 536 1,796 -- 2,332
------- ------- ------- ------- -------
Cash, end of period................... $ -- $ 541 $ 2,810 $ -- $ 3,351
======= ======= ======= ======= =======
</TABLE>
F-32
<PAGE> 11
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED FEBRUARY 2, 1997
<TABLE>
<CAPTION>
NON-
PARENT-ONLY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(DATA IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income (loss)................... $(1,955) $ 818 $(2,738) $ 1,920 $(1,955)
Adjustments to reconcile net income
(loss) to net cash from (used in)
operating activities:............
Depreciation and amortization.... -- 1,048 208 -- 1,256
Other adjustments................ -- (871) 1,360 -- 489
Changes in operating assets and
liabilities.................... -- (1,710) 2,565 (1) 854
------- ------- ------- ------- -------
Net cash from (used in)
operating activities...... (1,955) (715) 1,395 1,919 644
------- ------- ------- ------- -------
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property, plant and
equipment........................ -- (1,679) (158) -- (1,837)
------- ------- ------- ------- -------
Net cash used in investing
activities................ -- (1,679) (158) -- (1,837)
------- ------- ------- ------- -------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net change in debt.................. -- 2,288 (67) -- 2,221
Net change in equity................ (610) (1,113) 1,110 (613)
Other............................... 2,686 7 548 (3,150) 91
------- ------- ------- ------- -------
Net cash from (used in)
financing activities...... 2,076 2,295 (632) (2,040) 1,699
------- ------- ------- ------- -------
Effect of exchange rate changes on
cash................................ (121) -- (121) 121 (121)
------- ------- ------- ------- -------
Net increase (decrease) in cash....... -- (99) 484 -- 385
Cash, beginning of period............. -- 542 3,235 -- 3,777
------- ------- ------- ------- -------
Cash, end of period................... $ -- $ 443 $ 3,719 $ -- $ 4,162
======= ======= ======= ======= =======
</TABLE>
F-33
<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated balance sheets of Farah
Incorporated (a Texas corporation) and subsidiaries as of November 2, 1997 and
November 3, 1996 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of Farah's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Farah Incorporated and
subsidiaries as of November 2, 1997 and November 3, 1996, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
El Paso, Texas
December 17, 1997, except for
the information in Note 13 for
which the date is May 1, 1998.
F-34
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Farah Incorporated (a Texas corporation)
and subsidiaries for the year ended November 3, 1995. These financial statements
are the responsibility of Farah's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of Farah Incorporated and their
subsidiaries' operations and cash flows for the year ended November 3, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
December 15, 1995
(except with respect to the matter
discussed in Note 13, as to which
the date is May 1, 1998).
F-35
<PAGE> 14
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND NOVEMBER 3, 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NET SALES............................................... $ 273,719 $ 247,598 $ 240,797
Cost of sales........................................... 199,790 183,540 185,822
----------- ----------- -----------
Gross profit............................................ 73,929 64,058 54,975
Selling, general and administrative expenses............ 66,436 62,189 68,002
Termination of foreign operations....................... 5,106 -- --
Production conversion expenses.......................... 2,061 -- --
Relocation expenses..................................... 904 -- --
----------- ----------- -----------
Operating income (loss)............................... (578) 1,869 (13,027)
Other income (expense):
Interest expense...................................... (4,108) (4,065) (4,627)
Interest income....................................... 716 834 901
Foreign currency transaction gains.................... 163 374 512
Gain (loss) on sale of assets......................... (24) 10,041 756
Other, net............................................ 203 684 209
----------- ----------- -----------
(3,050) 7,868 (2,249)
----------- ----------- -----------
Income (loss) before income taxes....................... (3,628) 9,737 (15,276)
Income tax provision (benefit).......................... (3,898) 2,981 (2,335)
----------- ----------- -----------
Net income (loss)............................. $ 270 $ 6,756 $ (12,941)
=========== =========== ===========
Net income (loss) per share -- basic and
diluted..................................... $ .03 $ .66 $ (1.28)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 15
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 2, 1997 AND NOVEMBER 3, 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(THOUSANDS OF DOLLARS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2,332 $ 3,777
Trade receivables, net of allowance of $746 in 1997 and
$662 in 1996........................................... 43,053 41,671
Inventories:
Raw materials.......................................... 12,339 11,404
Work-in-process........................................ 18,457 15,251
Finished goods......................................... 43,996 35,378
-------- --------
Total inventories................................. 74,792 62,033
Other current assets...................................... 10,851 10,857
-------- --------
Total current assets.............................. 131,028 118,338
Note receivable............................................. -- 5,260
Property, plant and equipment, net.......................... 36,033 25,370
Other non-current assets.................................... 8,531 4,895
-------- --------
$175,592 $153,863
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 35,572 $ 20,744
Current installments of long-term debt.................... 5,301 1,288
Trade payables............................................ 20,600 24,038
Accrued compensation...................................... 2,755 3,101
Other current liabilities................................. 10,737 10,636
-------- --------
Total current liabilities......................... 74,965 59,807
Long-term debt, excluding current installments.............. 13,771 4,706
Other non-current liabilities............................... 2,957 3,992
Deferred gain on sale of building........................... 1,185 3,218
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, $.01 stated value, 20,000,000
shares authorized; issued 10,315,264 in 1997 and
10,209,246 in 1996..................................... 46,026 46,024
Additional paid-in capital................................ 30,627 29,894
Cumulative foreign currency translation adjustment........ (2,416) (742)
Minimum pension liability adjustment...................... -- (1,243)
Retained earnings......................................... 8,586 8,316
-------- --------
82,823 82,249
Less: Treasury stock, 36,275 shares, at cost.............. 109 109
-------- --------
Total shareholders' equity........................ 82,714 82,140
-------- --------
$175,592 $153,863
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 16
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND NOVEMBER 3, 1995
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN MINIMUM
COMMON STOCK ADDITIONAL CURRENCY PENSION TREASURY STOCK
-------------------- PAID-IN TRANSLATION LIABILITY RETAINED ---------------
SHARES AMOUNT CAPITAL ADJUSTMENT ADJUSTMENT EARNINGS SHARES AMOUNT
---------- ------- ---------- ----------- ---------- --------- ------ ------
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 4, 1994 10,116,616 $46,018 $28,497 $(1,066) $(1,880) $ 14,501 36,275 $109
Net loss................. -- -- -- -- -- (12,941) -- --
Foreign currency
translation
adjustment............. -- -- -- (229) -- -- -- --
Minimum pension liability
adjustment............. -- -- -- -- 245 -- -- --
Exercise of stock options
and other.............. 64,985 6 928 -- -- -- -- --
---------- ------- ------- ------- ------- -------- ------ ----
BALANCE, NOVEMBER 3, 1995 10,181,601 46,024 29,425 (1,295) (1,635) 1,560 36,275 109
Net income............... -- -- -- -- -- 6,756 -- --
Foreign currency
translation
adjustment............. -- -- -- 553 -- -- -- --
Minimum pension liability
adjustment............. -- -- -- -- 392 -- -- --
Exercise of stock options
and other.............. 27,645 -- 469 -- -- -- -- --
---------- ------- ------- ------- ------- -------- ------ ----
BALANCE, NOVEMBER 3, 1996 10,209,246 46,024 29,894 (742) (1,243) 8,316 36,275 109
Net income............... -- -- -- -- -- 270 -- --
Foreign currency
translation
adjustment............. -- -- -- (1,674) -- -- -- --
Minimum pension liability
adjustment............. -- -- -- -- 1,243 -- -- --
Exercise of stock options
and other.............. 106,018 2 733 -- -- -- -- --
---------- ------- ------- ------- ------- -------- ------ ----
BALANCE, NOVEMBER 2, 1997 10,315,264 $46,026 $30,627 $(2,416) $ -- $ 8,586 36,275 $109
========== ======= ======= ======= ======= ======== ====== ====
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 17
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND NOVEMBER 3, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)........................................... $ 270 $ 6,756 $(12,941)
Adjustments to reconcile net income (loss) to net cash from
(used in) operating activities:
Depreciation and amortization............................. 5,675 5,434 4,020
Amortization of deferred gain on building sale............ (2,033) (2,032) (2,032)
Amortization of deferred gain on subsidiary sale.......... (1,507) (2,538) --
Deferred income taxes..................................... (5,107) 1,654 (1,934)
(Gain) or loss on sale of assets.......................... 24 (10,041) (756)
Write-off of property, plant and equipment................ 1,524 -- --
Loss on discount of note receivable....................... 665 -- --
Decrease (increase) in:
Trade receivables, net.................................... (1,382) (1,847) (2,893)
Inventories............................................... (12,759) 10,730 2,661
Other current assets...................................... 1,326 1,931 (1,016)
Increase (decrease) in:
Trade payables............................................ (3,438) 6,394 (4,662)
Other..................................................... (246) (990) (1,098)
-------- -------- --------
Net cash from (used in) operating activities...... (16,988) 15,451 (20,651)
-------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (11,618) (4,397) (11,756)
Proceeds from disposition of property, plant and
equipment................................................. 85 22,689 1,785
-------- -------- --------
Net cash from (used in) investing activities...... (11,533) 18,292 (9,971)
-------- -------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net increase (decrease) in short-term debt.................. 14,828 (24,035) 26,771
Proceeds from issuance of long-term debt.................... 10,000 4 6,426
Repayment of long-term debt................................. (3,099) (9,371) (1,284)
Proceeds from repayment of note receivable.................. 4,935 -- --
Proceeds from sale of common stock.......................... 566 19 934
Other....................................................... (135) (318) (923)
-------- -------- --------
Net cash from (used in) financing activities...... 27,095 (33,701) 31,924
-------- -------- --------
Effect of exchange rate changes on cash..................... (19) 78 (17)
-------- -------- --------
Net increase (decrease) in cash................... (1,445) 120 1,285
Cash, beginning of year..................................... 3,777 3,657 2,372
-------- -------- --------
Cash, end of year........................................... $ 2,332 $ 3,777 3,657
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid............................................... $ 4,061 $ 4,449 $ 4,116
Income taxes paid........................................... 1,364 1,019 1,625
Assets acquired through direct financing loans or capital
leases.................................................... 6,643 726 3,923
Exchange of non-monetary assets............................. (466) -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 18
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 2, 1997, NOVEMBER 3, 1996 AND NOVEMBER 3, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Farah Incorporated is a multinational apparel marketer and manufacturer
headquartered in the United States. Farah's principal business is the sale of
men's and boys' pants, coats and shirts and women's slacks and skirts. The
principal markets for Farah's products are retail customers in the United
States, Europe and the South Pacific.
