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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-61967
333-61967-01
333-61967-02
333-61967-03
PROSPECTUS
TROPICAL SPORTSWEAR INT'L CORPORATION
OFFER TO EXCHANGE A NEW SERIES OF ITS
11% SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 6,
1998,
UNLESS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION
Tropical Sportswear Int'l Corporation, a Florida corporation ("TSI" or the
"Company"), is hereby offering, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter
of Transmittal," which together with this Prospectus constitutes the "Exchange
Offer"), to issue $100,000,000 aggregate principal amount of its 11% Senior
Subordinated Notes due 2008 (the "Exchange Notes"), in exchange for a like
principal amount of its issued and outstanding 11% Senior Subordinated Notes due
2008 (the "Old Notes," and together with the Exchange Notes, the "Notes").
The current offer and sale of the Exchange Notes are being registered under
the Registration Statement of which this Prospectus forms a part in order to
satisfy certain obligations of the Company contained in the Exchange and
Registration Rights Agreement dated as of June 24, 1998 (the "Registration
Rights Agreement") between the Company and the Initial Purchaser. Based on
existing interpretations of the Securities Act of 1933, as amended (the
"Securities Act"), by the staff of the Securities and Exchange Commission (the
"Commission") set forth in several "no-action" letters issued to third parties
and unrelated to the Company and the Exchange Offer, the Company believes that
Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by holders thereof
(other than any such holder which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act), without further compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement or understanding with any
person to participate in the distribution (within the meaning of the Securities
Act) of such Exchange Notes. See "The Exchange Offer -- Procedures for Tendering
Old Notes." Each holder of Old Notes wishing to accept the Exchange Offer must
represent to the Company, among other things, that it is not an affiliate of the
Company and that such conditions have been satisfied. A broker-dealer (a
"Participating Broker-Dealer") holding Old Notes may participate in the Exchange
Offer provided that it acquired the Old Notes for its own account as a result of
market-making or other trading activities. In connection with any resales of
Exchange Notes, any Participating Broker-Dealer who receives Exchange Notes for
Old Notes pursuant to the Exchange Offer may be an "underwriter" (within the
meaning of the Securities Act) and must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of the Exchange
Notes. The Commission has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of the
Old Notes) with this Prospectus, as it may be amended or supplemented from time
to time. Under the Registration Rights Agreement, the Company is required to
allow Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements, to use this Prospectus, as it may be amended
or supplemented from time to time, in connection with the resale of such
Exchange Notes for a period of 180 days. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer" and "Plan of Distribution."
The Company will not receive any cash proceeds from the Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will pay all the
expenses incident to the Exchange Offer (other than agency fees and commissions,
underwriting discounts and commissions and the fees and disbursements of counsel
and other advisors and experts retained by the holders). In the event the
Company terminates the Exchange Offer and does not accept for exchange any Old
Notes, the Company will promptly return the Old Notes to the holders thereof.
The net proceeds of the Offering, together with borrowings under the New Credit
Facility, were used to repay all debt of the Company outstanding under the
Bridge Facility (as defined herein), which was incurred to finance the
acquisition of Farah Incorporated, a Texas corporation now known as Savane
International Corp. ("Farah"), pursuant to a tender offer for all outstanding
shares of Farah's common stock (the "Tender Offer"). The Tender Offer was
consummated on June 10, 1998. See "Use of Proceeds" and "Plan of Distribution."
(Continued on following page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE EXCHANGE NOTES OFFERED HEREBY.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED, DISAPPROVED OR RECOMMENDED
BY THE COMMISSION OR ANY STATE SECURITIES COMMISSION. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT REVIEWED THIS PROSPECTUS OR CONFIRMED OR DETERMINED THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The Company will accept for exchange Old Notes validly tendered prior to
5:00 p.m., New York City time, on October 6, 1998, as such date and time may be
extended by the Company in its sole discretion (the "Expiration Date"). Tenders
of Old Notes may be withdrawn at any time prior to the Expiration Date. The
Exchange Offer is subject to certain customary conditions, but is not
conditioned upon any minimum aggregate principal amount of Old Notes being
tendered for exchange. See "The Exchange Offer -- Conditions."
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 2, 1998
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(Continued from previous page)
The Old Notes were sold by the Company on June 24, 1998 to Prudential
Securities Incorporated (the "Initial Purchaser") in a transaction not
registered under the Securities Act in reliance upon exemptions under the
Securities Act. The Initial Purchaser subsequently placed the Old Notes (i) with
Qualified Institutional Buyers (as defined in Rule 144A ("Rule 144A") under the
Securities Act) in reliance upon Rule 144A and (ii) outside of the United States
in compliance with Regulation S ("Regulation S") under the Securities Act (the
"Offering"). Accordingly, the Old Notes may not be reoffered, resold, pledged or
otherwise transferred except pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act. The Old
Notes sold in reliance on Rule 144A are designated eligible for trading in the
Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
Market. After the Exchange Offer, the Old Notes that remain outstanding will
continue to be subject to the restrictions on transfer contained in the legend
thereon and may not be reoffered, resold, pledged or otherwise transferred
except pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act.
The Exchange Notes are a new issuance of securities for which there is
currently no trading market. The Exchange Notes will not be listed on any
securities exchange. The Company has been advised by the Initial Purchaser that
it intends to make a market in the Exchange Notes; however, the Initial
Purchaser is not obligated to do so, and any such market making activities may
be discontinued at any time without notice. Accordingly, there can be no
assurance that an active trading market for the Exchange Notes will develop or
as to the liquidity of any such market. See "Risk Factors -- Absence of
Established Trading Market."
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the Exchange
Notes will bear a different CUSIP Number from the Old Notes, (ii) the issuance
of the Exchange Notes will be registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof, and (iii) holders of the Exchange Notes will not be entitled to certain
rights under the Registration Rights Agreement (as defined herein). The Exchange
Notes will evidence the same debt as the Old Notes (which they replace) and will
be issued under and be entitled to the benefits of the Indenture dated as of
June 24, 1998 (the "Indenture") among the Company, the Subsidiary Guarantors (as
defined herein) named therein and SunTrust Bank, Atlanta, as trustee (the
"Trustee"). See "The Exchange Offer" and "Description of the Notes."
Interest on the Exchange Notes will accrue from the date of original
issuance of the Old Notes, i.e., June 24, 1998 (the "Closing Date"), and be
payable semiannually in arrears on June 15 and December 15 of each year,
commencing December 15, 1998. Holders whose Old Notes are accepted for exchange
will be deemed to have waived the right to receive any interest accrued on the
Old Notes.
The Exchange Notes will be redeemable, in whole or in part, at the option of
TSI at any time on or after June 15, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption. In addition,
at any time on or prior to June 15, 2001, TSI may redeem up to 35% of the
original aggregate principal amount of the Notes with the net proceeds of one or
more Public Equity Offerings (as defined herein) at a redemption price equal to
111% of the principal amount thereof, plus accrued and unpaid interest to the
date of redemption; provided that immediately after giving effect to any such
redemption, at least $65.0 million aggregate principal amount of Notes remains
outstanding. Upon a Change of Control (as defined herein), each holder of the
Notes may require TSI to repurchase all or a portion of such holder's Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of repurchase. See "Description of the Notes."
The Exchange Notes will be, and the Old Notes are, general unsecured
obligations of TSI, subordinated in right of payment to all existing and future
senior debt of TSI, including debt incurred pursuant to the New Credit Facility
(as defined herein). The Exchange Notes will rank, and the Old Notes rank,
senior in right of payment to all existing and future subordinated debt of TSI,
if any. The Exchange Notes will be, and the Old Notes are, guaranteed on a
senior subordinated basis by the domestic subsidiaries of the Company (the
"Subsidiary Guarantors"). The Exchange Notes will be, and the Old Notes are,
effectively subordinated in right of payment to all debt and other liabilities
(including trade payables) of TSI's subsidiaries that are not Subsidiary
Guarantors. As of July 4, 1998, TSI and the Subsidiary Guarantors had an
aggregate of approximately $83.4 million of debt outstanding ranking senior to
the Exchange Notes, and TSI's subsidiaries that are not Subsidiary Guarantors
had an aggregate of approximately $3.8 million of accounts payable and
third-party debt outstanding. See "Description of the Notes -- Subordination."
(ii)
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AVAILABLE INFORMATION
The Company is and, prior to the consummation of the Transactions (as
defined herein) Farah was, subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith the Company files and, prior to the consummation of the
Transactions Farah filed, reports and other information with the Commission.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
in Suite 1400, Northwest Atrium Center, West Madison Street, Chicago, Illinois
60661, and 7 World Trade Center (13th floor), New York, New York 10048 and at
the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006. Copies of such material can be obtained from the Commission at prescribed
rates through its Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission also maintains a site on the World Wide
Web, the address of which is http://www.sec.gov, that contains reports, proxy
and information statements and other information regarding issuers, such as the
Company, that file electronically with the Commission.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-4 under the
Securities Act and the rules and regulations thereunder, for the Exchange Notes
offered pursuant to the Exchange Offer. For purposes hereof, the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. In accordance with the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information concerning the Company and the Exchange Notes, reference is made to
the Registration Statement and the exhibits and schedules filed therewith, which
may be examined without charge at, or copies obtained upon payment of prescribed
fees from, the Commission and its regional offices at the locations set forth
above. Any statements contained herein concerning the provisions of any document
are not necessarily complete, and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
The Indenture provides that if the Company is not subject to the periodic
reporting and informational requirements of the Exchange Act, it will, to the
extent such filings are accepted by the Commission and whether or not the
Company has a class of securities registered under the Exchange Act, submit to
the Commission all reports and other information that would be required to be
filed with the Commission if the Company were subject to such periodic reporting
and informational requirements.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed financial and other information,
including the consolidated financial statements and the notes thereto, included
elsewhere in this Prospectus. Unless the context otherwise requires, references
herein to (i) "TSI" or the "Company" are to Tropical Sportswear Int'l
Corporation and its subsidiaries; and (ii) "Farah" are to Farah Incorporated and
its subsidiaries. Unless the context otherwise requires, the unaudited pro forma
combined financial data contained herein gives effect to the Transactions as if
they had been consummated on September 29, 1996 in the case of statement of
operations data for fiscal 1997 and on September 28, 1997 in the case of
statement of operations data for the forty weeks ended July 4, 1998. References
herein to "fiscal" years are references to fiscal years of TSI (which end on the
Saturday nearest September 30th of each year) or to fiscal years of Farah (which
end on the first Sunday following October 31st of each year), as the context
requires.
THE COMPANY
On May 1, 1998, TSI entered into an agreement and plan of merger (the
"Merger Agreement") with Farah and Foxfire Acquisition Corp., a wholly-owned
subsidiary of TSI ("Foxfire"), pursuant to which Foxfire commenced the Tender
Offer to purchase all of the outstanding shares of common stock of Farah (the
"Shares"). The Tender Offer was consummated on June 10, 1998 and immediately
thereafter Foxfire was merged into Farah (the "Merger" and, together with the
Tender Offer, the "Farah Acquisition").
TSI is a leading producer and marketer of high quality casual and dress
apparel principally for men, which it markets under proprietary, licensed and
private brand names to major apparel retailers such as Costco, Dayton Hudson,
Dillard's, Eddie Bauer, Federated Department Stores (including Bloomingdale's
and Macy's), J.C. Penney, May Co., Nordstrom, Phillips-Van Heusen, Sam's Club (a
division of Wal-Mart) and Sears. Farah is a leading manufacturer of branded
apparel, principally for men and boys, which it markets to major apparel
retailers such as Belks, Dillard's, Federated Department Stores, Frederick
Atkins, May Co., Proffitt's, Sears and Wal-Mart. On a pro forma basis after
giving effect to the Transactions, the Company would have had net sales, EBITDA
(as defined herein) and a net loss of approximately $335.6 million, $23.1
million and $3.7 million, respectively, for the forty weeks ended July 4, 1998.
The Company was founded in 1927. Pursuant to a tax-free reorganization, the
Company was merged into a newly-formed corporation organized under the laws of
the State of Florida on January 27, 1997. The Company's executive offices are
located at 4902 West Waters Avenue, Tampa, Florida 33634-1302, and its telephone
number is (813) 249-4900.
TSI
TSI produces and markets high quality casual pants, jeans, shorts and dress
pants principally for men, which are marketed under TSI brands, private brands
and licensed brand names. In addition, in fiscal 1998 TSI introduced lines of
women's sportswear and men's and women's shirts marketed under its existing
brands and private brands. TSI's major brands include private brands such as
Flyers(TM), TSI brands such as Bay to Bay(R), Banana Joe(TM), Two Pepper(R) and
Texas Jeans(TM) and licensed brands such as Bill Blass(R) and Van Heusen(R). TSI
markets its apparel to leading apparel retailers in most major retail
distribution channels, including department and specialty stores, catalog
retailers, discount merchants and wholesale clubs.
TSI distinguishes itself from traditional private label and branded apparel
manufacturers by offering apparel retailers complete merchandise management
programs. Key features of these programs include consumer, product and market
analysis; design of individual styles and differentiated merchandise
assortments; inventory planning and sales forecasting by stock-keeping-unit (an
individual style, color and size, or "SKU"); retail pricing strategy; quick
response electronic order execution; and automatic replenishment by SKU of store
level inventories. These features result from TSI's sophisticated information
and production systems and technology and adherence to innovative standard
operating policies and procedures throughout its operations.
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TSI's merchandise strategy focuses on basic, recurring styles that TSI
believes are less susceptible to fashion obsolescence and less seasonal in
nature than fashion styles. All of TSI's products are derived from six
production platforms, or "chassis," each of which incorporates basic features
requiring distinct manufacturing processes. The six basic "chassis" are modified
to produce separate styles through variations in cut, fabric and finish. This
process enables TSI to efficiently produce a wide variety of products. All
finished goods receive customer-specific labeling and packaging only upon
receipt of a customer order confirmation. As a result, a common SKU,
differentiated only by labeling and packaging, can be sold by both a high-end
department store and a mass merchant at very different retail prices. This
merchandise strategy offers quick-response execution of customer orders without
the associated risk of carrying customer specific inventories. During fiscal
1997, 16 styles marketed under approximately 80 labels accounted for over 90.0%
of TSI's net sales.
TSI's production strategy focuses on low-cost, flexible and
capital-efficient operations. The Company operates its fabric cutting, finished
goods processing and distribution facilities in Tampa, Florida, which employ
sophisticated technology and systems to enhance product quality and
productivity. For labor intensive garment assembly and finishing operations, TSI
uses independent manufacturers located primarily in the Dominican Republic,
which adhere to TSI's strict operating procedures and standards.
FARAH
Farah is a leading manufacturer and marketer of high quality casual and
dress pants, shorts, sportcoats, suit separates (matching pants and sportcoats),
skirts and shirts principally marketed under the well-known Savane(R), Farah(R)
and John Henry(R) brands. Farah operates three divisions: Farah U.S.A., Farah
International and Savane Direct. Farah U.S.A., which accounted for approximately
75.7% of Farah's fiscal 1997 net sales, produces branded and private label
casual and dress apparel marketed to retailers throughout the United States.
Farah International, which accounted for approximately 18.1% of Farah's fiscal
1997 net sales, manufactures, sources and markets apparel primarily in the
United Kingdom, Australia and New Zealand. Savane Direct, which accounted for
approximately 6.2% of Farah's fiscal 1997 net sales, operates 32 United States
retail stores.