PRINCIPLES OF PRESENTATION
The consolidated financial statements include the accounts of Farah
Incorporated (the "Parent Company") and its subsidiaries ("Farah"). All
significant intercompany transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform with the 1997
presentation. The Parent Company's assets consist of investments in and advances
to subsidiaries. The Parent Company does not have any significant amount of
separate debt, credit facilities or other liabilities, except for the 8.5%
convertible subordinated debentures discussed in Note 3.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including inventory markdowns and valuation allowances for deferred taxes. Such
estimates and assumptions also affect the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. Farah has several items of other
comprehensive income and will adopt this standard in its 1998 fiscal year.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." This Statement requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. Upon adoption of this pronouncement, additional disclosures will be
required by Farah. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Farah intends to adopt
this statement for fiscal 1998 year-end disclosures.
CASH EQUIVALENTS
Cash equivalents include demand deposits and short-term investments with
original maturities of three months or less. Farah had no cash equivalents at
November 2, 1997 and November 3, 1996.
INVENTORIES
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market and include purchased materials, manufacturing labor and overhead. Market
is based upon estimated selling price less costs to sell.
F-40
<PAGE> 19
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
provided by the straight-line method over the estimated useful lives (Note 2) of
the related classes of assets.
Maintenance and repairs are charged to expense as incurred, and renewals
and betterments are capitalized. The cost and accumulated depreciation of assets
retired or otherwise disposed are removed from the accounts. Generally the
resulting gains and losses are included in operations. Gains on assets sold and
leased back are recognized over the initial lease term, net of any obligations
required by the lease agreements. See Note 7 for further discussion.
INTANGIBLE ASSETS
At November 2, 1997 and November 3, 1996, intangible assets were
approximately $1.0 million and $1.4 million, respectively, and consisted
primarily of goodwill and trademarks. Intangible assets are carried at cost less
accumulated amortization. Most intangible assets are amortized on a
straight-line basis over their estimated useful lives ranging from 2 to 30
years. Amortization expense was $281,000 in 1997, $353,000 in 1996 and $283,000
in 1995.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed in the year incurred.
Advertising expense was $14.0 million in 1997, $10.7 million in 1996 and $17.0
million in 1995.
FOREIGN CURRENCIES
Foreign entities whose functional currency is the U.S. dollar translate
monetary assets and liabilities at year-end exchange rates and non-monetary
items at historical rates. Income and expense accounts are translated at the
average rates in effect during the year, except for depreciation which is
translated at historical rates. Gains and losses from changes in exchange rates
are recognized in consolidated income in the year of occurrence.
Foreign 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 titled "Cumulative foreign currency translation
adjustment."
Also included in foreign currency transaction gains and losses for 1997 is
a gain of $758,000 due to cumulative translation adjustments transferred from
equity to operations upon the sale of one of Farah's foreign subsidiaries.
INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amount of assets and liabilities recognized for financial reporting
and tax purposes and are measured by applying currently enacted tax laws. Future
tax benefits, such as net operating loss carryforwards, are recognized to the
extent that realization of such benefits is more likely than not.
F-41
<PAGE> 20
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS
128 supersedes ABP Opinion No. 15, "Earnings Per Share." SFAS 128 requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for entities with complex capital structures. SFAS 128 has been
applied to all years presented. Income per share in 1997 and 1996 is based on
the weighted average number of shares and common stock equivalents outstanding.
Stock options are included as common stock equivalents under the treasury stock
method, where dilutive. The 8.5% convertible subordinated debentures (Note 3),
were not considered common stock equivalents as their effect would be
anti-dilutive. Loss per share in 1995 is based on the weighted average number of
shares outstanding.
Basic and diluted earnings per share has been calculated based on the
weighted average number of shares outstanding for all periods presented
(10,252,969 shares, 10,161,762 shares, and 10,122,308 shares for the years ended
November 2, 1997, November 3, 1996 and November 3, 1995, respectively); the
number of shares used in the diluted calculation does not materially differ from
the amount used in the basic calculation.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES (YEARS) 1997 1996
------------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Factory machinery and equipment..................... 9-12 $29,594 $27,060
Buildings........................................... 20-50 5,193 5,479
Building improvements............................... 3-20 7,418 4,373
Other fixtures and equipment........................ 3-20 16,580 13,813
Land................................................ 770 770
Factory machinery and other fixtures and equipment
under capital lease............................... 4,170 3,440
Construction in progress............................ 5,378 937
------- -------
Total property, plant and equipment....... 69,103 55,872
Less accumulated depreciation and amortization...... 33,070 30,502
------- -------
Net property, plant and equipment......... $36,033 $25,370
======= =======
</TABLE>
Accumulated amortization on assets under capital leases totaled $2.1
million at November 2, 1997 and $1.3 million at November 3, 1996.
At November 2, 1997, construction in progress consisted of $3.9 million of
equipment purchased for Farah's new distribution center, and approximately
$800,000 for hardware, software and installation costs incurred related to
replacement of Farah's enterprise wide computer systems. Construction in
progress under capital leases was $2.6 million and $348,000 at November 2, 1997
and November 3, 1996, respectively.
During 1997, Farah closed its manufacturing plant in Galway Ireland and
sold its remaining Irish facility located in Kiltimagh. Assets abandoned or sold
in Ireland approximated $1.5 million. See additional discussion in Note 8.
In June 1996, Farah sold its facility located in Piedras Negras, Mexico for
a purchase price of approximately $22.2 million in cash. Proceeds from the sale,
net of expenses, were used to retire a long-term capital lease obligation of
approximately $7.2 plus other long-term obligations. The balance of the proceeds
of approximately $13.8 million was applied to Farah's Credit Agreement.
F-42
<PAGE> 21
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization of property, plant and equipment approximated
$5.4 million in 1997, $5.1 million in 1996 and $3.7 million in 1995.
3. DEBT AND LIQUIDITY
SHORT-TERM DEBT
Farah's primary Credit Agreement provides up to $75 million of credit
through July 1, 2001, for Farah's United States and United Kingdom operations
for either borrowings or letters of credit. The Credit Agreement includes a term
loan payable in monthly installments over a 48 month period. The balance of the
term loan was $9.2 million as of November 2, 1997. Formulas derived from
accounts receivable and inventory define borrowing capacity under the Credit
Agreement. The Credit Agreement is collateralized by substantially all assets of
Farah U.S.A., Farah U.K. Limited and Savane Direct and is guaranteed by its
parent company and each of Farah U.S.A.'s domestic affiliates. Such guarantees
are collateralized by substantially all of the assets of the related affiliates.
The interest rate for the Credit Agreement and term loan is prime (8 1/2% at
November 2, 1997) plus 1/2% for borrowings and 1/6% per month for letters of
credit. Farah may also from time to time convert all or part of the loans
outstanding under the Credit Agreement or term loan into a loan based on the
LIBOR Rate. Upon conversion, the interest rate is be the LIBOR Rate, plus 2.75%.
The conversion to and continued applicability of the LIBOR Rate is conditioned
upon specific notification requirements, a minimum of $5 million of LIBOR Rate
loans outstanding, and various other requirements. At November 2, 1997, Farah
had $33.5 million, including $8.0 million of the term loan balance, in LIBOR
loans outstanding under the Credit Agreement. Interest rates on the LIBOR
contracts outstanding at November 2, 1997 ranged from 8.38% to 8.41%. An unused
credit line fee of 1/2% per annum is charged on the unused portion of the line
when borrowings decrease below $17.5 million. As of November 2, 1997, usage
under the Credit Agreement was $36.5 million (including letters of credit of
$1.3 million) and the excess credit line available was $23.5 million. The Credit
Agreement restricts certain additional indebtedness and requires the maintenance
of minimum tangible net worth, minimum working capital and limits capital
expenditures. As of November 2, 1997, Farah was in compliance with these
covenants. The Credit Agreement prohibits the payment of dividends by Farah, and
except for debt service of Farah's 8.5% convertible subordinated debentures, the
Credit Agreement restricts the subsidiaries from transferring substantially all
net assets to the Parent Company through intercompany loans, advances or
dividends.