The Company believes that retailer and consumer loyalty to the well known
Savane(R), Farah(R) and John Henry(R) brands represents Farah's key competitive
strength. Savane(R) products are marketed primarily to major department stores,
including Belks, Dillard's, Federated Department Stores, Frederick Atkins, May
Co. and Proffitt's. Farah(R) brand products are marketed primarily through the
mass merchant distribution channel. In fiscal 1997, Farah granted Wal-Mart a
non-exclusive license to sell Farah(R) brand products produced by other
manufacturers, for which Farah receives a royalty. Farah has an exclusive
license to produce and market men's pants, coats and shorts under the John
Henry(R) brand within the United States and Canada and, in fiscal 1996, Farah
began selling John Henry(R) brand products to Sears.
EXPECTED BENEFITS OF THE FARAH ACQUISITION
The Company believes that the combination of TSI and Farah will position it
to offer major retailers complete private label and branded merchandise
management programs in core apparel lines featuring both Farah's well-known
brands and TSI's brands and private brand programs. The Company intends to apply
TSI's proven production technology, comprehensive planning, control and customer
service systems and innovative operating policies and procedures to integrate
and substantially improve the profitability of Farah's operations. Anticipated
benefits of the Farah Acquisition include the following:
Complementary Branded and Private Label Product Line. TSI believes
the Savane(R), Farah(R) and John Henry(R) brands complement TSI's brands
and private brands, positioning the Company to offer differentiated branded
and private label programs in core apparel lines. The Company believes that
it can leverage its strength in these categories to develop customized
merchandise management programs featuring branded and private brand men's
shirts, women's basic sportswear and products in other core apparel
categories.
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Expanded Customer Base and Increased Customer Penetration. The
Company believes that its customized merchandise management programs and
customer service capabilities, together with the strength of the Farah
brands, will enable the Company to increase sales to existing accounts and
establish new accounts. The Company believes that substantial cross selling
opportunities exist to market TSI brand products to Farah's customers and
Farah brand products to TSI's customers. The Company intends to market
merchandise management programs to increase sales to these existing
customers and generate sales to new customers.
Greater Critical Mass. The Farah Acquisition will significantly
increase the Company's revenue base. On a pro forma basis after giving
effect to the Transactions, the Company's net sales for the forty weeks
ended July 4, 1998 would have been approximately $335.6 million. The
Company believes that its increased size, marketing resources, production
capacity and product offerings will enhance its relationships with key
suppliers and retailers and strengthen its competitive position in the
apparel industry.
Cost Savings. As part of its integration plan for the Farah
Acquisition, the Company believes that it can achieve at least $23.2
million of annual cost savings by the end of fiscal 1999. These cost
savings include (i) a reduction of selling, general and administrative
expenses (including distribution expenses) resulting in approximately $2.5
million of annual cost savings, (ii) the realization of production
efficiencies resulting in approximately $15.2 million of annual cost
savings and (iii) improvements in inventory management resulting in
approximately $5.5 million of annual cost savings.
Potential Divestiture Opportunities. Following the Farah Acquisition,
the Company intends to evaluate Farah's assets in light of TSI's strategic
and financial objectives and, to the extent such assets do not fit within
those objectives, dispose of or discontinue operating such assets. The
Company is currently considering its alternatives with respect to the Farah
International business and is currently engaged in negotiations with a
potential buyer regarding the sale of the Savane Direct business. Following
the closing of the Farah Acquisition, the Company closed the remainder of
Farah's sewing operations in San Jose, Costa Rica, and is currently seeking
a buyer for the facilities which housed such operations. There can be no
assurance that any such disposition or that additional closures will be
consummated. See "Business -- Integration Plan -- Potential Divestiture
Opportunities."
BUSINESS AND GROWTH STRATEGY
The Company believes that the Farah Acquisition will position it to take
advantage of key industry trends including: (i) an increasing emphasis by major
apparel retailers on outsourced merchandise management programs for core apparel
lines; (ii) a reduction by major retailers in the number of brands offered in
favor of a few of the most well-recognized consumer brands; (iii) an increase in
retailer and consumer demand for high-quality private brand apparel; (iv) a
shift in consumer preference toward casual dress; and (v) a shift in trade
policy which favors the manufacture of products in Mexico, the Caribbean and
Latin America. The key elements of the Company's business and growth strategies
include:
Advanced Planning and Control Systems and Procedures. The Company
employs advanced technology and comprehensive operating systems and
procedures which integrate and monitor each operation to reduce
inefficiencies, increase productivity and enhance customer service.
High-Quality Products. The Company applies stringent quality
standards throughout its operations, from the design of its products
through the shipment of customer orders. In fiscal 1997, the application of
these standards resulted in a rate of production of second quality finished
goods of 1.1% of total production.
Low-Cost and Flexible Operations. The Company is organized to effect
a short production cycle from the receipt of raw materials through the
shipment of a customer order. TSI believes its "chassis" production concept
allows it to execute more cost-effective production runs than those of its
competitors. The Company outsources labor intensive garment assembly and
finishing operations to independent manufacturers on a fixed cost per unit
basis. This strategy reduces the personnel and capital resources
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invested in the production process and enables TSI to vary production
levels with changes in customer demand.
Minimized Inventory Risk. The Company believes that it minimizes its
inventory risk by (i) producing focused lines of core apparel products,
(ii) minimizing the production cycle and maximizing production flexibility
and (iii) tracking customer demand trends by SKU on a per store basis. In
fiscal 1997, TSI's production cycle averaged 38 days and average inventory
turnover was approximately five times.
Customer Service. The Company provides customer satisfaction through
high-quality products and customized merchandise management programs. These
programs serve to increase retailer margins by outsourcing traditional
retailer merchandising functions and reducing inventory risk and excessive
markdowns.
Expand Private Brand Programs for Major Retailers. The Company
believes its high-quality and low-cost products, strong customer service
and merchandise management capabilities position it to increase private
brand market share as retailers consolidate and outsource private brand
programs.
New Product Introductions. The Company intends to develop and market
products that complement existing core product lines. Targeted product
categories include lines of men's casual shirts and women's sportswear. All
new product lines will employ the Company's "chassis" production concept.
Acquisitions. The Company will consider the acquisition of additional
established brands as well as the acquisition of producers of complementary
new product lines. The Company regularly evaluates acquisition
opportunities, but currently has no agreements, arrangements or
understandings with respect to any acquisitions, and there can be no
assurance that any acquisitions will be consummated.
THE TRANSACTIONS
Pursuant to the Merger Agreement, on May 8, 1998 Foxfire commenced the
Tender Offer to purchase all of the Shares at a purchase price of $9.00 per
Share. Consummation of the Tender Offer was subject to certain conditions
including, among others, that 66 2/3% of the outstanding Shares be validly
tendered, and not withdrawn, pursuant to the Tender Offer (the "Minimum Tender
Condition"). The Tender Offer was consummated on June 10, 1998 and immediately
thereafter Foxfire was merged into Farah in the Merger. Farah was the surviving
corporation in the Merger and is a wholly-owned subsidiary of TSI. The aggregate
consideration paid to the shareholders and optionholders of Farah was
approximately $95.8 million. See "The Transactions -- Farah Acquisition."
To finance the purchase price for the Farah Acquisition, the repayment of
approximately $5.9 million and $57.9 million of debt outstanding under TSI's
then existing credit facility and Farah's then existing credit facility,
respectively (together, the "Terminated Credit Facilities"), and the redemption
of approximately $1.7 million of Farah's 8.50% convertible subordinated
debentures due 2004 (the "Convertible Debentures"), concurrently with the
consummation of the Tender Offer the Company entered into (i) a $100.0 million
bridge financing facility (the "Bridge Facility") with Prudential Securities
Credit Corp. (the "Bridge Lender"), an affiliate of the Initial Purchaser, and
(ii) a new $85.0 million revolving credit facility (the "New Credit Facility")
arranged by Fleet Capital Corporation ("Fleet"). Following the closing of the
Offering, the borrowing availability under the New Credit Facility was increased
to $110.0 million, subject to borrowing base limitations. The Company used the
net proceeds from the Offering, together with borrowings under the New Credit
Facility, to repay all debt outstanding under the Bridge Facility. See "Use of
Proceeds."
The Farah Acquisition, the borrowings under the Bridge Facility and the New
Credit Facility to finance the Farah Acquisition, the repayment of the
Terminated Credit Facilities, the redemption of the Convertible Debentures and
the Offering and the application of the net proceeds therefrom, are collectively
referred to herein as the "Transactions."
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THE INITIAL OFFERING
Old Notes.................. The Old Notes were sold by the Company on June 24,
1998 to the Initial Purchaser pursuant to a
Purchase Agreement dated June 18, 1998 (the
"Purchase Agreement") between the Company and the
Initial Purchaser. The Initial Purchaser
subsequently placed the Old Notes (i) with
Qualified Institutional Buyers in reliance upon
Rule 144A and (ii) outside of the United States in
compliance with Regulation S.
Registration Rights
Agreement................ Pursuant to the Purchase Agreement, the Company and
the Initial Purchaser entered into the Registration
Rights Agreement, which grants the holders of the
Old Notes certain exchange and registration rights.
The Exchange Offer is intended to satisfy such
rights which will, subject to limited exceptions,
terminate upon the consummation of the Exchange
Offer.
THE EXCHANGE OFFER
Securities Offered......... $100,000,000 aggregate principal amount of the
Company's 11% Senior Subordinated Notes due 2008.
The Exchange Offer......... $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of Old
Notes. As of the date hereof, $100,000,000
aggregate principal amount of Old Notes are
outstanding. The Company will issue the Exchange
Notes to registered holders on or promptly after
the Expiration Date.
Based on existing interpretations of the Securities
Act by the staff of the Commission set forth in
several "no action" letters issued to third parties
and unrelated to the Company and the Exchange
Offer, the Company believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act), without further compliance with
the registration and prospectus delivery provisions
of the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders have no
arrangement or understanding with any person to
participate in the distribution (within the meaning
of the Securities Act) of such Exchange Notes. Each
holder of Old Notes wishing to accept the Exchange
Offer must represent to the Company, among other
things, that it is not an affiliate of the Company
and that such conditions have been satisfied. See
"-- Procedures for Tendering Old Notes."
A Participating Broker-Dealer holding Old Notes may
participate in the Exchange Offer provided that it
acquired the Old Notes for its own account as a
result of market-making or other trading
activities. In connection with any resales of
Exchange Notes, any Participating Broker-Dealer who
receives Exchange Notes for Old Notes pursuant to
the Exchange Offer may be an "underwriter" (within
the meaning of the Securities Act) and must deliver
a prospectus meeting the requirements of the
Securities Act in connection with any resale of the
Exchange Notes. The Letter of Transmittal states
that any acknowledgment by a Participating
Broker-Dealer that it will deliver a prospectus in
connec-
6
<PAGE> 9
tion with any resale of Exchange Notes, and any
such delivery of a prospectus, shall not be deemed
an admission by such Participating Broker-Dealer
that it is an underwriter. The Commission has taken
the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with
respect to the Exchange Notes (other than a resale
of an unsold allotment from the original sale of
the Old Notes) with this Prospectus, as it may be
amended or supplemented from time to time. Under
the Registration Rights Agreement, the Company is
required to allow Participating Broker-Dealers and
other persons, if any, subject to similar
prospectus delivery requirements, to use this
Prospectus, as it may be amended or supplemented
from time to time, in connection with the resale of
such Exchange Notes for a period of 180 days. See
"The Exchange Offer -- Purpose and Effect of the
Exchange Offer" and "Plan of Distribution."
Any holder who is an affiliate of the Company or
who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange Notes
(i) will not be able to rely on the interpretation
by the staff of the Commission set forth in the
above-mentioned "no-action" letters, (ii) will not
be able to tender its Old Notes in the Exchange
Offer and (iii) must comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with any sale or
transfer transaction unless such sale or transfer
is made pursuant to an exemption from such
requirements. Failure to comply with such
requirements may result in such holder incurring
liability under the Securities Act for which the
holder is not indemnified by the Company.
Expiration Date............ 5:00 p.m., New York City time, on October 6, 1998,
unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term
"Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and the
Old Notes................ Interest on each Exchange Note will accrue from the
Closing Date, i.e., June 24, 1998. Holders whose
Old Notes are accepted for exchange will be deemed
to have waived the right to receive any interest
accrued on the Old Notes.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company, but
it is not conditioned upon any minimum aggregate
principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer -- Conditions."
Procedures for Tendering
Old Notes................ Only a registered holder of Old Notes may tender
such Old Notes in the Exchange Offer. Each such
holder wishing to accept the Exchange Offer must
complete, sign and date the accompanying Letter of
Transmittal, or a facsimile thereof, in accordance
with the instructions contained herein and therein,
have the signatures thereon guaranteed if required
by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such
facsimile, together with the Old Notes and any
other required documents, to SunTrust Bank,
Atlanta, as exchange agent for the Exchange Offer
(the "Exchange Agent"), prior to 5:00 p.m., New
7
<PAGE> 10
York City time, on the Expiration Date at the
address and in the manner set forth herein under
"The Exchange Offer -- Exchange Agent" and on the
back cover of this Prospectus. Any delivery not
made in accordance with the requirements set forth
in this Prospectus and the accompanying Letter of
Transmittal will not constitute a valid delivery.
By executing the Letter of Transmittal, each holder
will represent to the Company (i) that any Exchange
Notes to be received by it will be acquired in the
ordinary course of such holder's business, (ii)
that it is not an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act,
(iii) that it has no arrangement with any person to
participate in the distribution (within the meaning
of the Securities Act) of the Exchange Notes and
(iv) if such holder is a Participating
Broker-Dealer that will receive Exchange Notes for
its own account in exchange for Old Notes that were
acquired as a result of market-making or other
trading activities, that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale of
such Exchange Notes. See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer"
and "-- Procedures for Tendering Old Notes."
Certain Provisions of the
Registration Rights
Agreement Applicable to
Participating
Broker-Dealers............. Upon consummation of the Exchange Offer certain
provisions of the Registration Rights Agreement
shall continue to apply to Participating
Broker-Dealers holding Exchange Notes.
Consequences of Failure to
Exchange................... The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may not be
reoffered, resold, pledged or otherwise transferred
except in accordance with applicable securities
laws of states of the United States and (i) to a
person whom the transferor reasonably believes is a
Qualified Institutional Buyer in a transaction
meeting the requirements of Rule 144A, (ii) in an
offshore transaction meeting the requirements of
Rule 903 or Rule 904 of Regulation S, (iii) to an
institution that is an "accredited investor" within
the meaning of Rule 501(a)(1), (2), (3) or (7) of
Regulation D under the Securities Act in a
transaction exempt from the registration
requirements of the Securities Act (if available),
(iv) pursuant to an exemption from registration
under the Securities Act provided by Rule 144
thereunder (if available) or (v) pursuant to an
effective registration statement under the
Securities Act. See "The Exchange
Offer -- Consequences of Failure to Exchange."
Shelf Registration
Statement.................. In the event that any changes in law or the
applicable interpretations of the staff of the
Commission do not permit the Company to effect the
Exchange Offer, or upon the request of the Initial
Purchaser under certain circumstances, the Company
will, in lieu of effecting the registration of the
Exchange Notes pursuant to the registration
statement for the Exchange Offer and at its cost,
(i) as promptly as practicable, file with the
Commission a shelf registration statement covering
resales of the Old Notes (the "Shelf Registration
Statement"), (ii) use its best efforts to cause the
Shelf Registration Statement to be declared
effective under the Securities Act by the 180th day
after the Closing Date (or promptly in the event of
a request by the Initial Purchaser) and (iii) use
its best
8
<PAGE> 11
efforts to keep the Shelf Registration Statement
effective until two years after the Closing Date
(or until one year after the Closing Date if such
Shelf Registration Statement is filed at the
request of the Initial Purchaser) or such shorter
period ending when all of the Old Notes registered
pursuant to such Shelf Registration Statement have
been sold or are otherwise eligible for resale
pursuant to Rule 144(k) under the Securities Act.
The Company will, in the event of the filing of the
Shelf Registration Statement, provide to each
holder of the Old Notes copies of the prospectus
which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf
Registration Statement for the Old Notes has become
effective and take certain other actions as are
required to permit unrestricted resales of the Old
Notes. A holder of Old Notes that sells such Old
Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling
securityholder in the related prospectus and to
deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions of the
Securities Act in connection with such sales and
will be bound by the provisions of the Registration
Rights Agreement which are applicable to such a
holder (including certain indemnification
obligations). In addition, each holder of the Old
Notes will be required to deliver information to be
used in connection with the Shelf Registration
Statement and to provide comments thereon, if any,
within the time periods set forth in the
Registration Rights Agreement in order to have
their Old Notes included in the Shelf Registration
Statement and to receive certain other benefits
provided by the Registration Rights Agreement. See
"The Exchange Offer -- Purpose and Effect of the
Exchange Offer."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on its own
behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal
and delivering its Old Notes, either make
appropriate arrangements to register ownership of
the Old Notes in such beneficial owner's name or
obtain a properly completed bond power from the
registered holder. Any such transfer of registered
ownership may take considerable time. The Company
will keep the Exchange Offer open for not less than
20 business days after the date on which notice of
the Exchange Offer is mailed to the holders of the
Old Notes in order to provide for any necessary
transfer of registered ownership.
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes but who cannot, prior to 5:00 p.m., New York
City time, on the Expiration Date (i) deliver their
Old Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to
the Exchange Agent or (ii) deliver a confirmation
of the book-entry tender of their Old Notes into
the Exchange Agent's account at The Depository
Trust Company ("DTC") and otherwise complete the
procedures for book-entry transfer, must provide a
properly completed and duly executed Notice of
Guaranteed Delivery (a "Notice of Guaranteed
Delivery") to the Exchange Agent and otherwise
comply with the guaranteed delivery
9
<PAGE> 12
procedures set forth under "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of Exchange
Notes...................... Subject to certain conditions, the Company will
accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly following
the Expiration Date. See "The Exchange Offer --
Terms of the Exchange Offer."
Certain Federal Income Tax
Considerations. .......... It is anticipated that the exchange of Old Notes
for Exchange Notes pursuant to the Exchange Offer
will not be a taxable event for United States
federal income tax purposes, because under existing
Treasury regulations, the Exchange Notes will not
differ materially in kind or extent from the Old
Notes. See "Certain Federal Income Tax
Considerations."
Accounting Treatment....... The Exchange Notes will be recorded at the same
carrying value as the Old Notes, which is face
value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no
gain or loss for accounting purposes will be
recognized by the Company in connection with the
Exchange Offer. The expenses of the Exchange Offer
will be amortized over the term of the Exchange
Notes.
Use of Proceeds............ The Company will not receive any cash proceeds from
the issuance of the Exchange Notes offered hereby.
In consideration for issuing the Exchange Notes as
contemplated in this Prospectus, the Company will
receive a like principal amount of Old Notes. The
form and terms of the Exchange Notes will be
identical in all material respects to the form and
terms of the Old Notes, except as described herein.
The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and
cannot be reissued. The net proceeds of the
Offering of approximately $95.6 million, together
with borrowings of approximately $4.4 million under
the New Credit Facility, were used to repay all
debt of the Company outstanding under the Bridge
Facility. Borrowings of $100.0 million under the
Bridge Facility and approximately $70.4 million
under the New Credit Facility were incurred to
finance the purchase price for the Farah
Acquisition, the repayment of the Terminated Credit
Facilities and the redemption of the Convertible
Debentures. See "Use of Proceeds."
Exchange Agent............. SunTrust Bank, Atlanta.
THE EXCHANGE NOTES
General.................... The form and terms of the Exchange Notes will be
identical in all material respects to the form and
terms of the Old Notes, except that (i) the
Exchange Notes will bear a different CUSIP Number
from the Old Notes, (ii) the issuance of the
Exchange Notes will be registered under the
Securities Act and, therefore, the Exchange Notes
will not bear legends restricting the transfer
thereof, and (iii) holders of Ex-
10
<PAGE> 13
change Notes will not be entitled to certain rights
under the Registration Rights Agreement, including
the provisions thereof which provide for an
increase in the interest rate on the Old Notes in
certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. The Exchange
Notes will evidence the same debt as the Old Notes
(which they replace) and will be issued under and
be entitled to the benefits of the Indenture. See
"The Exchange Offer -- Purpose and Effect of the
Exchange Offer."
Exchange Notes Offered..... $100,000,000 aggregate principal amount of 11%
Senior Subordinated Notes due 2008.
Maturity Date.............. June 15, 2008.
Interest Payment Dates..... June 15 and December 15 of each year, commencing
December 15, 1998.
Subsidiary Guarantees...... The Company's payment obligations under the
Exchange Notes will be jointly and severally
guaranteed on a senior subordinated basis (the
"Subsidiary Guarantees") by the Subsidiary
Guarantors. The Subsidiary Guarantees will be
subordinated to all senior debt of the Subsidiary
Guarantors. See "Description of the
Notes -- Subsidiary Guarantees."
Optional Redemption........ The Exchange Notes will be redeemable, in whole or
in part, at the option of the Company, at any time
on or after June 15, 2003, at the redemption prices
set forth herein, plus accrued and unpaid interest
to the date of redemption. In addition, at any time
on or prior to June 15, 2001, the Company may, at
its option, redeem up to 35% of the original
aggregate principal amount of the Notes with the
net proceeds of one or more Public Equity
Offerings, at a redemption price equal to 111% of
the principal amount thereof, plus accrued and
unpaid interest to the date of redemption; provided
that immediately after giving effect to any such
redemption, at least $65.0 million aggregate
principal amount of Notes remains outstanding. See
"Description of the Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control, each holder of Exchange
Notes will have the right to require the Company,
subject to certain conditions, to repurchase such
holder's Exchange Notes at a purchase price equal
to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of the
Notes -- Repurchase at the Option of Holders Upon
Change of Control."
Ranking.................... The Exchange Notes will be, and the Old Notes are,
general unsecured obligations of the Company,
subordinated in right of payment to all existing
and future senior debt of the Company, including
debt incurred pursuant to the New Credit Facility.
The Exchange Notes will rank, and the Old Notes
rank, pari passu in right of payment with all
future senior subordinated debt of the Company, if
any, and the Exchange Notes will rank, and the Old
Notes rank, senior in right of payment to all
future subordinated debt of the Company, if any.
The Exchange Notes will be, and the Old Notes are,
guaranteed, on a senior subordinated basis, by the
Subsidiary Guarantors and effectively subordinated
in right of payment to all debt and other
liabilities (including trade payables) of the
Company's subsidiaries that are not Subsidiary
Guarantors. As of July 4, 1998, the Company and the
Subsidiary Guarantors had an aggregate of
11
<PAGE> 14
approximately $83.4 million of Debt (as defined
herein) outstanding ranking senior to the Notes,
and the Company's subsidiaries that are not
Subsidiary Guarantors had approximately $3.8
million of accounts payable and third-party debt
outstanding. The Indenture permits the Company and
its subsidiaries to incur additional Debt,
including Senior Debt (as defined herein), subject
to certain limitations. See "Description of the
Notes -- Subordination" and "Description of Other
Indebtedness."
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, restrict the Company and its
Restricted Subsidiaries (as defined herein) with
respect to: (i) the incurrence of additional debt;
(ii) restricted payments; (iii) asset sales; (iv)
transactions with affiliates; (v) dividend and
other payment restrictions affecting Restricted
Subsidiaries; (vi) issuing stock of subsidiaries to
third parties; (vii) certain liens; and (viii)
certain consolidations, mergers or sales of assets.
All of these restrictions are subject to a number
of significant limitations and qualifications. See
"Description of the Notes -- Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
12
<PAGE> 15
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The summary unaudited pro forma combined financial data give effect to the
Transactions as if they had been consummated on September 29, 1996 and September
28, 1997, in the case of the summary unaudited pro forma combined statement of
operations data for fiscal 1997 and the forty weeks ended July 4, 1998,
respectively. The summary unaudited pro forma combined financial data is
presented for illustrative purposes only and is not necessarily indicative of
what the Company's actual results of operations would have been had the
Transactions been consummated as of the above-referenced dates or of the results
of operations of the Company for any future period. See "Unaudited Pro Forma
Combined Financial Data."
<TABLE>
<CAPTION>
PRO FORMA
-----------------------
FORTY
WEEKS
FISCAL ENDED
1997 JULY 4, 1998
-------- ------------
(IN THOUSANDS,
EXCEPT RATIOS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $425,411 $335,598
Cost of goods sold.......................................... 315,427 251,272
-------- --------
Gross profit................................................ 109,984 84,326
Selling, general and administrative expenses................ 87,279 66,614
Termination of foreign operations........................... 5,106 5,229
Production conversion expenses.............................. 2,061 642
Relocation expenses......................................... 904 3,262
-------- --------
Operating income............................................ 14,634 8,579
Interest expense, net(1).................................... 18,750 13,760
Bridge loan funding fee..................................... -- 500
Other expense, net.......................................... 231 637
-------- --------
Loss before income tax...................................... (4,347) (6,318)
Income tax benefit.......................................... (3,802) (2,652)
-------- --------
Net loss.......................................... $ (545) $ (3,666)
======== ========
OTHER DATA:
Depreciation and amortization(1)............................ $ 6,973 $ 5,815
EBITDA(2)................................................... 30,199 23,141
Adjusted EBITDA(3).......................................... 53,399 40,541
Cash interest expense(4).................................... 17,433 12,647
Ratio of Adjusted EBITDA to cash interest expense........... 3.1x 3.2x
Ratio of earnings to fixed charges(5)....................... -- --
</TABLE>
- ---------------
(1) Interest expense, net, and depreciation and amortization include
amortization of debt issuance costs of $1.3 million and $1.1 million for
fiscal 1997 and the forty weeks ended July 4, 1998, respectively. Interest
expense, net also includes interest income of $752,000 and $251,000 for
fiscal 1997 and the forty weeks ended July 4, 1998, respectively.
(2) EBITDA represents loss before income tax plus, without duplication, (i)
depreciation and amortization, (ii) interest expense, and (iii) special
charges incurred by Farah during the periods presented relating to the
termination of foreign operations, production conversions and/or relocation
expenses (the "Farah Charges"). EBITDA is presented because it provides
useful information regarding the Company's ability to service debt. EBITDA
should not be considered as an alternative measure of operating results or
cash flows from operations (as determined in accordance with generally
accepted accounting principles).
(3) Adjusted EBITDA represents EBITDA plus $23.2 million of annual cost savings
(or $17.4 million for the forty weeks ended July 4, 1998) that the Company
expects to achieve in connection with the Farah Acquisition assuming that
all cost savings were achieved at the beginning of the applicable period.
See "-- Expected Benefits of the Farah Acquisition -- Cost Savings."
13
<PAGE> 16
(4) Cash interest expense reflects, for the applicable period, aggregate
interest expense during such period minus non-cash interest expense during
such period attributable to the amortization of debt issuance costs. On a
pro forma basis after giving effect to the Transactions, non-cash interest
expense would have been $1.3 million and $1.1 million for fiscal 1997 and
the forty weeks ended July 4, 1998, respectively.
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of deferred financing costs), whether expensed or capitalized,
and the portion of rental expense that is representative of the interest
factor. On a pro forma basis after giving effect to the Transactions,
earnings would have been insufficient to cover fixed charges by $4.4 million
and $6.4 million for fiscal 1997 and the forty weeks ended July 4, 1998,
respectively.
14
<PAGE> 17
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus before making an
investment in the Exchange Notes offered hereby.
Certain of the matters discussed in this Prospectus may constitute
forward-looking statements for purposes of the Securities Act and the Exchange
Act. All statements, other than statements of historical facts, included in this
Prospectus 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 Farah
Acquisition 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.
INTEGRATION OF FARAH
The Farah Acquisition will result in a significant increase in the scope of
the Company's business. Farah's net sales for fiscal 1997 were approximately
$273.7 million, while TSI's net sales for fiscal 1997 were approximately $151.7
million. Specifically, as a result of the Farah Acquisition, the Company will
significantly increase (i) the number of its branded and private brand apparel
offerings, (ii) the number of its manufacturing and other operating locations,
(iii) the number of its employees, (iv) the geographical scope of its operations
and (v) the total scale of its operations. The integration of the operations of
Farah with those of the Company, the coordination of purchasing, distribution,
manufacturing and warehousing for the combined companies, the coordination of
Farah's sales and marketing operations with those of the Company and the
implementation of appropriate financial and management systems in connection
with the Farah Acquisition will require significant financial resources and
substantial attention from the Company's management. Any inability of the
Company to successfully integrate Farah in a timely and efficient manner could
have a material adverse affect on the Company's business, results of operations
and financial condition. In addition, the Company expects to realize certain
cost savings and business synergies as a result of the Farah Acquisition.
Realization of such cost savings and business synergies could be affected by a
number of factors beyond the Company's control, such as general economic
conditions, increased operating costs, the response of competitors, customers or
employees and regulatory developments. There can be no assurance that the
Company will achieve the expected cost savings and business synergies.
SUBSTANTIAL LEVERAGE
As a result of the consummation of the Transactions, the Company is highly
leveraged. As of July 4, 1998, the Company's consolidated debt was approximately
$183.4 million and its shareholders' equity was approximately $47.7 million. In
addition, on a pro forma basis after giving effect to the Transactions, the
Company's earnings would have been insufficient to cover fixed charges by
approximately $6.4 million for the forty weeks ended July 4, 1998. See
"Capitalization," "Description of the Notes" and "Description of Other
Indebtedness."
15
<PAGE> 18
The Indenture and the New Credit Facility permit the Company and its
subsidiaries to incur additional debt, subject to certain limitations. The
degree to which the Company is leveraged will have important consequences for
the holders of the Notes, including, but not limited to, the following: (i) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of principal and interest on its debt and will not be available
for other purposes; (ii) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions or other
purposes may be impaired; (iii) the Company's leverage may increase its
vulnerability to economic downturns and limit its ability to withstand
competitive pressures; (iv) the Company's ability to capitalize on significant
business opportunities may be limited; and (v) the Company's leverage may place
the Company at a competitive disadvantage in relation to less leveraged
competitors.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company, which
will be subject in part to factors beyond the control of the Company. Although
the Company believes that its cash flow will be adequate to meet its interest
and principal payments, there can be no assurance that the Company will generate
earnings in the future sufficient to cover its fixed charges. If the Company is
unable to generate earnings in the future sufficient to cover its fixed charges
and is unable to borrow sufficient funds under either the New Credit Facility or
from other sources, it may be required to refinance all or a portion of its
existing debt (including the Notes) or to sell all or a portion of its assets.