The following table reflects short-term debt balances and interest rates in
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Average outstanding balance........................... $31,813 $31,473 $36,842
Maximum month-end balance outstanding................. 42,899 41,816 47,338
Weighted average interest rate:
During year......................................... 9.4% 9.4% 9.7%
Year-end............................................ 8.5 9.2 9.8
</TABLE>
F-43
<PAGE> 22
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
--------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Term note, collateralized by substantially all assets of
Company, bearing interest at prime plus .5% and LIBOR plus
2.75% for LIBOR Rate Loans, due July 1, 2001, payable in
monthly installments of $208,333.......................... $ 9,167 $ --
8.5% convertible subordinated debentures due February 1,
2004, convertible into Farah's common stock at $15.2375
per share................................................. 1,663 1,663
Collateralized loan for aircraft purchase................... -- 1,165
Collateralized loan for aircraft purchase bearing interest
at 8.85%, fixed through April 2, 2000, then at prime plus
1%, due in monthly installments through April 2, 2007..... 1,078 --
Various notes, collateralized by property, plant and
equipment, bearing interest at rates ranging from 9.0% to
10.93%, due in monthly installments through 2001.......... 1,288 554
Various obligations under other capital leases.............. 5,876 2,612
------- ------
Total long-term debt...................................... 19,072 5,994
Less current installments................................. 5,301 1,288
------- ------
Net long-term debt................................ $13,771 $4,706
======= ======
</TABLE>
Installments of long-term debt and capital lease obligations mature as
follows:
<TABLE>
<CAPTION>
CAPITAL
LONG-TERM LEASE
DEBT OBLIGATIONS
--------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
1998........................................................ $ 3,237 $2,490
1999........................................................ 3,040 1,715
2000........................................................ 2,728 957
2001........................................................ 1,771 507
2002........................................................ 104 445
2003 and beyond............................................. 2,316 819
------- ------
13,196 6,933
Less interest portion....................................... -- 1,057
------- ------
$13,196 $5,876
======= ======
</TABLE>
Farah believes that its borrowing availability from its Credit Agreement,
its ability to access other capital markets, if necessary, and its projected
cash from operations will be sufficient to meet anticipated liquidity
requirements for fiscal 1998.
4. EMPLOYEE AND DIRECTOR STOCK OPTIONS AND AWARDS
Farah has several stock-based compensation plans, which are described
below. Farah applies APB Opinion 25 and related Interpretations in accounting
for its employee stock-based compensation plans. In 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully
adopted by Farah, would change the methods Farah applies in recognizing the cost
of its stock-based compensation plans. Adoption of the cost recognition
provisions of SFAS 123 is optional and Farah has decided not to elect these
provisions.
F-44
<PAGE> 23
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
However, pro forma disclosures as if Farah adopted the cost recognition
provisions of SFAS 123 are presented below.
STOCK OPTION PLAN
The current stock option plan is the Farah Incorporated 1991 Stock Option
and Restricted Stock Plan (the "1991 Plan"). Under the 1991 Plan, Farah is
authorized to issue up to 1,225,000 shares of common stock pursuant to stock
options (or, as described below, as shares of restricted stock). Farah is
authorized under the 1991 Plan to grant stock options as incentive stock options
(intended to qualify under Section 422 of the Internal Revenue Code of 1986, as
amended) and/or as options that are not intended to qualify as incentive stock
options.
The 1991 Plan provides that the exercise price of any stock option shall be
determined by the Stock Option and Compensation Committee in its discretion. All
options granted have an exercise price equal to the per share fair market value
as of the date of the grant. All stock options granted in 1995 have a term of
ten years and vest at the rate of fifty percent (50%) per year on each
anniversary of the date of grant, commencing on the first anniversary of the
date of grant. The options granted in 1996 and 1997 have a term of approximately
ten years, are 50% vested on the date of grant, and fully vest on the first
anniversary of the date of grant.
Farah granted 4,000 options in 1997, 489,000 options in 1996 and 7,000
options in 1995. In accordance with APB 25, Farah has not recognized any
compensation cost for the stock options granted in these years.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLANS
Farah adopted two non-employee director stock option plans, the Farah
Incorporated 1988 Stock Option Plan for Non-Employee Directors and the Farah
Incorporated 1996 Non-Employee Directors Stock Option Plan (collectively, the
"Director Stock Option Plans"). Under the Director Stock Option Plans, Farah is
authorized to issue up to 150,000 and 300,000 shares, respectively, of common
stock pursuant to stock options to selected directors. Farah is authorized under
the Director Stock Option Plans to grant only non-qualified stock options. The
Director Stock Option Plans provide that the exercise price of any stock option
shall be the fair market value as of the date the option is granted.
Farah granted options for 57,500, 31,000 and 9,000 shares under the
Director Stock Option Plans in 1997, 1996 and 1995, respectively. Stock options
granted from the 1988 Stock Option Plan have a term of ten years and are fully
vested as of the date of grant. Stock options granted from the 1996 plan have a
term of five years and vest at the rate of 50% per year on each anniversary of
the date of grant, commencing on the first anniversary of the date of grant. In
accordance with APB 25, Farah has not recognized any compensation cost for the
stock options granted in 1997, 1996 and 1995.
F-45
<PAGE> 24
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of Farah's stock options as of November 2, 1997,
November 3, 1996 and November 3, 1995 and the changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1997 STOCK OPTIONS 1996 STOCK OPTIONS 1995 STOCK OPTIONS
--------------------- --------------------- ---------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES OF AVERAGE SHARES OF AVERAGE SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 949,713 $ 8.21 455,637 $10.87 478,985 $10.68
Granted....................... 61,500 8.05 520,000 5.94 16,000 8.53
Exercised..................... (98,650) 5.74 (3,500) 5.48 (25,514) 5.81
Forfeited..................... (41,000) 14.01 (17,924) 11.08 (10,834) 11.02
Expired....................... (6,063) 7.50 (4,500) 6.96 (3,000) 9.81
------- ------- -------
Outstanding at end of year.... 865,500 8.21 949,713 8.21 455,637 10.87
======= ======= =======
Exercisable at end of year.... 801,000 8.25 678,463 9.07 448,637 10.91
Weighted-average fair market
value of options granted
during the year............. $ 3.85 $ 2.66 $ 3.78
</TABLE>
As of November 2, 1997, the weighted average remaining term for outstanding
options is 7.17 years. The fair value of each stock option granted is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants in 1997, 1996 and 1995:
dividend yield of 0% for all years; expected volatility of 45.1% in 1997 and
51.3% in 1996 and 1995; risk-free interest rates are different for each grant
and range from 6.1% to 7.1%; and the expected lives of options are different for
each grant and range from 3.6 years to 4.8 years.
RESTRICTED STOCK
Restricted stock may be granted pursuant to the 1991 Plan.
Farah may grant, as restricted common stock, all or a portion of the
1,225,000 shares of common stock reserved under the 1991 Plan. During fiscal
1997, 1996 and 1995 there were no shares of restricted stock granted.
During 1994 and 1993, 104,000 and 80,000 shares, respectively, of Farah's
common stock were awarded to certain officers and directors pursuant to the 1991
Plan. The awards vest over varying periods ending in 1998, of which 12,500
shares vested in 1997, 37,665 shares vested in 1996 and 62,666 shares vested in
1995. Farah recognizes the expense related to these awards over the period of
service specified in the vesting provision of the awards and recorded
compensation expense of $77,000 in 1997, $266,000 in 1996 and $704,000 in 1995
for restricted stock awards.
F-46
<PAGE> 25
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER COMMON SHARE
Had the compensation cost for Farah's employee based compensation plans
been determined consistent with SFAS 123, Farah's net income (loss) and net
income (loss) per common share for 1997, 1996 and 1995 would approximate the pro
forma amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ -------
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $ 270 6,756 (12,941)
Pro forma................................................. (78) 5,945 (12,973)
Net income (loss) per share:
Basic and diluted as reported............................. $ .03 .66 (1.28)
Basic pro forma........................................... (.01) .59 (1.28)
Diluted pro forma......................................... (.01) .58 (1.28)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.
5. INCOME TAXES
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at November 2, 1997 and November 3, 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(THOUSANDS OF
DOLLARS)
---------------
<S> <C> <C>
DEFERRED TAX ASSETS:
U.S. federal NOL carryforwards............................ $3,949 $2,062
Foreign NOL carryforwards................................. 1,382 771
Deferred gains............................................ 403 1,871
Foreign tax credit carryforwards.......................... 626 451
Other accrued expenses.................................... 4,031 3,563
Other..................................................... 759 235
------ ------
Total deferred tax assets......................... 11,150 8,953
------ ------
DEFERRED TAX LIABILITIES:
Tax in excess of financial statement depreciation and
amortization........................................... 1,732 1,980
Other..................................................... 699 600
------ ------
Total deferred tax liabilities.................... 2,431 2,580
------ ------
Net deferred tax asset.................................... 8,719 6,373
Valuation allowance....................................... (1,064) (3,825)
------ ------
Deferred income tax asset, net......................... 7,655 2,548
Less current portion................................... (4,207) (2,548)
------ ------
Long-term deferred income tax asset, net............... $3,448 --
====== ======
</TABLE>
The fiscal 1997 increase in Farah's deferred tax assets was primarily due
to Farah's domestic and foreign net operating losses incurred for the year.