There can be no assurance that a refinancing would be possible, nor can there be
any assurance as to the timing of any asset sales or the proceeds that the
Company could realize therefrom. In addition, the terms of the New Credit
Facility and the Indenture restrict the Company's ability to sell assets and the
use of the proceeds therefrom. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Liquidity and Capital Resources of TSI" and "Description of Other
Indebtedness -- New Credit Facility."
If for any reason, including a shortfall in anticipated operating results
or proceeds from asset sales, the Company were unable to meet its debt service
obligations, it would be in default under the terms of the New Credit Facility.
In the event of such a default, the lenders under the New Credit Facility could
elect to declare all debt thereunder to be immediately due and payable,
including accrued and unpaid interest, and to terminate their commitments
thereunder to provide funding. In addition, such lenders could proceed against
their collateral, which consists of substantially all of the current and future
personal property of the Company and certain of its subsidiaries. Any default
under the New Credit Facility could result in a default under the Company's
other debt or result in a bankruptcy of the Company. Such defaults would delay
or preclude payment of principal of, premium, if any, and interest on, the
Notes. See "Description of the Notes -- Subordination."
ACQUISITIONS
The Company intends to pursue acquisitions as part of its business
strategy. The Company regularly evaluates acquisition opportunities that would
complement its ongoing operations. There can be no assurance that the Company
will be able to successfully identify suitable acquisition candidates, obtain
sufficient financing on acceptable terms to fund acquisitions, complete
acquisitions, integrate acquired operations into its existing operations or
profitably manage acquired businesses. Once integrated, acquired operations may
not achieve levels of revenues, profitability or productivity comparable to
those achieved by the Company's existing operations, or otherwise perform as
expected. Acquisitions may also involve a number of special risks, including,
among others, possible adverse effects on the Company's operating results,
diversion of management's attention and the Company's resources, and dependence
on retaining, hiring and training key personnel, some or all of which could have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company competes for acquisition and
expansion opportunities with companies that have substantially greater resources
than the Company. Although the Company regularly evaluates acquisition
opportunities, it currently has no agreements, arrangements or understandings
with respect to any acquisitions.
16
<PAGE> 19
RELIANCE ON KEY CUSTOMERS
On a pro forma basis after giving effect to the Transactions, sales to the
Company's five largest customers would have represented approximately 47.2% of
net sales for the forty weeks ended July 4, 1998. On a pro forma basis after
giving effect to the Transactions, sales to Wal-Mart, Dillard's and Federated
Department Stores would have accounted for approximately 20.0%, 8.0% and 7.0%,
respectively, of net sales for the forty weeks ended July 4, 1998. The Company
does not have long-term contracts with any of its customers, and sales to
customers generally occur on an order-by-order basis and are subject to certain
rights of cancellation and rescheduling by the customer or by the Company.
Accordingly, the level of unfilled orders at any given time may not be
indicative of eventual actual shipments. In addition, the Company's inability to
timely fulfill customer orders may materially and adversely affect the Company's
relationships with its customers. Any deterioration in the Company's
relationship with any key customers could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's future financial condition and results of operations will
depend to a significant extent upon the commercial success of its major
customers and their continued willingness to purchase the Company's products.
Any significant downturn in the business of the Company's major customers or
their commitment to the Company's programs or brands could cause those customers
to reduce or discontinue their purchases from the Company, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Customers and Customer Service."
APPAREL INDUSTRY
The apparel industry has historically been subject to cyclical variations,
and a recession in the general economy or uncertainties regarding future
economic prospects that affect consumer spending habits could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company believes that its success depends in large part upon its
ability to anticipate, gauge and respond to changing consumer demands and
fashion trends in a timely manner. Failure by the Company to identify and
respond appropriately to changing consumer demands and fashion trends could
adversely affect consumer acceptance of the Company's products and may have a
material adverse effect on the Company's business, results of operations and
financial condition.
Additionally, a number of apparel retailers have experienced significant
changes and difficulties over the past several years, including consolidation of
ownership, increased centralization of buying decisions, restructurings,
bankruptcies and liquidations. During past years, various apparel retailers,
including some of the Company's customers, have experienced financial problems
that have increased the risk of extending credit to such retailers. Financial
problems with respect to any of the Company's customers could cause the Company
to reduce or discontinue business with such customers or require the Company to
assume more credit risk relating to such customers' receivables, either of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Industry."
COMPETITION
The apparel industry is highly competitive and TSI and Farah compete with
numerous apparel manufacturers, including brand name and private brand
producers, and retailers which have established, or may establish, internal
product development and sourcing capabilities. TSI's and Farah's products also
compete with a substantial number of designer and non-designer product lines.
Many of TSI's and Farah's competitors and potential competitors have greater
financial, manufacturing and distribution resources than TSI and Farah. Any
increased competition from manufacturers or retailers, or any increased success
by existing competition, could have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business -- Competition."
DEPENDENCE ON INTELLECTUAL PROPERTY; RISK OF INFRINGEMENT CLAIMS
TSI and Farah use a number of trademarks, certain of which TSI and Farah
have registered with the United States Patent and Trademark Office. The Company
believes these registered and common law
17
<PAGE> 20
trademarks and other proprietary rights are important to its success and its
competitive position. TSI and Farah experience, from time to time, challenges to
the use or registration of certain of their trademarks and use of their trade
dress. Levi Strauss & Co. recently brought suit against TSI alleging, among
other things, that a TSI trademark and the trade dress used in the labeling and
packaging of certain TSI products infringe upon certain of Levi Strauss & Co.'s
proprietary trademark and trade dress rights. The outcome of the litigation
cannot be determined at this time. Nevertheless, in an attempt to limit TSI's
liability, if any, with respect to such alleged infringement, TSI has
unilaterally altered the trademark and trade dress which are currently the
subject of this lawsuit. There can be no assurance, however, that the
modifications made to the subject trademark and trade dress do not infringe upon
Levi Strauss & Co.'s rights or that Levi Strauss & Co. will not continue to seek
to recover damages and attorneys' fees from TSI with respect to the use of this
modified trademark and trade dress, or with respect to the trademark and trade
dress prior to modification. See "Business -- Legal Proceedings." Additionally,
there can be no assurance that TSI's and Farah's other trademarks and
proprietary rights do not or will not violate the proprietary rights of others,
that they would be upheld if challenged or that TSI or Farah would not be
prevented, in any such event, from using its trademarks or other proprietary
rights, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. In the event of
litigation arising from alleged infringement, any claiming party may have
significantly greater resources than the Company to pursue such litigation, and
the Company could be forced to incur substantial costs to defend such
litigation. In addition, if any such party is successful in challenging the
Company's or Farah's trademarks or use of trade dress, the Company could be
forced to pay significant damages or required to enter into expensive royalty or
licensing arrangements with such third party. Accordingly, any such litigation
could have a material adverse effect on the Company's business, results of
operations and financial condition.
In addition, TSI and Farah use various trademarks owned by other companies
in the promotion, distribution and sale of their products pursuant to licensing
agreements. From time to time, the Company has been engaged in litigation
regarding its licensing arrangements. There can be no assurance that any of the
licensing agreements will not be terminated or will be renewed in the future. In
the event TSI and Farah are unable to use the trademarks of such other companies
in the future, the Company's business, results of operations and financial
condition may be materially adversely affected. See "Business -- Trademarks and
Licenses."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success is dependent upon its ability to retain its
senior management as well as its ability to attract and retain qualified
management, administrative and sales personnel to support its existing
operations and future growth. The loss of the services of any members of its
senior management, or the inability to attract and retain other qualified
personnel, could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management."
PRICE AND AVAILABILITY OF RAW MATERIALS
The principal fabrics used in the Company's and Farah's apparel consist of
cotton, wool, synthetic and blended fabrics. These fabrics, with the quality the
Company and Farah require, are available from a limited number of suppliers. The
prices paid by the Company and Farah for such fabrics are largely dependent on
the market prices for the raw materials used to produce them, namely cotton,
wool, rayon and polyester. The price and availability of such raw materials and,
in turn, the fabrics used in the Company's and Farah's apparel may fluctuate
significantly, depending on a variety of factors, including crop yields and
weather patterns. In the event that the Company is required to obtain fabrics
from sources other than its current suppliers, the quality of available fabrics
also may fluctuate significantly. Fluctuations in the price, availability and
quality of the fabrics or other raw materials used by the Company could have a
material adverse effect on the Company's cost of sales or its ability to meet
its customers' demands and, as a result, could have a material adverse effect on
the Company's business, results of operations and financial condition. There
also can be no assurance that the Company will be able to pass along to its
customers all, or any portion of, any future increases in the prices paid for
the fabrics used in the manufacture of the Company's products. See
"Business--Production."
18
<PAGE> 21
DEPENDENCE ON INDEPENDENT MANUFACTURERS
TSI and Farah use independent manufacturers to assemble or produce a
substantial portion of their respective products. The Company and Farah are
dependent upon the ability of their independent manufacturers to adequately
finance the assembly or production of goods ordered and maintain sufficient
manufacturing capacity. The use of independent manufacturers to assemble or
produce finished goods and the resulting lack of direct control could subject
the Company to difficulty in obtaining timely delivery of products of acceptable
quality. Neither the Company nor Farah generally has long-term contracts with
any independent manufacturers. Alternative manufacturers, if available, may not
be able to provide the Company with products or services of a comparable
quality, at an acceptable price or on a timely basis. There can be no assurance
that there will not be a disruption in the supply of the Company's products from
its independent manufacturers or, in the event of a disruption, that the Company
would be able to substitute in a timely manner suitable alternative
manufacturers. The failure of any independent manufacturer to perform or the
loss of any independent manufacturer could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Production."
INTERNATIONAL SOURCING AND MANUFACTURING
During fiscal 1997 and the forty weeks ended July 4, 1998, all of TSI's
products were assembled or produced by independent manufacturers operating
outside the United States, primarily in the Dominican Republic and, to a lesser
extent, Mexico. In addition, substantially all of Farah's products have
historically been assembled outside the United States, with a significant
portion of such production occurring in Mexico and Costa Rica. Accordingly, the
Company expects that after the Farah Acquisition almost all of its products will
be assembled or produced outside the United States. Generally, neither the
Company nor Farah has any long-term contracts with its independent
manufacturers. There can be no assurance that the Company will not experience
difficulties with such manufacturers, which could include a reduced availability
of production capacity, failure to meet production deadlines or increases in
manufacturing costs. In addition, the use of foreign manufacturers requires the
Company to order products further in advance to account for additional
transportation time. If the Company overestimates customer demand, it may be
required to hold goods in inventory which it may be unable to sell at historical
margins; if it underestimates customer demand, the Company may not be able to
fill orders on a timely basis.
International manufacturing is subject to a number of other risks including
work stoppages, transportation delays and interruptions, delays and
interruptions resulting from natural disasters, political instability, economic
disruptions, expropriation, nationalization, the imposition of tariffs and
import and export controls, changes in governmental policies and other events.
Any such event could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, a significant
portion of Farah's manufacturing operations are located in a number of countries
outside the United States. As a consequence, following the Farah Acquisition,
the Company will be subject to additional risks associated with owning and
operating manufacturing facilities abroad. These include, among others, the
risks of becoming subject to labor laws and other government regulations imposed
by the countries in which the Company operates. Any such adverse change could
result in loss of revenues, customer orders and customer goodwill and could have
a material adverse effect on the Company's business, results of operations and
financial condition.
The Company and Farah are also exposed to foreign currency risk. Although
TSI and, to a lesser extent Farah, have historically contracted to assemble or
produce substantially all of their goods in United States dollars, reductions in
the value of the United States dollar could increase the prices that the Company
pays for its products, which increases the Company may not be able to pass on to
its customers. Any such price increases could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business -- Production."
IMPORTS AND IMPORT RESTRICTIONS
Substantially all of TSI's and Farah's import operations are subject to the
terms of bilateral textile agreements between the United States and a number of
countries, which agreements impose quotas on the
19
<PAGE> 22
amount and type of goods that can be imported into the United States from these
countries. Pursuant to international agreements and/or United States laws, these
bilateral textile agreements allow, and any future bilateral textile agreement
may allow, the United States, under certain circumstances, to impose restraints
at any time on the importation of additional or new categories of merchandise.
The Company's imported products are also subject to United States customs
duties. On a pro forma basis after giving effect to the Transactions, such
duties would have represented approximately 4.3% of the Company's cost of goods
sold for the forty weeks ended July 4, 1998.
The United States and the countries in which TSI's and Farah's products are
manufactured may from time to time impose new quotas, duties, tariffs or other
restrictions or adversely adjust presently prevailing quotas, duties or tariffs.
In addition, the United States may bar imports of products that are found to
have been manufactured by convict, forced or indentured labor and may withdraw
the "most favored nation" status of certain countries, which could result in the
imposition of higher tariffs on products imported from such countries. Any such
new or adjusted restrictions could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Imports and Import Regulations."
MANAGEMENT INFORMATION SYSTEMS
TSI and Farah rely upon the accuracy and proper utilization of their
respective management information systems to provide timely distribution
services and to properly track their respective operating results. The Company
began implementation of a new, integrated management information system in the
second quarter of fiscal 1998 and continues to integrate additional functions.
The Company expects that it will need to modify its management information
systems as a result of the Farah Acquisition. Further modification and
refinement will be required as the Company grows and its business needs change.
The occurrence of a significant system failure or the Company's inability to
modify its management information systems to respond to the Farah Acquisition
and other changes in its business needs could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business -- Management Information Systems."
CONTROL BY PRINCIPAL SHAREHOLDERS
As of August 17, 1998, William W. Compton, the Company's Chairman of the
Board and Chief Executive Officer, and Michael Kagan, the Company's Executive
Vice President and Chief Financial Officer, owned or controlled approximately
12.5% and 7.5%, respectively, of the outstanding shares of TSI's common stock
(the "Common Stock"). As of such date, Accel, S.A. de C.V., a Mexican
corporation ("Accel"), owned approximately 21.1% of the outstanding shares of
the Common Stock. In addition, pursuant to TSI's Amended and Restated Articles
of Incorporation, Accel currently has the right to nominate two persons to stand
for election to TSI's seven-member Board of Directors, and separate family
limited partnerships controlled by Messrs. Compton and Kagan, respectively, each
currently has the right to nominate one person to stand for election to TSI's
seven-member Board of Directors. Moreover, Accel and Messrs. Compton and Kagan
and their respective family limited partnerships have entered into a
shareholders' agreement pursuant to which, among other things, each of them has
agreed to vote the shares of Common Stock owned or controlled by them to elect
the nominees of the other parties to the shareholders' agreement to TSI's Board
of Directors. In light of the foregoing, such persons will effectively have the
ability to significantly influence the election of TSI's directors and the
outcome of all other issues submitted to TSI's shareholders. See "Management"
and "Principal Shareholders."
SEASONALITY
Historically, TSI's and Farah's businesses have been seasonal, with
slightly higher sales and income in their respective second and fourth fiscal
quarters, just prior to and during the two peak retail selling seasons for
spring and fall merchandise. In addition, certain of TSI's and Farah's products,
such as shorts and corduroy pants, tend to be seasonal in nature. In the event
such products represent a greater percentage of the Company's sales in the
future, the seasonality of the Company's sales may be increased.
20
<PAGE> 23
RANKING OF THE NOTES AND THE SUBSIDIARY GUARANTEES
The Exchange Notes will be, and the Subsidiary Guarantees are, general
unsecured obligations of the Company and the Subsidiary Guarantors,
respectively, subordinated in right of payment to all existing and future senior
debt of the Company and the Subsidiary Guarantors, including Debt under the New
Credit Facility. As of July 4, 1998, the Company and the Subsidiary Guarantors
had an aggregate of approximately $83.4 million of Debt outstanding ranking
senior to the Notes, and the Company had $46.4 million of additional borrowing
availability under the New Credit Facility (subject to borrowing base
limitations), all of which would be Senior Debt. In the event of a bankruptcy,
liquidation or reorganization of the Company or a Subsidiary Guarantor, the
assets of the Company or such Subsidiary Guarantor would be available to pay
obligations on the Notes only after all senior debt of the Company or such
Subsidiary Guarantor, as the case may be, has been repaid in full. Consequently,
sufficient assets may not exist to pay amounts due on the Notes. In addition,
the subordination provisions of the Indenture provide that no cash payments may
be made with respect to the Notes during the continuance of a payment default
under certain Senior Debt of the Company. Furthermore, if certain nonpayment
defaults exist with respect to certain Senior Debt, the holders of such Senior
Debt would be able to prevent payments of principal of, premium, if any, and
interest on, the Notes for certain periods of time. See "Description of the
Notes -- Subordination."
None of TSI's or Farah's non-United States subsidiaries will be Subsidiary
Guarantors, and the Notes are, and the Exchange Notes will be, effectively
subordinated in right of payment to all debt and other liabilities (including
trade payables) of these subsidiaries. As of July 4, 1998, TSI's subsidiaries
that are not Subsidiary Guarantors had approximately $3.8 million of accounts
payable and third party debt outstanding. The right of the Company to receive
assets of any of its subsidiaries that are not Subsidiary Guarantors upon
liquidation or reorganization of such subsidiary will be subordinated to the
claims of that subsidiary's creditors (including trade creditors), except to the
extent the Company itself is recognized as a creditor of such subsidiary. See
"Description of the Notes -- Subordination."
RESTRICTIONS IMPOSED BY THE NEW CREDIT FACILITY AND THE INDENTURE
The New Credit Facility and the Indenture contain a number of significant
covenants which, among other things, restrict the ability of the Company to
dispose of assets, incur additional debt, repay other debt, pay dividends, make
certain investments or acquisitions, repurchase or redeem capital stock, engage
in mergers or consolidations, or engage in certain transactions with
subsidiaries and affiliates and otherwise restrict corporate activities. There
can be no assurance that such restrictions will not adversely affect the
Company's ability to finance its future operations or capital needs or engage in
other business activities that may be in the best interest of the Company. In
addition, the New Credit Facility also requires the Company to maintain
compliance with certain financial ratios. The ability of the Company to comply
with such ratios may be affected by events beyond the Company's control. A
breach of any of these covenants or the inability of the Company to comply with
the required financial ratios could result in a default under the New Credit
Facility. In the event of such a default, the lenders under the New Credit
Facility could elect to declare all debt thereunder to be immediately due and
payable, including accrued and unpaid interest, and to terminate their
commitments thereunder to provide funding. In addition, such lenders could
proceed against their collateral, which consists of substantially all of the
current and future personal property of the Company and certain of its
subsidiaries. Any default under the New Credit Facility could result in a
default under the Company's other debt or result in a bankruptcy of the Company.
Such defaults would delay or preclude payment of principal of, premium, if any,
and interest on, the Notes. See "Description of the Notes" and "Description of
Other Indebtedness -- New Credit Facility."
LIMITATION ON SUBSIDIARY GUARANTEES; FRAUDULENT CONVEYANCE CONCERNS
The issuance of a Subsidiary Guarantee by a Subsidiary Guarantor may be
subject to review under federal or state fraudulent conveyance laws in the event
of the bankruptcy or other financial difficulty of such Subsidiary Guarantor.
Depending upon the standard applied in connection with such review, such review
could result in the debt evidenced by a Subsidiary Guarantee being voided or
subordinated to all other debt of such Subsidiary Guarantor (in addition to the
Senior Debt of such Subsidiary Guarantor to which such
21
<PAGE> 24
Subsidiary Guarantee is expressly subordinated), and could result in payments
previously made in respect of such Subsidiary Guarantee being returned to such
Subsidiary Guarantor.
For example, under applicable law, if a court, in a lawsuit by an unpaid
creditor or representative of creditors of a Subsidiary Guarantor, were to find
that when such Subsidiary Guarantor incurred the debt evidenced by its
Subsidiary Guarantee, such Subsidiary Guarantor (a)(i) was insolvent or was
rendered insolvent by reason of such incurrence, (ii) was engaged in a business
or transaction for which the assets remaining with such Subsidiary Guarantor
constituted unreasonably small capital or (iii) intended to incur, or believed
(or reasonably should have believed) that it would incur, debt beyond its
ability to pay such debt as it matures and (b) received less than reasonably
equivalent value or fair consideration for the incurrence of such debt, then the
Subsidiary Guarantee could be voided, or claims in respect of the Subsidiary
Guarantee could be subordinated to all other debt of such Subsidiary Guarantor.
In addition, any amounts previously paid by a Subsidiary Guarantor pursuant to a
Subsidiary Guarantee could be voided and required to be returned to such
Subsidiary Guarantor, or to a fund for the benefit of the creditors of such
Subsidiary Guarantor. The measure of insolvency for purposes of the foregoing
considerations will vary depending upon the law of the jurisdiction being
applied. Generally, however, a Subsidiary Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, is
greater than the saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets is less than the amount that would
be required to pay its probable liability on its existing debts, including
contingent liabilities, as they become absolute and matured or (ii) it could not
pay its debts as they become due.
A court will likely find that a Subsidiary Guarantor did not receive fair
consideration or reasonably equivalent value for its guarantee to the extent
that its liability thereunder exceeds any direct benefit it received from the
issuance of the Old Notes. Each Subsidiary Guarantee will limit the liability of
the Subsidiary Guarantor thereunder to the maximum amount that it could pay
without the guarantee being deemed a fraudulent transfer. There can be no
assurance that this limitation will be effective. If this limitation is not
effective, the issuance of a Subsidiary Guarantee by a Subsidiary Guarantor
could be deemed to render insolvent such Subsidiary Guarantor. If this
limitation is effective, there can be no assurance that the limited amount so
guaranteed would be sufficient to pay amounts owed under the Notes and the
Indenture in full.
LIMITATION ON CHANGE OF CONTROL
The Indenture requires the Company, in the event of a Change of Control, to
make an offer to purchase all outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. The New Credit Facility restricts such a purchase and such an offer
would require the approval of the lenders thereunder. In addition, certain
events involving a change of control may be an event of default under the New
Credit Facility or other debt of the Company that may be incurred in the future.
Accordingly, the right of the holders of the Notes to require the Company to
repurchase the Notes may be of limited value if the Company cannot obtain the
required approval under the New Credit Facility. In addition, even if such
approval were obtained, there can be no assurance that the Company will have the
financial resources necessary to purchase the Notes upon a Change of Control.
Failure to offer to repurchase the Notes under such circumstances, however,
would constitute an event default under the Indenture. See "Description of the
Notes -- Repurchase at the Option of Holders Upon Change of Control."
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the provisions in
the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to an exemption from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable state
securities laws. The Company does not currently anticipate that it will register
Old Notes under the Securities Act. See "The Exchange Offer."
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<PAGE> 25
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each Participating Broker-Dealer that receives Exchange
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. To the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Notes could be adversely
affected. See "The Exchange Offer" and "Plan of Distribution."
ABSENCE OF ESTABLISHED TRADING MARKET
The Exchange Notes are a new issuance of securities for which there is
currently no trading market. The Exchange Notes will not be listed on any
securities exchange. The Company has been advised by the Initial Purchaser that
it intends to make a market in the Exchange Notes; however, the Initial
Purchaser is not obligated to do so, and any such market making activities may
be discontinued at any time without notice. Accordingly, there can be no
assurance that an active trading market for the Exchange Notes will develop or
as to the liquidity of any such market. In addition, if the Exchange Notes are
traded after their initial issuance, they may trade at a discount from their
initial offering price, depending upon prevailing interest rates, the market for
similar securities, the performance of the Company and other factors.
YEAR 2000
The "Year 2000 Issue" is the result of computer programs and systems having
been designed and developed to use two digits, rather than four, to define the
applicable year. As a result, these computer programs and systems may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The new or upgraded management information systems which TSI began
implementing in the second quarter of fiscal 1998 will, among other things,
address problems resulting from the Year 2000 Issue. The Year 2000 Issue impacts
TSI's main operating system which includes subsystems related to customer
analysis, order processing, planning, procurement, production and sales. While
the new management information system, which is Year 2000 compliant, will not be
operational until approximately the third quarter of fiscal 1999, TSI plans to
have all existing systems Year 2000 compliant by the first quarter of fiscal
1999 and plans to spend up to $500,000 for this portion of its systems upgrade.
Based on assessments made during fiscal 1996 and 1997, Farah decided to
replace its entire inventory management, warehouse distribution and order
processing systems so that those systems will be Year 2000 compliant. Farah will
utilize both internal and external resources to reprogram or replace and test
the software for Year 2000 modifications. The Company plans to complete the
inventory management and order processing portions of Farah's Year 2000 project
no later than December 31, 1998 and plans to complete the remainder of the
project by June 30, 1999. Farah incurred $1.0 million in costs attributable to
Year 2000 compliance in fiscal 1997 and expects to incur an additional $2.6
million in fiscal 1998. The majority of these costs have been and will continue
to be capitalized, as they relate to software purchases and development.
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<PAGE> 26
The Company and Farah are currently communicating with all significant
suppliers and large customers to determine the extent to which the Company and
Farah are vulnerable to those third parties' failure to remediate their own Year
2000 Issues. The Company believes that the modifications and conversions that it
and Farah are making and plan to make will allow it to mitigate problems
resulting from the Year 2000 Issue. However, if such modifications and
conversions are not made or are not completed timely, the Year 2000 Issue could
have a material adverse effect on the Company's business, results of operations
and financial condition.
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<PAGE> 27
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive a like principal amount of Old Notes. The
form and terms of the Exchange Notes will be identical in all material respects
to the form and terms of the Old Notes, except as described herein. The Old
Notes surrendered in exchange for Exchange Notes will be retired and canceled
and cannot be reissued. Accordingly, issuance of the Exchange Notes will not
result in any increase or decrease in the debt of the Company. As such, no
effect has been given to the Exchange Offer in the capitalization table set
forth in this Prospectus under "Capitalization."
The net proceeds of the Offering of approximately $95.6 million, together
with borrowings of approximately $4.4 million under the New Credit Facility,
were used to repay all debt of the Company outstanding under the Bridge
Facility. Borrowings of $100.0 million under the Bridge Facility and
approximately $70.4 million under the New Credit Facility were incurred to
finance the purchase price for the Farah Acquisition, the repayment of the
Terminated Credit Facilities and the redemption of the Convertible Debentures.
For a description of certain terms of the Bridge Facility and the New Credit
Facility, see "Description of Other Indebtedness -- Bridge Facility" and "-- New
Credit Facility."
The following table sets forth the approximate sources and uses of funds
for the Transactions (assuming that the Transactions occurred concurrently (and
consequently no borrowings were necessary under the Bridge Facility) on June 10,
1998).
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
11% Senior Subordinated Notes due 2008.................... $100,000
New Credit Facility(1).................................... 70,397
--------
Total sources..................................... $170,397
========
USES OF FUNDS:
Farah Acquisition......................................... $ 95,848
Repayment of Terminated Credit Facilities(2).............. 63,821
Redemption of Convertible Debentures(3)................... 1,728
Estimated fees and expenses(4)............................ 9,000
--------
Total uses........................................ $170,397
========
</TABLE>
- ---------------
(1) As of July 4, 1998, the Company had approximately $46.4 million of
additional borrowing availability under the New Credit Facility, subject to
borrowing base limitations. See "Description of Other Indebtedness -- New
Credit Facility."
(2) TSI's Terminated Credit Facility, which was terminated in connection with
the consummation of the Transactions, would have expired by its terms in
January 1999 and, as of June 10, 1998, debt outstanding thereunder accrued
interest at a weighted average interest rate of approximately 9.75% per
annum. Farah's Terminated Credit Facility, which was terminated in
connection with the consummation of the Transactions, would have expired by
its terms in July 2001 and, as of February 1, 1998, debt outstanding
thereunder accrued interest at a weighted average interest rate of
approximately 8.7% per annum.
(3) The Convertible Debentures, which were redeemed in connection with the
consummation of the Transactions, would have matured by their terms in
February 2004 and accrued interest at a fixed rate of 8.5% per annum.
(4) Includes (i) an aggregate of $1.0 million of fees paid to the Initial
Purchaser in its capacity as dealer manager in connection with the Tender
Offer and as financial advisor in connection with the Farah Acquisition,
(ii) the discount of $2.8 million paid to the Initial Purchaser in
connection with the Offering, (iii) fees of $500,000 paid to the Bridge
Lender in connection with the Bridge Facility, (iv) fees of $1.1
25
<PAGE> 28
million paid to Fleet and the other lenders in connection with the New
Credit Facility, (v) a fee of $198,000 paid under Farah's Terminated Credit
Facility as a prepayment premium and (vi) estimated legal, accounting and
other fees and expenses aggregating $3.4 million paid in connection with the
Transactions.
26
<PAGE> 29
CAPITALIZATION
The following table sets forth the actual capitalization (in thousands) of
TSI as of July 4, 1998. This table should be read in conjunction with the
Condensed Consolidated Financial Statements of TSI, including the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<S> <C>
Short-term debt(1):
Current portion of long-term debt and capital leases...... $ 3,714
Long-term debt(1):
New Credit Facility(2).................................... 63,578
Real estate loan.......................................... 9,316
11% Senior Subordinated Notes due 2008.................... 100,000
Other long-term debt and obligations under capital
leases................................................. 6,762
--------
Total long-term debt................................... 179,656
--------
Total debt........................................ 183,370
Shareholders' equity:
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding............ --
Common Stock, $.01 par value; 50,000,000 shares
authorized; 7,600,000 shares issued and
outstanding(3)......................................... 76
Additional paid-in capital................................ 17,270
Retained earnings......................................... 30,376
--------
Total shareholders' equity............................. 47,722
--------
Total capitalization.............................. $231,092
--------
</TABLE>
- ---------------
(1) See Note 3 to the Condensed Consolidated Financial Statements of the Company
at July 4, 1998 for a discussion of the Company's and Farah's outstanding
debt, respectively.
(2) As of July 4, 1998, the Company had approximately $46.4 million of
additional borrowing availability under the New Credit Facility, subject to
borrowing base limitations. See "Description of Other Indebtedness -- New
Credit Facility."
(3) Excludes an aggregate of 470,200 shares of Common Stock issuable upon the
exercise of outstanding stock options.