Realization of the deferred tax assets is dependent upon Farah generating future
taxable income from operations in the respective taxing jurisdictions. Farah has
domestic net operating loss carryforwards of $11.6 million, of which $7.1
million expire in 2010. The remaining $4.5 million of domestic net operating
loss carryforwards expire in 2012. Farah does not believe it is more likely than
not that it will generate sufficient taxable income during the carryforward
periods for certain portions of the
F-47
<PAGE> 26
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred tax assets and accordingly, provided a valuation allowance of $1.1
million and $3.8 million at November 2, 1997 and November 3, 1996, respectively.
During fiscal 1997, Farah reevaluated the realizability of its deferred tax
assets pursuant to the criteria of Statement of Financial Accounting Standards
No. 109, and concluded that it is more likely than not that Farah will realize
tax benefits associated with its domestic net operating losses, together with
certain other tax benefits, that were previously subject to valuation allowance.
As a result of this reevaluation, the beginning of the year valuation allowance
was reduced by approximately $3.2 million.
The federal examination of Farah's United States tax returns for fiscal
years 1994 and 1995 was completed during the year without any proposed income or
expense adjustments or modifications to its tax credits. Farah is waiting for
acceptance of the auditor's report from the Joint Committee on Taxation of the
United States Treasury Department.
Income (loss) before taxes and incomes taxes in 1997, 1996 and 1995 are
shown below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES:
Domestic operations...................................... $ (855) $ 6,277 $(16,728)
Foreign operations....................................... (2,773) 3,460 1,452
------- ------- --------
Total consolidated............................. $(3,628) $ 9,737 $(15,276)
======= ======= ========
INCOME TAX PROVISION:
Domestic operations
Current................................................ $ 668 $ 450 $ (1,087)
Deferred............................................... (3,956) 1,654 (1,934)
------- ------- --------
Total domestic................................. (3,288) 2,104 (3,021)
Foreign operations
Current................................................ 541 877 686
Deferred............................................... (1,151) -- --
------- ------- --------
Total foreign.................................. (610) 877 686
------- ------- --------
Total consolidated............................. $(3,898) $ 2,981 $ (2,335)
======= ======= ========
</TABLE>
The effective tax rate differs from the U.S. statutory rate of 34% as
summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Expected income taxes at U.S. statutory rate............... $(1,234) $3,311 $(5,194)
Non-deductible expenses.................................. 92 212 87
Permanent differences on assets sold..................... -- 172 --
Effect of differing tax rates in foreign countries....... 191 (91) 46
Unrecognized deferred tax benefits....................... 244 -- 2,633
U.S. taxes on dividends from foreign countries........... 166 -- 93
Recognition of previously unrecognized deferred tax
benefits.............................................. (3,226) (761) --
Other.................................................... (131) 138 --
------- ------ -------
Income taxes, as reported.................................. $(3,898) $2,981 $(2,335)
======= ====== =======
</TABLE>
At November 2, 1997, Farah's foreign subsidiaries had net deferred tax
assets of $2.0 million from net operating loss carryforwards and deferred
charges that are available to offset future foreign taxable income. In addition,
at November 2, 1997, Farah had $626,000 in foreign tax credit carryforwards to
offset any U.S. tax
F-48
<PAGE> 27
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generated by future foreign income repatriated and taxed in the U.S. These
credits expire in the years 1998 through 2001 if not used.
Certain of Farah's foreign subsidiaries have undistributed accumulated
earnings of approximately $25.5 million, as adjusted for U.S. tax purposes at
November 2, 1997. No U.S. tax has been provided on the undistributed earnings
because Farah 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 $7.1 million at November 2, 1997. If earnings are repatriated,
foreign tax credits can offset a portion of the U.S. tax on such earnings.
6. EMPLOYEE BENEFIT PLANS
Farah has two retirement plans: (1) a defined contribution plan established
pursuant to Section 401(k) of the Internal Revenue Code which covers all
non-union U.S. employees, and (2) a defined benefit plan which covers
substantially all bargaining unit employees and retirees.
Under the defined contribution plan, each participant may contribute from
1% to 15% of his/her compensation. Farah matches contributions up to 3% of the
participant's compensation. In 1997, 1996 and 1995, Farah's contribution to the
plan was approximately $418,000, $306,000 and $444,000, respectively.
Under the defined benefit plan, 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.
Farah's policy is to fund accrued pension cost when such costs are
deductible for tax purposes. Net periodic pension cost for the years ended
November 2, 1997, November 3, 1996 and November 3, 1995, included the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.............. $ 60 $ 64 $ 47
Interest cost on projected benefit obligation............... 579 576 577
Actual return on plan assets................................ (1,300) (786) (1,514)
Net amortization and deferral............................... 705 263 1,165
------- ----- -------
Net periodic pension cost......................... $ 44 $ 117 $ 275
======= ===== =======
</TABLE>
F-49
<PAGE> 28
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the funded status at November 2, 1997 and
November 3, 1996, of the defined benefit plan:
<TABLE>
<CAPTION>
1997 1996
------- -------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation................................... $(7,694) $(7,601)
Nonvested benefit obligation................................ (129) (174)
------- -------
Accumulated benefit obligation......................... $(7,823) $(7,775)
======= =======
Projected benefit obligation................................ $(7,823) $(7,775)
Plan assets at market value................................. 8,371 7,437
------- -------
Funded status.......................................... 548 (338)
Unrecognized transition liability being recognized over
average future service of plan participants............... 335 401
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions........ 793 1,243
Adjustment required to recognize minimum liability.......... -- (1,644)
------- -------
Prepaid/(Unfunded Reserve)........................ $ 1,676 $ (338)
======= =======
</TABLE>
In determining the benefit obligations and service cost of Farah's defined
benefit plan, weighted average discount rates of 7.5% and 7.75% were used in
1997 and 1996, respectively. The expected long-term rate of return on plan
assets was 9.5% in both years.
7. COMMITMENTS AND CONTINGENCIES
LEASE AND CAPITAL EXPENDITURE COMMITMENTS
During 1988, Farah consummated a sale and leaseback of its main El Paso,
Texas, manufacturing and office facility. In connection with the sale, Farah
entered into a 10 year operating lease of the facility which expires in May
1998. A deferred gain was recognized on the sale, of which $1.2 million remains
to be recognized through 1998. A portion of the sale was paid by delivery of a
$7.5 promissory note to Farah, collateralized by a second mortgage on the
property. In the fourth quarter of 1997, this note receivable was prepaid by the
borrower. In consideration for this prepayment, Farah discounted the note 12.5%.
A loss of approximately $665,000 was recognized in this transaction, and is
reflected in the caption "Other, net" on the Consolidated Statement of
Operations.
F-50
<PAGE> 29
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Farah and its subsidiaries occupy certain facilities and use certain
equipment under operating leases which expire at various dates from fiscal 1998
to 2016. The following is a summary by year of the noncancelable portion of
future minimum lease payments under operating leases:
<TABLE>
<CAPTION>
THOUSANDS
OF DOLLARS
----------
<S> <C>
1998...................................................... $ 8,640
1999...................................................... 5,096
2000...................................................... 3,965
2001...................................................... 3,179
2002...................................................... 2,951
Later years............................................... 25,185
-------
Lease payments*............................................. $49,016
=======
</TABLE>
- ---------------
* Minimum payments have not been reduced by minimum sublease rental income of
$820,000 due in the future under noncancelable subleases.
Farah has subleased approximately 70% of its El Paso manufacturing
facility. The noncancelable portion of future minimum rental income due in 1998
is $820,000.
Rental expense for all operating leases for 1997, 1996 and 1995 was $8.4
million, $8.2 million and $8.7 million, respectively (net of sublease income of
approximately $1.3 million in 1997, $1.1 million in 1996 and $1.0 million in
1995).
At November 2, 1997, Farah had commitments for capital expenditures of
approximately $4.4 million.
CREDIT RISKS
Financial instruments which potentially expose Farah to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
consist primarily of cash and trade accounts receivable. Farah restricts
investment of cash to financial institutions of high credit standing. In
addition, Farah performs ongoing credit evaluations of its customers' financial
condition. Farah establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historic trends and
other information. Farah's customers are not concentrated in any specific
geographic region but are concentrated in the retail industry. In 1997, 1996 and
1995, one U.S. customer accounted for $35.9 million (13.1%), $36.3 million
(14.6%) and $30.2 million (12.5%), respectively, of Farah's consolidated sales.
In addition, in 1997 and 1996 another U.S. customer accounted for $35.2 million
(12.8%) and $26.6 million (10.7%) of consolidated sales, respectively. A third
customer accounted for $27.3 million (10.0%) of consolidated sales in 1997.