27
<PAGE> 30
THE TRANSACTIONS
FARAH ACQUISITION
On June 10, 1998, the Farah Acquisition was consummated in accordance with
the Merger Agreement among TSI, Foxfire and Farah. Pursuant to the Merger
Agreement, on May 8, 1998 Foxfire commenced the Tender Offer to purchase all of
the Shares at a purchase price of $9.00 per Share. The aggregate consideration
paid to the shareholders and optionholders of Farah was approximately $95.8
million. The Board of Directors of Farah unanimously approved the Farah
Acquisition, determined that the purchase price was fair to the shareholders of
Farah and recommended that all shareholders of Farah tender their Shares
pursuant to the Tender Offer.
Consummation of the Tender Offer was conditioned upon, among other things,
(i) satisfaction of the Minimum Tender Condition and (ii) the expiration or
termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, applicable to the purchase of Shares
pursuant to the Tender Offer (which waiting period expired on June 4, 1998). The
Tender Offer expired at 12:00 Midnight, New York City time, on June 5, 1998. The
Tender Offer was consummated on June 10, 1998 and immediately thereafter Foxfire
was merged into Farah in the Merger. Farah was the surviving corporation in the
Merger and is a wholly-owned subsidiary of TSI. Certain customary covenants of
the Company contained in the Merger Agreement survived consummation of the
Merger.
BRIDGE FACILITY AND NEW CREDIT FACILITY
To finance the Farah Acquisition, the repayment of the Terminated Credit
Facilities and the redemption of the Convertible Debentures, concurrently with
the consummation of the Tender Offer the Company entered into the Bridge
Facility and the New Credit Facility. The Bridge Facility provided for aggregate
borrowing availability of $100.0 million and was fully drawn upon consummation
of the Tender Offer. All debt thereunder was repaid in connection with the
consummation of the Transactions. For a description of certain terms of the
Bridge Facility, see "Description of Other Indebtedness -- Bridge Facility."
The New Credit Facility, which replaced the Terminated Credit Facilities,
was arranged by Fleet and permits revolving borrowings and letter of credit
issuances in an aggregate principal amount of $110.0 million, subject to
borrowing base limitations. The New Credit Facility has a term of five years.
For a description of certain terms of the New Credit Facility, see "Description
of Other Indebtedness -- New Credit Facility."
28
<PAGE> 31
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 and (ii) on September 28, 1997 with respect to the Unaudited Pro Forma
Combined Statement of Operations for the forty weeks ended July 4, 1998. 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 forty weeks ended July 4, 1998 has been derived from TSI's
unaudited statement of income for the forty weeks ended July 4, 1998 and Farah's
unaudited statement of operations for the thirty-nine weeks ended May 3, 1998.
The Farah Acquisition has been 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 results of operations would have been had the Transactions been
consummated as of the above-referenced dates or of the 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
Prospectus.
29
<PAGE> 32
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 1,400(2) 87,279
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) (1,400) 14,634
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) (13,895) (4,347)
Income taxes (benefit)................................. 4,907 (3,898) (4,811)(4) (3,802)
-------- -------- -------- --------
Net income (loss)............................. $ 8,269 $ 270 $ (9,084) $ (545)
======== ======== ======== ========
Earnings per share, basic and diluted.................. $ 1.37 $ (0.09)
======== ========
Basic and diluted weighted average number of common
shares outstanding................................... 6,000 6,000
</TABLE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FORTY WEEKS ENDED JULY 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........................................... $152,290 $201,928 $(18,620)(6) $335,598
Cost of goods sold.................................. 114,570 150,648 (13,946)(6) 251,272
-------- -------- -------- --------
Gross profit........................................ 37,720 51,280 (4,674) 84,326
Selling, general and administrative expenses........ 22,136 47,345 1,050(2) 66,614
(3,917)(6)
Termination of foreign operations................... -- 5,229 -- 5,229
Production conversion expenses...................... -- 642 -- 642
Relocation expenses................................. -- 3,262 -- 3,262
-------- -------- -------- --------
Operating income (loss)............................. 15,584 (5,198) (1,807) 8,579
Other (income) expense:
Interest expense.................................. 2,238 3,907 9,496(3) 14,011
(1,630)(6)
Interest income................................... (64) (194) 7(6) (251)
Bridge loan funding fee........................... 500 -- -- 500
Other (income) expense, net....................... 731 (144) 50(6) 637
-------- -------- -------- --------
Total other expense........................ 3,405 3,569 7,923 14,897
-------- -------- -------- --------
Income (loss) before income taxes................... 12,179 (8,767) (9,730) (6,318)
Income taxes (benefit).............................. 4,531 (3,779) (3,404)(4) (2,652)
-------- -------- -------- --------
Net income (loss).......................... $ 7,648 $ (4,988) $ (6,326) $ (3,666)
======== ======== ======== ========
Earnings (loss) per share, basic and diluted........ $ 1.02 $ (0.49)
======== ========
Basic weighted average number of common shares
outstanding....................................... 7,465 7,465
Diluted weighted average number of shares
outstanding....................................... 7,517 7,465
</TABLE>
See accompanying notes.
30
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(1) Represents Farah's results of operations for fiscal 1997.
(2) Represents amortization of intangibles of $42.0 million over a 30 year
period.
(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 less interest recognized by Farah during the twenty-four days ended
July 4, 1998.
<TABLE>
<CAPTION>
FORTY
WEEKS ENDED
FISCAL 1997 JULY 4, 1998
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Interest expense on the New Credit Facility................. $ 4,810 $ 3,607
Interest expense on the Notes............................... 11,000 8,250
Interest expense on the Existing Credit Facilities and
Convertible Debentures.................................... (4,632) (3,474)
Bridge Facility funding fee................................. 500 500
Debt issuance cost amortization............................. 817 613
-------- --------
Net increase in interest expense.................. $ 12,495 $ 9,496
======== ========
</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 thirty-nine weeks ended May
3, 1998.
(6) Represents actual results of operations for Farah from the date of the Farah
Acquisition to July 4, 1998, which are included in TSI's statement of
operations for the forty weeks ended July 4, 1998.
31
<PAGE> 34
SELECTED HISTORICAL FINANCIAL INFORMATION OF TSI
The selected consolidated financial data of TSI set forth below for, and as
of the end of, fiscal 1993, 1994, 1995, 1996 and 1997, and for, and as of the
end of, the thirty-nine weeks ended June 28, 1997 and the forty weeks ended July
4, 1998, have been derived from the consolidated financial statements of TSI, of
which (i) the consolidated financial statements of TSI for, and as of the end
of, fiscal 1995, 1996 and 1997, the thirty-nine weeks ended June 28, 1997 and
the forty weeks ended July 4, 1998 are included elsewhere in this Prospectus,
(ii) the consolidated financial statements for, and as of the end of, fiscal
1993, 1994, 1995, 1996 and 1997 were audited by Ernst & Young LLP, independent
auditors, and (iii) the consolidated financial statements for, and as of the end
of, the thirty-nine weeks ended June 28, 1997 and the forty weeks ended July 4,
1998 are unaudited. In the opinion of management, the consolidated financial
statements for, and as of the end of, the thirty-nine weeks ended June 28, 1997
and the forty weeks ended July 4, 1998 include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for, and the financial position at the end of, each of
such periods. The results of operations for the forty weeks ended July 4, 1998
are not necessarily indicative of the results to be expected for fiscal 1998 or
any future period. The selected consolidated financial data below is qualified
in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, including the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS FORTY WEEKS
FISCAL YEAR ENDED ENDED
--------------------------------------------------- JUNE 28, JULY 4,
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $74,271 $100,359 $110,064 $117,355 $151,692 $115,608 $152,290
Cost of sales....................... 57,726 75,677 87,858 91,132 115,637 88,327 114,570
------- -------- -------- -------- -------- -------- --------
Gross profit........................ 16,545 24,682 22,206 26,223 36,055 27,281 37,720
Selling, general and administrative
expenses.......................... 11,071 14,291 15,060 15,189 19,443 14,745 22,136
------- -------- -------- -------- -------- -------- --------
Operating income.................... 5,474 10,391 7,146 11,034 16,612 12,536 15,584
Interest expense, net(1)............ 1,644 2,115 3,160 2,498 2,899 2,233 2,174
Bridge loan funding fee............. -- -- -- -- -- -- 500
Factoring expense................... 463 668 708 373 505 589 620
Other expense (income), net......... 1,053 (983) 293 247 32 29 111
------- -------- -------- -------- -------- -------- --------
Income before income taxes.......... 2,314 8,591 2,985 7,916 13,176 9,685 12,179
Income taxes........................ 946 3,613 825 2,745 4,907 3,518 4,531
------- -------- -------- -------- -------- -------- --------
Net income.................. $ 1,368 $ 4,978 $ 2,160 $ 5,171 $ 8,269 $ 6,167 $ 7,648
======= ======== ======== ======== ======== ======== ========
Net income per common share, basic
and diluted(2):................... $ 0.23 $ 0.83 $ 0.36 $ 0.86 $ 1.37 $ 1.03 $ 1.02
======= ======== ======== ======== ======== ======== ========
Weighted average number of shares
used in the calculation:.......... 6,015 6,015 6,015 6,015 6,015 6,015 7,517
OTHER DATA:
Depreciation and amortization....... $ 589 $ 953 $ 1,226 $ 1,431 $ 2,121 $ 1,541 $ 2,314
EBITDA(3)........................... 4,554 11,670 7,382 11,885 18,232 13,489 17,231
Cash interest expense............... 1,644 2,115 3,160 2,498 2,899 2,233 2,087
Ratio of earnings to fixed
charges(4)........................ 2.2x 4.5x 1.9x 3.7x 5.2x 5.0x 5.3x
BALANCE SHEET DATA:
Working capital..................... $ 4,714 $ 23,600 $ 31,655 $ 25,483 $ 30,234 $ 33,904 $115,452
Total assets........................ 41,522 52,023 55,237 63,415 69,658 71,412 298,170
Long-term debt and obligations under
capital leases.................... 1,677 20,973 27,175 24,162 24,055 29,740 179,656
Shareholders' equity................ 6,073 11,050 13,211 18,382 26,651 24,549 47,722
</TABLE>
32
<PAGE> 35
- ---------------
(1) Includes interest income of approximately $7,000, $11,000, $11,000, $40,000,
$36,000, $30,000 and $64,000 for fiscal 1993, 1994, 1995, 1996, 1997, the
thirty-nine weeks ended June 28, 1997 and the forty weeks ended July 4,
1998, respectively.
(2) Computed on the basis described in the Notes to the Consolidated Financial
Statements.
(3) EBITDA represents income before income taxes plus, without duplication, (i)
depreciation and amortization and (ii) interest expense. EBITDA is presented
because it provides useful information regarding the Company's ability to
service debt. EBITDA should not be considered as an alternative measure of
operating results or cash flows from operations (as determined in accordance
with generally accepted accounting principles).
(4) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of debt issuance costs), whether expensed or capitalized, and
the portion of rental expense that is representative of the interest factor.
33
<PAGE> 36
SELECTED HISTORICAL FINANCIAL INFORMATION OF FARAH
The selected consolidated financial data of Farah set forth below for, and
as of the end of, fiscal 1993, 1994, 1995, 1996 and 1997, and for, and as of the
end of, the twenty-six weeks ended May 4, 1997 and May 3, 1998, have been
derived from the consolidated financial statements of Farah, of which (i) the
consolidated financial statements of Farah for, and as of the end of, fiscal
1995, 1996 and 1997 and the twenty-six weeks ended May 4, 1997 and May 3, 1998
are included elsewhere in this Prospectus, (ii) the consolidated financial
statements for, and as of the end of, fiscal 1993, 1994 and 1995 were audited by
Arthur Andersen LLP, independent public accountants, (iii) the consolidated
financial statements for, and as of the end of, fiscal 1996 and 1997 were
audited by PricewaterhouseCoopers LLP, independent accountants, and (iv) the
consolidated financial statements for, and as of the end of, the twenty-six
weeks ended May 4, 1997 and May 3, 1998 are unaudited. In the opinion of
management, the financial statements for, and as of the end of, the twenty-six
weeks ended May 4, 1997 and May 3, 1998 include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for, and the financial position at the end of, each of
such periods. The results of operations for the twenty-six weeks ended May 3,
1998 are not necessarily indicative of the results to be expected for fiscal
1998 or any future period. The selected consolidated financial data below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Farah's Consolidated Financial Statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
ENDED
FISCAL YEAR -------------------
---------------------------------------------------- MAY 4, MAY 3,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $180,114 $242,775 $240,797 $247,598 $273,719 $132,709 $125,174
Cost of sales...................... 127,020 172,300 185,822 183,540 199,790 95,113 93,504
-------- -------- -------- -------- -------- -------- --------
Gross profit....................... 53,094 70,475 54,975 64,058 73,929 37,596 31,670
Selling, general and administrative
expenses......................... 47,372 58,294 68,002 62,189 66,436 32,882 30,336
Termination of foreign
operations....................... -- -- -- -- 5,106 2,462 2,585
Production conversion expenses..... 4,000 -- -- -- 2,061 849 --
Relocation expenses................ -- -- -- -- 904 -- 2,696
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)............ 1,722 12,181 (13,027) 1,869 (578) 1,403 (3,947)
Interest expense, net(1)........... 1,452 1,756 3,726 3,231 3,392 1,232 2,451
Other (income), net................ (166) (680) (1,477) (11,099) (342) (248) (328)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes............................ 436 11,105 (15,276) 9,737 (3,628) 419 (6,070)
Income taxes (benefit)............. 304 300 (2,335) 2,981 (3,898) (837) (1,665)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)......... $ 132 $ 10,805 $(12,941) $ 6,756 $ 270 $ 1,256 $ (4,405)
======== ======== ======== ======== ======== ======== ========
Earnings per Share:
Basic............................ $ .02 $ 1.18 $ (1.28) $ .66 $ .03 $ .31 $ (.43)
Diluted.......................... $ .02 $ 1.16 $ (1.28) $ .66 $ .03 $ .31 $ (.43)
OTHER DATA:
Depreciation and amortization...... $ 654 $ 934 $ 1,988 $ 864 $ 2,135 $ 193 $ 2,278
EBITDA(2).......................... 6,542 13,795 (9,562) 13,832 9,970 5,155 3,940
Ratio of earnings to fixed
charges(3)....................... 1.1x 3.2x -- 2.4x -- -- --
BALANCE SHEET DATA:
Working capital.................... $ 33,979 $ 67,384 $ 49,008 $ 58,531 $ 56,063 $ 53,205 $ 45,233
Total assets....................... 118,891 158,051 173,827 153,863 175,592 163,476 171,781
Long-term debt..................... 1,179 5,170 12,568 4,706 13,771 5,549 13,900
Shareholders' equity............... 43,425 85,961 73,970 82,140 82,714 83,043 78,011
</TABLE>
- ---------------
(1) Includes interest income of approximately $723,000, $723,000, $901,000,
$834,000, $716,000, $396,000 and $67,000 for fiscal 1993, 1994, 1995, 1996,
1997 and the twenty-six weeks ended May 4, 1997 and May 3, 1998,
respectively.