LEGAL PROCEEDINGS
Farah is involved in certain legal proceedings in the normal course of
business. Based on advice of legal counsel, Farah believes that the outcome of
such litigation will not materially affect its consolidated financial position,
results of operations or cash flows.
8. TERMINATION OF FOREIGN OPERATIONS, PRODUCTION CONVERSION EXPENSES AND
RELOCATION EXPENSES
Termination of foreign operations. During fiscal 1997, Farah incurred a
loss related to a fire and ultimate disposition of its Irish operations. A total
loss of approximately $5.1 million was recognized related to these events. This
loss resulted mainly from the write-down of fixed assets, severance payments and
legal and
F-51
<PAGE> 30
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
professional fees incurred. This amount has been classified as "Termination of
foreign operations" in the Consolidated Statement of Operations.
Production conversion expenses. In fiscal 1997, Farah incurred start-up
costs related to two new laundry facilities in Juarez and Torreon, Mexico and
the expansion of Farah's existing facility in Chihuahua, Mexico. Conversion
costs were also incurred as Farah began to source more product from global
contractors. Expenses related to these items totaled approximately $2.1 million,
and have been separately stated in the line item "Production conversion
expenses" in the Consolidated Statement of Operations.
Relocation expenses. In the third quarter of fiscal 1997, Farah completed
its move to new corporate headquarters. In addition, Farah is currently in the
process of relocating its distribution center to a new facility from which it
expects to realize improved distribution and inventory management efficiencies.
Farah anticipates completion of the distribution center relocation in the second
quarter of fiscal 1998. In moving to the new headquarters and distribution
center, Farah incurred duplicate operating costs, moving expenses and
professional fees. These expenses approximated $904,000, and have been
separately stated under the caption "Relocation expenses" in the Consolidated
Statement of Operations.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Farah in estimating the
fair value disclosures for its financial instruments. For cash and trade
receivables, the carrying amounts reported in the Consolidated Balance Sheets
approximate fair value because of the short-term maturity of these instruments.
The carrying values of the borrowings under the Credit Agreement approximate
fair value, as interest rates for these instruments approximate current market
rates. The carrying amount of Farah's convertible debentures was $1.7 million at
November 2, 1997 and November 3, 1996. The fair value for these debentures for
the same periods was $1.3 million and $1.2 million respectively. The fair value
of the convertible debentures was based upon quoted market prices at November 2,
1997 and November 3, 1996.
10. GEOGRAPHIC SEGMENT INFORMATION
Farah is engaged in one business segment. This includes the design,
manufacture, distribution and sale of men's, young men's, boys' and women's
apparel in the United States and certain foreign countries, principally in
Europe and the South Pacific. The following table presents information regarding
geographic segments for 1997, 1996 and 1995. Transfers between the United States
and foreign areas are recorded at normal selling prices. Operating profit is
total revenue less operating expenses. In computing operating profit, general
corporate expenses, interest expense and income taxes have been excluded.
F-52
<PAGE> 31
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
NET SALES:
United States to unaffiliated customers.............. $224,051 $199,574 $193,274
Transfers between areas.............................. -- -- 266
-------- -------- --------
Total United States.......................... 224,051 199,574 193,540
Europe............................................... 31,752 30,677 32,033
South Pacific........................................ 17,916 17,347 15,490
Adjustments and eliminations......................... -- -- (266)
-------- -------- --------
Total........................................ $273,719 $247,598 $240,797
======== ======== ========
OPERATING PROFIT (LOSS):
United States........................................ $ 5,180 $ 1,981 $(12,489)
Europe............................................... (4,801) 3 385
South Pacific........................................ 1,970 2,626 1,549
Adjustments and eliminations......................... -- -- --
-------- -------- --------
Total........................................ 2,349 4,610 (10,555)
Net gain (loss) on sale of assets...................... (24) 10,041 755
General corporate expenses............................. (2,561) (1,683) (1,751)
Interest expense, net.................................. (3,392) (3,231) (3,725)
-------- -------- --------
Income (loss) before income taxes...................... $ (3,628) $ 9,737 $(15,276)
======== ======== ========
IDENTIFIABLE ASSETS:
United States........................................ $143,182 $123,520 $146,172
Europe............................................... 15,513 16,552 17,326
Far East and the South Pacific....................... 21,000 17,645 14,357
Adjustments and eliminations......................... (4,103) (3,854) (4,028)
-------- -------- --------
Total........................................ $175,592 $153,863 $173,827
======== ======== ========
</TABLE>
Approximately 66% and 26% of all product sold in the United States in 1997
was assembled in Mexico and Costa Rica, respectively, in Farah's owned
facilities or by contractors. Included in Farah's consolidated balance sheet at
November 2, 1997 were net assets located in Mexico and Costa Rica totaling
approximately $6.7 million and $8.3 million respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." This Statement requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. Upon adoption of this pronouncement, additional disclosures will be
required by Farah. This Statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Farah intends to adopt
this statement for its 1998 fiscal year.
F-53
<PAGE> 32
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. QUARTERLY UNAUDITED INFORMATION
Quarterly unaudited information for fiscal 1997 compared to fiscal 1996 is
as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
1997
Net sales........................... $ 61,938 $ 70,771 $ 64,256 $ 76,754
Gross profit........................ 17,708 19,888 16,723 19,610
Net income (loss)................... (1,955) 3,211 (403) (583)
Net income (loss) per share -- basic
and diluted....................... (.19) .31 (.04) (.06)
Weighted average shares of common
stock outstanding -- basic........ 10,191,103 10,265,762 10,276,022 10,278,989
Weighted average shares of common
stock and common stock equivalents
outstanding -- diluted............ 10,191,103 10,543,165 10,276,022 10,278,989
1996
Net sales........................... $ 51,510 $ 64,058 $ 55,973 $ 76,057
Gross profit........................ 13,797 16,134 14,562 19,565
Net income (loss)................... (989) (176) 6,887 1,034
Net income (loss) per
share -- basic.................... (.10) (.02) .68 .10
Net income (loss) per
share -- diluted.................. (.10) (.02) .67 .10
Weighted average shares of common
stock outstanding -- basic........ 10,149,070 10,167,647 10,166,594 10,169,739
Weighted average shares of common
stock and common stock equivalents
outstanding -- diluted............ 10,149,070 10,161,647 10,344,513 10,234,442
</TABLE>
In the first quarter of 1997 an after tax loss of $2.5 million was recorded
related to a loss incurred in one of Farah's Irish facilities, as a result of a
fire.
In the fourth quarter of 1997 an additional after tax loss of $1.1 million
was recorded related to the final disposition of Farah's Irish facilities.
In the third quarter of 1996, Farah sold its Piedras Negras, Mexico
facility, resulting in an after-tax gain of approximately $6.9 million.
12. SUBSEQUENT EVENTS
Subsequent to November 2, 1997, Farah's Board of Directors approved the
closure of Farah's finishing facility in Cartago, Costa Rica and a reduction of
sewing operations in Farah's San Jose, Costa Rica facility. The Cartago
facility, as well as some of the manufacturing equipment in both locations will
be held for sale. Farah expects to record a pre-tax charge of $3.5 to $4.0
million in the first quarter of 1998 on the write-down of these assets to
expected realizable value and the accrual of costs related to severance payments
and other closing expenses. Approximately 680 production and 20 administrative
employees will be terminated between the two facilities. Farah expects the
completion of these events to occur prior to the end of fiscal 1998. This
decision will eliminate certain fixed costs and should result in lower product
costs as Farah sources more goods from Mexico and other lower cost suppliers
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors Affecting Farah's Business and Prospects").
F-54
<PAGE> 33
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RECENT DEVELOPMENT -- MERGER AGREEMENT AND SUPPLEMENTAL COMBINED CONDENSED
FINANCIAL STATEMENTS
Pursuant to a definitive merger agreement dated May 1, 1998, Foxfire
Acquisition Corp., a company formed by Tropical Sportswear Int'l Corporation
("Tropical") in contemplation of the acquisition (the "Acquisition") of Farah
Incorporated will, subject to conditions, acquire all of the issued and
outstanding capital stock of Farah Incorporated. The Acquisition will be
financed through senior subordinated notes of Tropical (the "Notes"). The Notes
will be jointly and severally guaranteed by Tropical's and Farah Incorporated's
domestic subsidiaries. The wholly-owned foreign subsidiaries of Farah
Incorporated will not be guarantors with respect to the Notes and are not
anticipated to have any credit arrangements senior to the Notes except for their
local overdraft facility and capital lease obligations. Proceeds from the Notes
will be used to repay amounts outstanding under Farah Incorporated's Credit
Agreement and to redeem the 8.5% convertible subordinated debentures.
The following are the supplemental combining condensed balance sheets as of
November 2, 1997 and November 3, 1996 and the supplemental combining condensed
statements of operations and of cash flows for each of the three years in the
period ended November 2, 1997. The only intercompany eliminations are the normal
intercompany eliminations with regards to intercompany sales and Farah
Incorporated's investment in the wholly-owned subsidiaries. Separate complete
financial statements of the guarantor subsidiaries are not presented because
management has determined that they are not material to investors.
F-55
<PAGE> 34
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NOVEMBER 2, 1997
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $ -- $224,051 $65,269 $(15,601) $273,719
Cost of sales................................. -- 167,078 48,313 (15,601) 199,790
----- -------- ------- -------- --------
Gross profit................................ -- 56,973 16,956 -- 73,929
Selling, general and administrative
expenses.................................... -- 51,100 15,336 -- 66,436
Termination of foreign operations............. -- 3,493 1,613 -- 5,106
Production conversion expenses................ -- 2,061 -- -- 2,061
Relocation expenses........................... -- 904 -- -- 904
----- -------- ------- -------- --------
Operating income (loss)..................... -- (585) 7 -- (578)
Interest, net................................. (141) (3,165) (86) -- (3,392)
Other, net.................................... -- (201) 543 -- 342
Equity in earnings of subsidiaries............ 411 -- -- (411) --
----- -------- ------- -------- --------
Income (loss) before income taxes............. 270 (3,951) 464 (411) (3,628)
Income tax provision (benefit)................ -- (4,439) 541 -- (3,898)
----- -------- ------- -------- --------
Net income (loss).................... $ 270 $ 488 $ (77) $ (411) $ 270
===== ======== ======= ======== ========
</TABLE>
YEAR ENDED NOVEMBER 3, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales................................... $ -- $199,574 $66,103 $(18,079) $247,598
Cost of sales............................... -- 152,107 49,512 (18,079) 183,540
------- -------- ------- -------- --------
Gross profit.............................. -- 47,467 16,591 -- 64,058
Selling, general and administrative
expenses.................................. -- 48,271 13,918 -- 62,189
------- -------- ------- -------- --------
Operating income (loss)................... -- (804) 2,673 -- 1,869
Interest, net............................... (141) (3,006) (84) -- (3,231)
Other, net.................................. -- 10,308 791 -- 11,099
Equity in earnings of subsidiaries.......... 6,897 -- -- (6,897) --
------- -------- ------- -------- --------
Income before income taxes.................. 6,756 6,498 3,380 (6,897) 9,737
Income tax provision........................ -- 2,103 878 -- 2,981
------- -------- ------- -------- --------
Net income......................... $ 6,756 $ 4,395 $ 2,502 $ (6,897) $ 6,756
======= ======== ======= ======== ========
</TABLE>
YEAR ENDED NOVEMBER 3, 1995
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ -- $193,540 $73,225 $(25,968) $240,797
Cost of sales.............................. -- 154,235 57,555 (25,968) 185,822
-------- -------- ------- -------- --------
Gross profit............................. -- 39,305 15,670 -- 54,975
Selling, general and administrative
expenses................................. -- 53,872 14,130 -- 68,002
-------- -------- ------- -------- --------
Operating income (loss).................. -- (14,567) 1,540 -- (13,027)
Interest, net.............................. (141) (3,441) (144) -- (3,726)
Other, net................................. -- 1,419 58 -- 1,477
Equity in losses of subsidiaries........... (12,800) -- -- 12,800 --
-------- -------- ------- -------- --------
Income (loss) before income taxes.......... (12,941) (16,589) 1,454 12,800 (15,276)
Income tax provision (benefit)............. -- (3,021) 686 -- (2,335)
-------- -------- ------- -------- --------
Net income (loss)................. $(12,941) $(13,568) $ 768 $ 12,800 $(12,941)
======== ======== ======= ======== ========
</TABLE>
F-56
<PAGE> 35
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 2, 1997
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash......................................... $ -- $ 536 $ 1,796 $ -- $ 2,332
Accounts receivable, net..................... -- 36,078 7,490 (515) 43,053
Inventories.................................. -- 60,404 14,388 -- 74,792
Other current assets......................... -- 10,371 480 -- 10,851
------- -------- ------- -------- --------
Total current assets................ -- 107,389 24,154 (515) 131,028
------- -------- ------- -------- --------
Property, plant and equipment, net........... -- 28,756 7,277 -- 36,033
Other assets, net............................ 84,377 (44,758) (239) (30,849) 8,531
------- -------- ------- -------- --------
Total assets........................ $84,377 $ 91,357 $31,192 $(31,364) $175,592
======= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current installments of
long-term debt........................... $ -- $ 36,880 $ 3,993 $ -- $ 40,873
Accounts payable and accrued liabilities... -- 27,078 7,529 (515) 34,092
------- -------- ------- -------- --------
Total current liabilities........... -- 63,958 11,522 (515) 74,965
------- -------- ------- -------- --------
Long-term debt and capital lease
obligations................................ 1,663 12,017 91 -- 13,771
Other noncurrent liabilities................. -- 7,344 385 (3,587) 4,142
Stockholders' equity......................... 82,714 8,068 19,194 (27,262) 82,714
------- -------- ------- -------- --------
Total liabilities and stockholders'
equity............................ $84,377 $ 91,387 $31,192 $(31,364) $175,592
======= ======== ======= ======== ========
</TABLE>
NOVEMBER 3, 1996
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash......................................... $ -- $ 542 $ 3,235 $ -- $ 3,777
Accounts receivable, net..................... -- 33,738 8,283 (350) 41,671
Inventories.................................. -- 50,044 11,989 -- 62,033
Other current assets......................... -- 7,915 2,942 -- 10,857
------- -------- ------- -------- --------
Total current assets................ -- 92,239 26,449 (350) 118,338
------- -------- ------- -------- --------
Property, plant and equipment, net........... -- 16,712 8,658 -- 25,370
Other assets, net............................ 83,803 (42,522) (344) (30,782) 10,155
------- -------- ------- -------- --------
Total assets........................ $83,803 $ 66,429 $34,763 $(31,132) $153,863
======= ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt and current installments of
long-term debt........................... $ -- $ 19,959 $ 2,073 $ -- $ 22,032
Accounts payable and accrued liabilities... -- 30,065 8,060 (350) 37,775
------- -------- ------- -------- --------
Total current liabilities........... -- 50,024 10,133 (350) 59,807
------- -------- ------- -------- --------
Long-term debt and capital lease
obligations................................ 1,663 2,739 304 -- 4,706
Other noncurrent liabilities................. -- 10,238 475 (3,503) 7,210
Stockholders' equity......................... 82,140 3,428 23,851 (27,279) 82,140
------- -------- ------- -------- --------
Total liabilities and stockholders'
equity............................ $83,803 $ 66,429 $34,763 $(31,132) $153,863
======= ======== ======= ======== ========
</TABLE>
F-57
<PAGE> 36
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NOVEMBER 2, 1997
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income (loss)..................... $ 270 $ 488 $ (77) $(411) $ 270
Adjustments to reconcile net income
(loss) to net cash from (used in)
operating activities:
Depreciation and amortization...... -- 4,968 707 -- 5,675
Other adjustments.................. -- (7,768) 1,334 -- (6,434)
Changes in operating assets and
liabilities...................... -- (16,824) 325 -- (16,499)
----- -------- ------- ----- --------
Net cash from (used in)
operating activities........ 270 (19,136) 2,289 (411) (16,988)
----- -------- ------- ----- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and
equipment.......................... -- (11,059) (993) 434 (11,618)
Proceeds from disposition of property,
plant and equipment................ -- 63 456 (434) 85
----- -------- ------- ----- --------
Net cash used in investing
activities.................. -- (10,996) (537) -- (11,533)
----- -------- ------- ----- --------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net change in debt.................... -- 20,249 1,480 -- 21,729
Net change in equity.................. 323 4,152 (4,561) 409 323
Other................................. (574) 5,725 (91) (17) 5,043
----- -------- ------- ----- --------
Net cash from (used in)
financing activities........ (251) 30,126 (3,172) 392 27,095
----- -------- ------- ----- --------
Effect of exchange rate changes on
cash.................................. (19) -- (19) 19 (19)
----- -------- ------- ----- --------
Net decrease in cash.................... -- (6) (1,439) -- (1,445)
Cash, beginning of period............... -- 542 3,235 -- 3,777
----- -------- ------- ----- --------
Cash, end of period..................... $ -- $ 536 $ 1,796 $ -- $ 2,332
===== ======== ======= ===== ========
</TABLE>
F-58
<PAGE> 37
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NOVEMBER 3, 1996
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income............................. $ 6,756 $ 4,395 $ 2,502 $(6,897) $ 6,756
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization....... -- 4,483 951 -- 5,434
Other adjustments................... -- (13,505) 213 -- (13,292)
Changes in operating assets and
liabilities....................... -- 20,043 (3,664) 174 16,553
------- -------- ------- ------- --------
Net cash from operating
activities................... 6,756 15,416 2 (6,723) 15,451
------- -------- ------- ------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and
equipment........................... -- (559) (3,838) -- (4,397)
Proceeds from disposition of property,
plant and equipment................. -- 21,674 1,015 -- 22,689
------- -------- ------- ------- --------
Net cash from (used in)
investing activities......... -- 21,115 (2,823) -- 18,292
------- -------- ------- ------- --------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net change in debt..................... -- (30,791) (2,611) -- (33,402)
Net change in equity................... 1,336 5,517 287 (5,804) 1,336
Other.................................. (8,170) (11,417) 5,347 12,605 (1,635)
------- -------- ------- ------- --------
Net cash from (used in)
financing activities......... (6,834) (36,691) 3,023 6,801 (33,701)
------- -------- ------- ------- --------
Effect of exchange rate changes on
cash................................... 78 -- 78 (78) 78
------- -------- ------- ------- --------
Net increase (decrease) in cash.......... -- (160) 280 -- 120
Cash, beginning of period................ -- 702 2,955 -- 3,657
------- -------- ------- ------- --------
Cash, end of period...................... $ -- $ 542 $ 3,235 $ -- $ 3,777
======= ======== ======= ======= ========
</TABLE>
F-59
<PAGE> 38
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NOVEMBER 3, 1995