(2) EBITDA represents income (loss) before income taxes plus, without
duplication, (i) depreciation and amortization, (ii) interest expense and
(iii) the Farah Charges for the periods presented. EBITDA is
34
<PAGE> 37
presented because it provides useful information regarding Farah's ability
to service debt. EBITDA should not be considered as an alternative measure
of operating results or cash flows from operations (as determined in
accordance with generally accepted accounting principles).
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges (excluding capitalized
interest). Fixed charges consist of interest expense (which includes
amortization of debt issuance costs), whether expensed or capitalized, and
the portion of rental expense that is representative of the interest factor.
For fiscal 1995, fiscal 1997 and the twenty-six weeks ended May 4, 1997 and
May 3, 1998, earnings were insufficient to cover fixed charges by $15.3
million, $3.6 million, $1.3 million and $4.4 million, respectively.
35
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of TSI and Farah, including the notes
thereto, appearing elsewhere in this Prospectus.
GENERAL
On May 1, 1998, TSI entered into the Merger Agreement with Farah and
Foxfire, a wholly-owned subsidiary of TSI, pursuant to which Foxfire commenced
the Tender Offer to purchase all of the outstanding Shares. The Tender Offer was
consummated on June 10, 1998 and immediately thereafter Foxfire was merged into
Farah in the Merger. Farah was the surviving corporation in the Merger and is a
wholly-owned subsidiary of the Company. The combination of TSI and Farah has
created one of the largest marketers and manufacturers of apparel in the United
States. The Company will operate the existing businesses of TSI and Farah on a
combined basis under a new capital structure. Accordingly, the financial
condition and results of operations of the Company after consummation of the
Farah Acquisition will not be directly comparable to the historical financial
condition or results of operations of TSI or Farah on a stand alone basis.
As part of its integration plan for the Farah Acquisition, the Company
believes that it can achieve at least $23.2 million of annual cost savings by
the end of fiscal 1999. These cost savings include (i) a reduction of selling,
general and administrative expenses resulting in approximately $2.5 million of
annual cost savings (including distribution expenses), (ii) the realization of
production efficiencies resulting in approximately $15.2 million of annual cost
savings and (iii) improvements in inventory management resulting in
approximately $5.5 million of annual cost savings. In addition, the Company is
evaluating Farah's assets in light of TSI's strategic and financial objectives
and, to the extent such assets do not fit within those objectives, intends to
dispose of or discontinue operating such assets. The Company is currently
considering its alternatives with respect to the Farah International business
and is currently engaged in negotiations with a potential buyer regarding the
sale of the Savane Direct business. Following the consummation of the Farah
Acquisition, the Company closed the remainder of Farah's sewing operations in
San Jose, Costa Rica, and is currently seeking a buyer for the facility which
housed such operations. There can be no assurance that any such disposition or
that additional closures will be consummated. See "Business -- Integration
Plan -- Potential Divestiture Opportunities."
The retail market experienced a down cycle during calendar 1995. Like many
other categories of retail products during this period, the apparel industry
suffered from weak customer demand and many apparel manufacturers incurred
higher than normal order cancellations. This weak apparel retail environment
caused TSI and Farah to offer products below normal selling prices and, in some
cases, below cost. This resulted in only small sales increases from fiscal 1995
to fiscal 1996 for both TSI and Farah. In addition, both TSI's and Farah's gross
margins weakened in fiscal 1995 but improved during fiscal 1996. A recovery in
the retail market began early in calendar 1996, and the Company believes that
market conditions returned to historical levels in calendar 1997.
In response to these difficult market conditions and their negative impact
on the Company's business, the Company initiated a capital investment program
and operating system and procedure enhancements designed to improve production
efficiencies, lower production costs and reduce inventory risks. As a result,
TSI has reduced its production cycle from 43 days in fiscal 1995 to 38 days in
fiscal 1997, and has reduced average inventory from 94 days of net sales in
fiscal 1995 to 70 days in fiscal 1997, while improving customer service and
customer order execution.
TSI and Farah produce similar products and use similar production
operations. Because Farah principally markets branded products, the Company
expects that it will realize higher average unit selling prices and higher gross
margins on sales of Farah products than sales of TSI's private brands. However,
Farah's branded programs generally require higher selling, marketing,
advertising and customer service costs as a percentage of net sales to generate
retailer and consumer awareness of, and demand for, its brands. Because of the
similarity of TSI's and Farah's product lines, the Company believes that cost of
goods sold for Farah products will generally be comparable to TSI's.
36
<PAGE> 39
RESULTS OF OPERATIONS FOR TSI
The following table sets forth, for the periods indicated, selected items
in the Company's consolidated statements of operations expressed as a percentage
of net sales:
<TABLE>
<CAPTION>
THIRTY-NINE FORTY
FISCAL YEAR WEEKS ENDED WEEKS ENDED
----------------------- JUNE 28, JULY 4,
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................... 79.8 77.7 76.2 76.4 75.2
----- ----- ----- ----- -----
Gross profit............................. 20.2 22.3 23.8 23.6 24.8
Selling, general and administrative
expenses............................... 13.7 12.9 12.8 12.9 14.5
----- ----- ----- ----- -----
Operating income......................... 6.5 9.4 11.0 10.7 10.3
Interest expense......................... 2.9 2.1 1.9 1.9 1.5
Factoring expense........................ 0.6 0.3 0.3 0.4 0.4
Bridge loan funding fee.................. -- -- -- -- 0.3
Other expense, net....................... 0.3 0.3 0.1 -- 0.1
----- ----- ----- ----- -----
Income before income taxes............... 2.7 6.7 8.7 8.4 8.0
Provision for income taxes............... 0.7 2.3 3.2 3.1 3.0
----- ----- ----- ----- -----
Net income............................... 2.0% 4.4% 5.5% 5.3% 5.0%
===== ===== ===== ===== =====
</TABLE>
Forty Weeks Ended July 4, 1998 Compared to Thirty-Nine Weeks Ended June 28,
1997
Net Sales. Net sales increased 31.7% to $152.3 million in the forty weeks
ended July 4, 1998 from $115.6 million in the thirty-nine weeks ended June 28,
1997. This increase was primarily due to an increase in units sold and higher
average selling prices per unit caused primarily by the inclusion of Farah's
results of operations in the results of operations of the Company from June 10,
1998, the date of the closing of the Farah Acquisition (the "Acquisition Closing
Date").
Gross Profit. Gross profit increased 38.3% to $37.7 million in the forty
weeks ended July 4, 1998, or 24.8% of net sales, from $27.3 million in the
thirty-nine weeks ended June 28, 1998, or 23.6% of net sales. The dollar
increase was primarily due to the increase in sales volume caused mainly by the
inclusion of Farah's results of operations of the Company from the Acquisition
Closing Date. The increase in the gross profit percentage was primarily due to a
change in mix of products sold to higher margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 49.0% to $22.1 million in the forty weeks
ended July 4, 1998, or 14.5% of net sales, from $14.9 million in the thirty-nine
weeks ended June 28, 1997, or 12.9% of net sales. The dollar increase was
primarily due to an increase in overall volume as a result of including Savane's
results of operations in the results of operations of the Company from the
Acquisition Closing Date. The increase in selling, general and administrative
expenses as a percentage of net sales was primarily due to higher advertising
and other brand support related expenses covered by the inclusion of Farah's
operations from the Acquisition Closing Date.
Interest Expense. Interest expense decreased slightly to $2.2 million in
the forty weeks ended July 4, 1998 from $2.3 million in the thirty-nine weeks
ended June 28, 1997. Interest expense decreased due to a reduction in
outstanding indebtedness as a result of the application of the proceeds from the
Company's October 1997 initial public offering to repay outstanding borrowings,
offset in part by the Company's incurrence of indebtedness in connection with
the Farah Acquisition.
Bridge Loan Funding Fee. As part of the Transactions, the Company entered
into the $100 million Bridge Facility. In connection therewith, the Company paid
a fee to the Bridge Lender of $500,000.
Income Taxes. The Company's effective income tax rate for the forty weeks
ended July 4, 1998 was 37.2% compared to 36.3% in the thirty-nine weeks ended
June 28, 1997. These rates are based on the Company's expected effective annual
tax rate. The increase was due to the Company's receipt of the
37
<PAGE> 40
remaining benefit, in fiscal 1997, of previously non-deductible losses from a
foreign subsidiary. Additionally, in fiscal 1998, more of the Company's income
is expected to be taxed at a higher statutory rate.
Net Income. As a result of the above factors, net income increased 24.0%
to $7.6 million in the forty weeks ended July 4, 1998, or 5.0% of net sales,
from $6.2 million in the thirty-nine weeks ended June 28, 1997, or 5.3% of net
sales.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales increased 29.3% to $151.7 million in fiscal 1997 from
$117.4 million in fiscal 1996. This increase was attributable to a 27.0%
increase in the number of units shipped and a 2.0% increase in the average
selling price per unit. These increases were primarily the result of increased
market penetration and brand acceptance.
Gross Profit. Gross profit increased 37.5% to $36.1 million in fiscal
1997, or 23.8% of net sales, from $26.2 million in fiscal 1996, or 22.3% of net
sales. The increase in gross margin resulted primarily from a significant
reduction in the level of markdowns. During the first several weeks of fiscal
1996, a significant number of orders were canceled due to the soft retail market
experienced by most major retailers. In an effort to control the cost of rising
inventories and in anticipation of a continued weak retail market, the Company
sold products below its normal selling prices and, in some cases, below its
cost. Also, the Company recorded additional markdown allowances for any
remaining excess inventory. During the latter part of fiscal 1996, the retail
market strengthened and the level of markdowns decreased significantly. This
trend continued during fiscal 1997 and the gross margin returned to historical
levels. Concurrent with the improvement in the retail market, the Company
initiated a capital investment program and operating system and procedure
enhancements designed to improve production efficiencies, lower production costs
and reduce inventory risks.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 28.0% to $19.4 million in fiscal 1997, or
12.8% of net sales, from $15.2 million in fiscal 1996, or 12.9% of net sales.
The increase in selling, general and administrative expenses was principally due
to the overall increase in the level of operations of the Company. The principal
components of the increase included $590,000 in distribution center labor,
$370,000 in depreciation and occupancy costs related to the Company's new
distribution center, $520,000 in commissions and selling costs, $450,000 in
information technology costs, $515,000 in merchandising costs, $330,000 in
certain legal expenses and $330,000 in bad debts related to a customer
bankruptcy.
Interest Expense. Interest expense increased 16.1% to $2.9 million in
fiscal 1997 from $2.5 million in fiscal 1996. The increase in interest expense
was the result of higher average outstanding borrowings during fiscal 1997 to
support greater working capital needs attributable to increased sales volume and
to finance capital expenditures, offset in part by a lower average interest rate
due to a renegotiation of the Company's Terminated Credit Facility in November
1996.
Factoring Expense. Factoring expense increased 35.4% to $505,000 in fiscal
1997 from $373,000 in fiscal 1996, or 0.3% of net sales for both fiscal years.
Income Taxes. The Company's effective income tax rate for fiscal 1997 was
37.2% compared to 34.7% in fiscal 1996. The increase in the effective rate for
fiscal 1997 was primarily due to the Company receiving in fiscal 1996 a benefit
for previously unrecognized losses of an international subsidiary, which was
closed in fiscal 1995.
Net Income. As a result of the above factors, net income increased 59.9%
to $8.3 million in fiscal 1997, or 5.5% of net sales, from $5.2 million fiscal
1996, or 4.4% of net sales.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Net sales increased 6.6% to $117.4 million in fiscal 1996 from
$110.1 million in fiscal 1995. This increase was primarily the result of a 5.8%
increase in the average selling price per unit. The provision for returns and
allowances was $3.0 million in fiscal 1996 and $3.1 million for fiscal 1995.
During the last three
38
<PAGE> 41
quarters of fiscal 1996, the retail market strengthened and the Company was able
to significantly reduce the level of markdowns and close out sales experienced
during fiscal 1995 and the first quarter of fiscal 1996.
Gross Profit. Gross profit increased 18.1% to $26.2 million in fiscal
1996, or 22.3% of net sales, from $22.2 million in fiscal 1995, or 20.2% of net
sales. The increase in gross margin was primarily attributable to an increase in
the average selling price per unit without a corresponding increase in the
average cost per unit. As a result of a progressive weakening of the retail
market in 1995, the Company sold selected products at selling prices below
normal sales prices. These markdowns were concentrated in the first quarter of
fiscal 1996 when a significant number of orders was canceled. In limited cases,
to control the costs of rising inventories, the Company sold products at prices
that were below its costs. Also, the Company recorded additional markdown
allowances for any remaining excess inventory. The provision recorded by the
Company for such losses increased from $468,000 in fiscal 1995 to $798,000 in
fiscal 1996. In addition, during fiscal 1995, the Company incurred increased
labor expense, including significant overtime, due to a shift toward smaller
individual orders from customers seeking to minimize retail inventories during
the industry down cycle. During the latter part of fiscal 1996, order sizes
returned to historical levels, which increased the average order size and led to
a favorable impact on gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $15.2 million in fiscal 1996, or 12.9% of
net sales, from $15.1 million in fiscal 1995, or 13.7% of net sales. Selling,
general and administrative expenses as a percentage of net sales decreased
slightly due to the Company's ability to leverage certain fixed overhead costs
against the increased level of sales.
Interest Expense. Interest expense decreased 20.9% to $2.5 million in
fiscal 1996 from $3.2 million in fiscal 1995. The decrease was due principally
to lower average outstanding borrowings resulting from the reduction of working
capital requirements, caused primarily by the reduction in average inventory
levels throughout the year.
Factoring Expense. Factoring expense decreased 47.3% to $373,000 in fiscal
1996, or 0.3% of net sales, from $708,000 in fiscal 1995, or 0.6% of net sales.
The decrease was primarily the result of a more favorable factoring arrangement
entered into in October 1995.
Income Taxes. The Company's effective income tax rate for fiscal 1996 was
34.7% compared to 27.6% in fiscal 1995. The lower effective rate during fiscal
1995 was primarily the result of the Company receiving the benefit of previously
unrecognized losses of an international subsidiary. The company decided to cease
the operations of this subsidiary in September 1995. Prior to this decision,
these losses were not deductible for United States income tax purposes.
Net Income. As a result of the above factors, net income increased 139.4%,
to $5.2 million in fiscal 1996, or 4.4% of net sales, from $2.2 million fiscal
1995, or 2.0% of net sales.