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income (loss)..................... $(12,941) $(13,568) $ 768 $12,800 $(12,941)
Adjustments to reconcile net income
(loss) to net cash from (used in)
operating activities:
Depreciation and amortization...... -- 3,088 932 0 4,020
Other adjustments.................. -- (5,132) 410 0 (4,722)
Changes in operating assets and
liabilities........................ -- (8,172) 1,374 (210) (7,008)
-------- -------- ------ ------- --------
Net cash from (used in)
operating activities........ (12,941) (23,784) 3,484 12,590 (20,651)
-------- -------- ------ ------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and
equipment.......................... -- (9,616) (2,140) -- (11,756)
Proceeds from disposition of property,
plant and equipment................ -- 1,761 24 -- 1,785
-------- -------- ------ ------- --------
Net cash used in investing
activities.................. -- (7,855) (2,116) -- (9,971)
-------- -------- ------ ------- --------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net change in debt.................... -- 29,031 2,882 -- 31,913
Net change in equity.................. 967 2,971 (2,940) (31) 967
Other................................. 11,991 (323) (48) (12,576) (956)
-------- -------- ------ ------- --------
Net cash from (used in)
financing activities........ 12,958 31,679 (106) (12,607) 31,924
-------- -------- ------ ------- --------
Effect of exchange rate changes on
cash.................................. (17) -- (17) 17 (17)
-------- -------- ------ ------- --------
Net increase in cash.................... -- 40 1,245 -- 1,285
Cash, beginning of period............... -- 662 1,710 -- 2,372
-------- -------- ------ ------- --------
Cash, end of period..................... $ -- $ 702 $2,955 $ -- $ 3,657
======== ======== ====== ======= ========
</TABLE>
F-60
<PAGE> 1
EXHIBIT 99.3
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following Unaudited Pro Forma Combined Financial Data give effect to
the Transactions as if they had been consummated: (i) on September 29, 1996 with
respect to the Unaudited Pro Forma Combined Statement of Operations for fiscal
1997, (ii) on September 28, 1997 with respect to the Unaudited Pro Forma
Combined Statement of Operations for the twenty-seven weeks ended April 4, 1998,
(iii) on March 30, 1997 with respect to the Unaudited Pro Forma Combined
Statement of Operations for the twelve months ended April 4, 1998 and (iv) on
April 4, 1998 with respect to the Unaudited Pro Forma Combined Balance Sheet.
The Unaudited Pro Forma Combined Statement of Operations for fiscal 1997 has
been derived from the audited statement of operations of TSI and Farah for their
respective 1997 fiscal years. The Unaudited Pro Forma Combined Statement of
Operations for the twenty-seven weeks ended April 4, 1998 has been derived from
TSI's unaudited statement of income for the twenty-seven weeks ended April 4,
1998 and Farah's unaudited statement of operations for the twenty-six weeks
ended February 1, 1998. The Unaudited Pro Forma Combined Statement of Operations
for the twelve months ended April 4, 1998 has been derived from TSI's unaudited
statement of income for the twelve months ended April 4, 1998 and Farah's
unaudited statement of operations for the twelve months ended February 1, 1998.
The Unaudited Pro Forma Combined Balance Sheet has been derived from the
unaudited balance sheet of TSI as of April 4, 1998 and the unaudited balance
sheet of Farah as of February 1, 1998.
The Farah Acquisition will be accounted for using the purchase method of
accounting. The total purchase price for the Farah Acquisition has been
allocated to tangible and intangible assets and liabilities based upon
management's preliminary estimates of their fair market values with the excess
of cost over the fair market value of the net assets acquired allocated to
goodwill. Each of the allocations is subject to revision when additional
information concerning asset and liability valuations is obtained. The Company
believes, based upon currently available information, that the asset and
liability valuation for the Farah Acquisition will not be materially different
from that reflected in the Unaudited Pro Forma Combined Financial Data.
The Company believes that it can achieve at least $23.2 million of annual
cost savings in connection with the Farah Acquisition by the end of fiscal 1999
through a reduction of selling, general and administrative expenses (including
distribution expenses), the realization of production efficiencies and
improvements in inventory management. The Unaudited Pro Forma Combined Financial
Data do not give effect to these cost savings.
The Unaudited Pro Forma Combined Financial Data is presented for
illustrative purposes only and is not necessarily indicative of what the
Company's actual financial position or results of operations would have been had
the Transactions been consummated as of the above-referenced dates or of the
financial position or results of operations of the Company for any future
period. The Unaudited Pro Forma Combined Financial Data should be read in
conjunction with the Consolidated Financial Statements of TSI and Farah,
including the notes thereto, appearing elsewhere in this Offering Memorandum.
23
<PAGE> 2
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- -----------------------
TSI FARAH(1) ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales...................................... $151,692 $273,719 $ -- $425,411
Cost of goods sold............................. 115,637 199,790 -- 315,427
-------- -------- -------- --------
Gross profit................................. 36,055 73,929 -- 109,984
Selling, general and administrative expenses... 19,443 66,436 885(2) 86,764
Termination of foreign operations.............. -- 5,106 -- 5,106
Production conversion expenses................. -- 2,061 -- 2,061
Relocation expenses............................ -- 904 -- 904
-------- -------- -------- --------
Operating income (loss)........................ 16,612 (578) (885) 15,149
Other (income) expense:
Interest expense............................. 2,899 4,108 12,495(3) 19,502
Interest income.............................. (36) (716) -- (752)
Other (income) expense, net.................. 573 (342) -- 231
-------- -------- -------- --------
Total other expense.................. 3,436 3,050 12,495 18,981
-------- -------- -------- --------
Income (loss) before income taxes.............. 13,176 (3,628) (13,380) (3,832)
Income taxes (benefit)......................... 4,907 (3,898) (4,811)(4) (3,802)
-------- -------- -------- --------
Net income (loss).............................. $ 8,269 $ 270 ($ 8,569) $ (30)
======== ======== ======== ========
Earnings per share, basic and diluted.......... $ 1.37 $ (0.01)
======== ========
Basic and diluted weighted average number of
common shares outstanding.................... 6,000 6,000
</TABLE>
See accompanying notes.
24
<PAGE> 3
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWENTY-SEVEN WEEKS ENDED APRIL 4, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ------------------------
TSI FARAH(5) ADJUSTMENTS COMBINED
------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.......................................... $82,467.. $135,798 $ -- $218,265
Cost of goods sold................................. 62,696 100,284 -- 162,980
------- -------- ------- --------
Gross profit..................................... 19,771 35,514 -- 55,285
Selling, general and administrative expenses....... 11,360 30,723 442(2) 42,525
Termination of foreign operations.................. -- 6,624 -- 6,624
Production conversion expenses..................... -- 642 -- 642
Relocation expenses.............................. -- 1,358 -- 1,358
------- -------- ------- --------
Operating income (loss).......................... 8,411 (3,833) (442) 4,136
Other (income) expense:
Interest expense................................. 840 2,588 6,497(3) 9,925
Interest income.................................. (47) (157) -- (204)
Other (income) expense, net...................... 389 472 -- 861
------- -------- ------- --------
Total other expense...................... 1,182 2,903 6,497 10,582
------- -------- ------- --------
Income (loss) before income taxes.................. 7,229 (6,736) (6,939) (6,446)
Income taxes (benefit)............................. 2,671 (3,083) (2,502)(4) (2,914)
------- -------- ------- --------
Net income (loss).................................. $ 4,558 ($ 3,653) ($4,437) ($ 3,532)
======= ======== ======= ========
Earnings (loss) per share, basic and diluted....... $ 0.62 ($ 0.48)
======= ========
Basic weighted average number of common shares
outstanding...................................... 7,398 7,398
Diluted weighted average number of shares
outstanding...................................... 7,408 7,398
</TABLE>
See accompanying notes.
25
<PAGE> 4
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED APRIL 4, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- ----------------------
TSI FARAH(6) ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales......................................... $162,800 $270,825 $ -- $433,625
Cost of goods sold................................ 123,743 198,700 -- 322,443
-------- -------- -------- --------
Gross profit............................ 39,057 72,125 -- 111,182
Selling, general and administrative expenses...... 21,180 64,510 885(2) 86,575
Termination of foreign operations................. -- 6,624 -- 6,624
Production conversion expenses.................... -- 1,789 -- 1,789
Relocation expenses............................... -- 1,696 -- 1,696
-------- -------- -------- --------
Operating income (loss)........................... 17,877 (2,494) (885) 14,498
Other (income) expense:
Interest expense................................ 2,258 4,600 12,495(3) 19,353
Interest income................................. (68) (555) -- (623)
Other (income) expense, net..................... 709 (262) -- 447
-------- -------- -------- --------
Total other expense..................... 2,899 3,783 12,495 19,177
-------- -------- -------- --------
Income (loss) before income taxes................. 14,978 (6,277) (13,380) (4,679)
Income taxes (benefit)............................ 5,620 (5,432) (4,811)(4) (4,623)
-------- -------- -------- --------
Net income (loss)................................. $ 9,358 $ (845) $ (8,569) $ (56)
======== ======== ======== ========
Earnings (loss) per share, basic and diluted...... $ 1.40 $ (0.01)
======== ========
Basic weighted average number of common shares
outstanding..................................... 6,697 6,697
Diluted weighted average number of shares
outstanding..................................... 6,707 6,697
</TABLE>
See accompanying notes.
26
<PAGE> 5
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF APRIL 4, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ----------------------
TSI FARAH(7) ADJUSTMENTS COMBINED
------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash............................................ $ 138 $ 3,351 $ --(8) $ 3,489
Accounts receivable............................. 33,360 29,144 -- 62,504
Inventories..................................... 23,371 77,868 -- 101,239
Prepaid expenses and other current assets....... 229 6,674 -- 6,903
Deferred income taxes........................... 1,440 3,405 -- 4,845
------- -------- -------- --------
Total current assets.................... 58,538 120,442 -- 178,980
Property, plant, and equipment, net............... 20,770 34,249 (850)(9) 54,169
Other assets...................................... 214 6,555 (159)(9)
6,596(10) 13,206
Goodwill, net..................................... 387 511 26,536(9) 27,434
Deferred income taxes............................. -- 5,337 907(9) 6,244
------- -------- -------- --------
Total assets............................ $79,909 $167,094 $ 33,030 $280,033
======= ======== ======== ========
Current liabilities:
Short-term debt................................. $ -- $ 33,982 $(33,750)(11) $ 232
Accounts payable................................ 14,143 17,587 -- 31,730
Accrued expenses................................ 3,624 11,949 1,505(9) 17,078
Current portion of long-term debt............... 1,269 5,647 (3,071)(11) 3,845
------- -------- -------- --------
Total current liabilities............... 19,036 69,165 (35,316) 52,885
Long-term debt.................................... 15,810 15,083 141,670(11) 172,563
Deferred income taxes............................. 431 -- 6,000(9) 6,431
Other non-current liabilities..................... -- 2,845 -- 2,845
------- -------- -------- --------
Total liabilities....................... 35,277 87,093 112,354 234,724
Deferred gain on sale of building................. -- 677 -- 677
Shareholders' equity:
Common stock.................................... 76 46,026 (46,026)(12) 76
Additional paid-in capital...................... 17,270 30,627 (30,627)(12) 17,270
Retained earnings............................... 27,286 5,516 (5,516)(12) 27,286
Treasury stock.................................. -- (109) 109(12) --
Current translation adjustment.................. -- (2,736) 2,736(12) --
------- -------- -------- --------
Total shareholders' equity.............. 44,632 79,324 (79,324) 44,632
------- -------- -------- --------
Total liabilities and shareholders'
equity................................ $79,909 $167,094 $ 33,030 $280,033
======= ======== ======== ========
</TABLE>
See accompanying notes.
27
<PAGE> 6
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(1) Represents Farah's results of operations for fiscal 1997.
(2) Represents amortization of intangibles of $26.5 million over a 30 year
period (see Note 9). The final allocation and amortization period are
subject to adjustment upon completion of the Farah Acquisition and review
of Farah's operations.
(3) Represents the additional interest expense that would have been incurred if
the Notes and borrowings under the New Credit Facility incurred in
connection with the Farah Acquisition had been outstanding for the entire
period.
<TABLE>
<CAPTION>
TWENTY-SEVEN TWELVE MONTHS
WEEKS ENDED ENDED
FISCAL 1997 APRIL 4, 1998 APRIL 4, 1998
----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense on the New Credit Facility...... $ 4,810 $ 2,405 $ 4,810
Interest expense on the Notes.................... 11,000 5,500 11,000
Interest expense on the Existing Credit
Facilities and Convertible Debentures.......... (4,632) (2,317) (4,632)
Bridge Facility funding fee...................... 500 500 500
Debt issuance cost amortization.................. 817 409 817
------- ------- -------
Net increase in interest expense................. $12,495 $ 6,497 $12,495
======= ======= =======
</TABLE>
(4) Reflects the income tax effect of the pro forma adjustments (excluding the
non-deductible amortization of intangibles (see Note 2)) based upon an
assumed combined effective income tax rate of 38.5%.
(5) Represents Farah's results of operations for the twenty-six weeks ended
February 1, 1998.
(6) Represents Farah's results of operations for the twelve months ended
February 1, 1998.
(7) Represents Farah's financial position as of February 1, 1998.
(8) Reflects the adjustment to record the following (in thousands):
<TABLE>
<S> <C>
Gross proceeds from the Offering............................ $100,000
Initial borrowings under the New Credit Facility............ 55,360
Cash paid to holders of Shares (10,301,357 outstanding
Shares at $9.00 per Share)................................ (92,712)
Assumed settlement of Farah options and restricted stock
grants (see Note 9(a)).................................... (3,136)
Repayment of TSI's Existing Credit Facility................. (6,557)
Repayment of Farah's Existing Credit Facility............... (42,292)
Prepayment premium on Farah's Existing Credit Facility...... (200)
Redemption of the Convertible Debentures.................... (1,663)
Payment of debt issuance costs relating to the Notes........ (3,671)
Payment of debt issuance costs relating to the New Credit
Facility.................................................. (1,675)
Bridge Facility funding fee................................. (500)
Financial advisors, legal, accounting and other professional
fees...................................................... (2,954)
</TABLE>
28
<PAGE> 7
(9) In connection with the Farah Acquisition, each shareholder of Farah
received total consideration of $9.00 in cash for each Share beneficially
owned by such shareholder. The aggregate purchase price paid by TSI in
connection with the Farah Acquisition is summarized below (in thousands).
<TABLE>
<S> <C>
AGGREGATE PURCHASE PRICE:
Cash paid to holders of Shares (10,301,357 outstanding
Shares
at $9.00 per Share)....................................... $92,712
Assumed settlement of Farah stock options and restricted
stock grants.............................................. 3,136(a)
Prepayment premium on Farah's Existing Credit Facility...... 200
Financial advisors, legal, accounting and other professional
fees incurred in
connection with the Farah Acquisition..................... 2,205
-------
Aggregate purchase price.................................... $98,253
=======
ALLOCATION OF PURCHASE PRICE:
Aggregate purchase price.................................... $98,253
Less net book value of assets acquired.................... 79,324
-------
Excess of cost over net book value of assets acquired....... $18,929
Less adjustments to record assets and liabilities acquired
at fair market value:
Write-down of property, plant and equipment............ (850)(b)
Plant closing costs.................................... (1,505)(c)
Other assets........................................... (159)(d)
Deferred income taxes, net............................. (5,093)(e)
-------
(7,607)
-------
Excess of cost over fair market value of net assets
acquired.................................................. $26,536(f)
=======
</TABLE>
- ---------------
(a) Reflects the settlement of the Farah options and restricted stock
grants assuming that the holder of each option or restricted stock
grant outstanding as of April 4, 1998 elected to receive an amount in
cash equal to the difference between $9.00 per Share and the per share
exercise price of such option or restricted stock grant.
(b) Reflects write-down of certain property, plant and equipment related
to a plant closure.
(c) Represents estimated cost of closing a production facility, including
severance, professional fees and other related costs.
(d) Reflects an adjustment to record the write-off of the unamortized
balance of debt issuance costs related to Farah's Existing Credit
Facility.
(e) To record deferred taxes related to the temporary difference between
the financial statement carrying amount and the tax basis of the Farah
acquired assets as adjusted at an assumed income tax rate of 38.5% for
the years in which those differences are expected to be recovered or
settled.
(f) Upon completion of its determination of fair values, TSI may identify
intangible assets (such as trade names) to which a portion of the
purchase price should be allocated. TSI believes that the amortization
period for such identifiable intangible assets and any remaining
excess of cost over fair market value of net assets acquired will be
30 years.
(10) Reflects debt issuance costs of $6.6 million incurred in connection with
consummation of the Bridge Facility, the New Credit Facility and the
Offering.
29
<PAGE> 8
(11) Reflects the adjustment to record the following (in thousands):
<TABLE>
<S> <C> <C>
Repayment of short-term portion of Farah's Existing Credit
Facility.................................................. $(33,750)
Repayment of current portion of TSI's Existing Credit
Facility.................................................. $ (571)
Repayment of current portion of Farah's Existing Credit
Facility.................................................. (2,500) (3,071)
-------
Issuance of the Notes....................................... 100,000
Initial borrowings under New Credit Facility................ 55,360
Repayment of long-term portion of TSI's Existing Credit
Facility.................................................. (5,985)
Repayment of long-term portion of Farah's Existing Credit
Facility.................................................. (6,042)
Redemption of Convertible Debentures........................ (1,663)
-------
141,670
--------
Net increased borrowings.................................... $104,849
========
</TABLE>
(12) Reflects the elimination of Farah's equity as a result of the Farah
Acquisition.
30