39
<PAGE> 42
RESULTS OF OPERATIONS FOR FARAH
The following table sets forth, for the periods indicated, selected items
in Farah's consolidated statements of operations expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
TWENTY-SIX
WEEKS ENDED
FISCAL YEAR ---------------
--------------------- MAY 4, MAY 3,
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales:
Farah U.S.A........................................ 73.5% 73.8% 75.7% 77.2% 76.8%
Farah International................................ 19.7 19.4 18.1 17.0 16.7
Savane Direct...................................... 6.8 6.8 6.2 5.8 6.5
----- ----- ----- ----- -----
Total net sales............................ 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
Cost of sales........................................ 77.2 74.1 73.0 71.7 74.7
----- ----- ----- ----- -----
Gross profit......................................... 22.8 25.9 27.0 28.3 25.3
Selling, general and administrative expenses......... 28.2 25.1 24.3 24.8 24.2
Termination of foreign operations.................... -- -- 1.8 1.9 2.0
Production conversion expenses....................... -- -- 0.8 0.6 --
Relocation expenses.................................. -- -- 0.3 -- 2.2
----- ----- ----- ----- -----
Operating income (loss).................... (5.4) 0.8 (0.2) 1.0 (3.1)
Other expense (income), net.......................... (0.9) 3.1 (1.1) (0.7) (1.7)
----- ----- ----- ----- -----
Income (loss) before income taxes.................... (6.3) 3.9 (1.3) 0.3 (4.8)
Income tax expense (benefit)......................... (0.9) 1.2 (1.4) (0.6) (1.3)
----- ----- ----- ----- -----
Net income (loss).......................... (5.4)% 2.7% 0.1% 0.9% (3.5)%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended May 3, 1998 Compared to Six Months Ended May 4, 1997
Net Sales. Net sales decreased 5.7% to $125.2 million in the first six
months of fiscal 1998 from $132.7 million in the first six months of fiscal
1997. Sales of Farah U.S.A. decreased 6.2%, to $96.1 million in the first six
months of fiscal 1998 from $102.5 million in the first six months of fiscal
1997. This decrease was primarily a result of a 5.8% decrease in unit sales due
to production delays, lower than normal orders following a poor Christmas retail
selling season and start-up problems incurred at Farah's new distribution center
which resulted in canceled orders, late deliveries and corresponding price
concessions. On a comparative basis from the first six months of fiscal 1997 to
the first six months of fiscal 1998, sales of Savane products decreased 8.0%,
sales of John Henry products increased 12.5%, sales of Farah label products
increased 32.4% and sales of private label products decreased 24.2%.
Net sales of Farah International decreased 7.3% to $20.8 million in the
first six months of fiscal 1998 from $22.5 million in the first six months of
fiscal 1997. This decrease was primarily due to an 8.4% decrease in average unit
sale prices in the first six months of fiscal 1998, which was partially offset
by a 1.2% increase in unit sales. The decrease in the average unit sales prices
was due to a decrease in concession sales in the United Kingdom (which typically
generate higher per unit sales prices) and a weakening of the United Kingdom,
Australian and New Zealand currencies in relation to the United States dollar.
Net sales of Savane Direct increased 6.2% to $8.2 million in the first six
months of fiscal 1998 from $7.8 million in the first six months of fiscal 1997.
This increase was primarily due to a 4.8% increase in same store sales in the
first six months of fiscal 1998, as well as a 7.4% increase in average selling
price per unit. The increase in average price per unit was generated by the
closing of unprofitable stores, the opening of new stores in more attractive
retail locations and a shift in the Savane Direct product mix to a higher
proportion of first quality merchandise.
Gross Profit. Gross profit decreased 15.8% to $31.7 million in the first
six months of fiscal 1998, or 25.3% of net sales, from $37.6 million in the
first six months of fiscal 1997, or 28.3% of net sales. Gross profit
40
<PAGE> 43
of Farah U.S.A. decreased 21.7%, to $20.5 million in the first six months of
fiscal 1998, or 21.4% of net sales, from $26.3 million in the first six months
of fiscal 1997, or 25.6% on net sales. This decrease in gross profit at Farah
U.S.A. was primarily due to an increase in the percentage of Farah label
products included in total unit sales, which are typically sold for lower prices
than other Farah products. Gross profit also decreased during the first six
months of fiscal 1998 as a result of higher markdown expenses and price
concessions given due to late deliveries resulting from start-up problems at
Farah's new distribution center.
Gross profit of Farah International decreased 5.3% to $7.3 million in the
first six months of fiscal 1998, or 34.9% of net sales, from $7.7 million in the
first six months of fiscal 1997, or 34.1% of net sales. This decrease was
primarily due to lower net sales. The increase in gross profit as a percentage
of net sales in the first six months of fiscal 1998 was due to the shift in
production of Farah International products to outside contractors and the
corresponding reduction in production expenses, which reduced the average cost
of sales per unit.
Gross profit of Savane Direct increased 5.2% to $3.9 million in the first
six months of fiscal 1998, or 46.9% of net sales, from $3.7 million in the first
six months of fiscal 1997, or 47.3% of net sales. The increase in gross profit
was due primarily to an increase in sales of first quality Savane merchandise,
which typically has a higher sales price per unit than other Savane Direct
merchandise.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 7.7% to $30.3 million in the first six months
of fiscal 1998, or 24.2% of net sales, from $32.9 million in the first six
months of fiscal 1997, or 24.8% of net sales. This decrease was primarily
attributable to a decrease in advertising and other selling costs, partially
offset by higher labor costs and freight chargebacks incurred due to start-up
problems incurred at Farah's new distribution center.
Termination of Foreign Operations. During the first quarter of fiscal
1998, Farah decided to close its finishing facility in Cartago, Costa Rica, and
reduce sewing operations in its San Jose, Costa Rica facility. Farah recorded a
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 to reflect the accrual
of severance payments and other closing expenses.
On January 5, 1997, certain inventory and manufacturing equipment at
Farah's Galway, Ireland facility were either destroyed or damaged by fire. As a
result of the fire and its related impact, Farah recorded a charge of $2.5
million (net of insurance proceeds) in the first quarter of fiscal 1997. The
Company recognized an additional loss of $2.6 million in the fourth quarter of
fiscal 1997 in connection with the sale of its Irish facilities. As a term of
the sale, the purchaser (the "Irish Purchaser") agreed to assume certain
liabilities of Farah and, in exchange therefor, Farah and the Irish Purchaser
entered into a long-term supply contract which required the Irish Purchaser to
produce and sell, and Farah to purchase at prices favorable to the Irish
Purchaser, minimum quantities of merchandise. In the second quarter of fiscal
1998, the contract was amended to lower the required minimum production levels
as a result of the Irish Purchaser's failure to meet the production levels
originally required under the contract. As a result of this amendment, the loss
of $2.6 million referred to above was reduced by $1.4 million in the second
quarter of fiscal 1998.
Relocation Expenses. Farah recently completed the move of its finished
goods inventory to its new distribution center which resulted in duplicate
operating costs, moving expenses, costs associated with the testing and
modification of systems and procedures and professional fees of $2.7 million in
the first six months of fiscal 1998.
Income Taxes. Farah recorded a tax benefit resulting from a loss in the
first six months of fiscal 1998. A tax benefit was also recorded in the first
six months of 1997, resulting mainly from the recognition of $1.1 million of
deferred tax assets that were generated but not recognized in prior years.
Farah's effective tax rates for the first six months of fiscal 1998 and the
first six months of fiscal 1997 were 27.4% and (200.0%), respectively. Farah's
effective tax rate varies due to the different tax rates in countries in which
Farah conducts its business.
Net Income. As a result of the above factors, net income decreased to a
net loss of $4.4 million in the first six months of 1998 from net income of $1.3
million in the first six months of 1997.
41
<PAGE> 44
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales increased 10.5% to $273.7 million in fiscal 1997 from
$247.6 million in fiscal 1996. Net sales of Farah U.S.A. increased 13.4%, to
$207.2 million in fiscal 1997 from $182.8 million in fiscal 1996. This increase
was primarily due to a 12.1% increase in unit sales and a 1.1% increase in
average sales price per unit. On a comparative basis from fiscal 1996 to fiscal
1997, sales of Savane@ products increased 18.0%, sales of John Henry@ products
increased 54.1%, sales of Farah@ label products increased 25.0% and sales of
private label products decreased 15.4%.
Net sales of Farah International increased 3.4% to $49.7 million in fiscal
1997 from $48.0 million in fiscal 1996. Unit sales and the average selling price
per unit increased 2.4% and 1.0%, respectively, at Farah International in fiscal
1997.
Net sales of Savane Direct remained flat at $16.8 million in both fiscal
1997 and fiscal 1996. Same store sales increased 4.1% in fiscal 1997 compared to
fiscal 1996. The average sales price per unit at Savane Direct increased 20.1%
in fiscal 1997, while unit sales decreased 16.7%. These changes were primarily
due to the relocation of unprofitable stores in better locations and the
inclusion of a higher proportion of first quality products in such stores.
Gross Profit. Gross profit increased 15.4% to $73.9 million in fiscal
1997, or 27.0% of net sales, from $64.0 million in fiscal 1996, or 25.9% of net
sales. Gross profit of Farah U.S.A. increased 22.8%, to $49.3 million in fiscal
1997, or 23.8% of net sales, from $40.1 million in fiscal 1996, or 22.0% of net
sales. This increase in gross profit at Farah U.S.A. was a result of an increase
in the average selling price per unit, as well as the continued effort to reduce
production costs. Gross profit increases were partially offset by returns and
markdown allowances which resulted from quality problems in selected product
lines.
Gross profit of Farah International increased 2.4% to $16.7 million in
fiscal 1997, or 33.6% of net sales, from $16.3 million in fiscal 1996, or 33.9%
of net sales. The decrease in gross margin was due primarily to increased
production costs, which offset a slight increase in the average price per unit
sold. The weakness of the Australian dollar, relative to the United States
dollar, also contributed to the decrease in gross margin, as a portion of Farah
Australia's raw materials are purchased from the United States.
Gross profit of Savane Direct increased 4.3% to $8.0 million in fiscal
1997, or 47.5% of net sales, from $7.7 million in fiscal 1996, or 45.5% of net
sales. The increase was due to sales of more first quality merchandise as a
percentage of net sales, the closing of stores with low margin contribution and
improvements in inventory management.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 6.8% to $66.4 million in fiscal 1997, or 24.3%
of net sales, from $62.2 million in fiscal 1996, or 25.1% of net sales. The
decrease of selling, general and administrative expenses as a percentage of net
sales was primarily due to sales increases and reduced expenses at Farah U.S.A.,
as well as a reduction in overhead costs at Savane Direct. The improvement in
selling, general and administrative expenses as a percentage of net sales was
partially offset by increased concession, exhibition and personnel expenses at
Farah International.
Termination of Foreign Operations. The loss on the disposal of Farah's
Irish facilities resulted from a fire that occurred at a facility leased by
Farah in Galway, Ireland, in January 1997. The subsequent reevaluation by Farah
of its Irish operations resulted in the decision to terminate manufacturing
activity in Ireland and in the sale of its Irish facility in Kiltimagh. The
pre-tax charge of $5.1 million (net of insurance proceeds) recorded in
connection with the disposal of those facilities consisted primarily of the
write-down of equipment, severance payments, and legal and professional fees.
Production Conversion Expenses. Production conversion expenses aggregated
$2.0 million during fiscal 1997. Farah opened two new laundry facilities and
expanded a finishing facility in Mexico during fiscal 1997. Due to start-up
costs, the facilities incurred higher production costs and produced more
irregular units than expected under normal production conditions.
As a result of the sale of its Piedras Negras facility in fiscal 1996,
Farah relied more heavily on outside contractors as sources of production. The
establishment of new relationships with contractors in fiscal 1997
42
<PAGE> 45
resulted in production of irregular units at rates which were higher than
expected. The markdown of these excess irregular units resulted in selling
prices which were below production costs.
Relocation Expenses. In the third quarter of fiscal 1997, Farah completed
its move to new corporate headquarters. In addition, in fiscal 1997 Farah
incurred costs in connection with the relocation of its distribution center.
These relocations resulted in duplicate operating costs, moving expenses and
professional fees of approximately $900,000.
Other Income (Expense). Net interest expense increased 5.0% to
approximately $3.4 million in fiscal 1997 from interest expense of $3.2 million
in fiscal 1996 as a result of a number of significant capital expenditures by
Farah in fiscal 1997, including an expansion of a manufacturing facility, a move
to new corporate headquarters and a transition to a new distribution facility.
Also during fiscal 1997, Farah continued to modify its computer systems with the
goal of enabling those systems to use dates beyond December 31, 1999.
Farah established its Terminated Credit Facility during the third quarter
of fiscal 1997. The new agreement reduced the interest rate on Farah's line of
credit. Increases in the prime interest rate earlier in the year, combined with
higher interest rates on the financing of some capital expenditures, offset the
interest rate reduction obtained in Farah's Terminated Credit Facility. Interest
income in fiscal 1997 was derived primarily from a note receivable that was
scheduled to mature in 2007. In the fourth quarter of fiscal 1997, the note was
prepaid by the borrower.
Income Tax Expense (Benefit). Farah's effective tax rate was 107.4% in
fiscal 1997 compared with 30.6% in fiscal 1996. Farah recorded a tax benefit of
$3.9 million in fiscal 1997. The recognition of $3.2 million of deferred tax
assets that were generated but not recognized in prior years comprised the
largest portion of Farah's fiscal 1997 tax benefit.
Net Income. As a result of the above factors, net income decreased 96.2%,
to $270,000 in fiscal 1997, or 0.1% of net sales, from $6.8 million in fiscal
1996, or 2.7% of net sales.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Net sales increased 2.8% to $247.6 million in fiscal 1996 from
$240.8 million in fiscal 1995. Net sales of Farah U.S.A. increased 3.2%, to
$182.8 million in fiscal 1996 from $177.0 million in fiscal 1995. On a
comparative basis from fiscal 1995 to fiscal 1996, sales of Savane@ products
increased approximately 9.8%, sales of John Henry@ products decreased by 28.3%
sales of Farah@ label products decreased 31.8% and sales of private label
product increased 22.7%.
Net sales of Farah International increased 1.1% to $48.0 million in fiscal
1996 from $47.5 million in fiscal 1995. Unit sales and the average unit sales
price both increased by 0.5% in fiscal 1996.
Net sales of Savane Direct increased 3.6% to $16.8 million in fiscal 1996
from $16.2 million in fiscal 1995. Same store sales decreased approximately 3.0%
in fiscal 1996 compared to fiscal 1995. The average unit sales price increased
by 13.4% during fiscal 1996 as the mix of sales of first quality product
improved. Unit sales decreased by 8.7% as competition in the retail outlet
market increased.
Gross Profit. Gross profit increased 16.5% to $64.1 million in fiscal
1996, or 25.9% of net sales, from $55.0 million in fiscal 1995, or 22.8% of net
sales. Gross profit of Farah U.S.A. increased 29.0%, to $40.1 million in fiscal
1996, or 22.0% of net sales, from $31.1 million in fiscal 1995, or 17.6% of net
sales. Gross margin improved at Farah U.S.A. as a result of a cost containment
program initiated in the latter part of fiscal 1995, including increasing
factory efficiencies, reducing overhead and improving first quality production
percentages, factory deliveries and work-in-process turns. There were also
significant reductions in the production work force, particularly in the United
States. Farah also improved product quality and reduced the number of irregulars
and second quality products in fiscal 1996. Finally, Farah recorded fewer
reserves for inventory markdowns in fiscal 1996 resulting from significantly
reduced inventory levels.
Gross profit of Farah International increased 3.8% to $16.3 million in
fiscal 1996, or 33.9% of net sales, from $15.7 million in fiscal 1995, or 33.0%
of net sales. Gross profit of Savane Direct decreased 6.5%, to $7.7
43
<PAGE> 46
million in fiscal 1996, or 45.5% of net sales, from $8.2 million in fiscal 1995,
or 50.5% of net sales. Gross margin at Savane Direct was down compared to the
prior year, as a result of higher promotional sales, combined with a lower mix
of irregulars and closeout goods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 8.5% to $62.2 million in fiscal 1996, or 25.1%
of net sales, from $68.0 million in fiscal 1995, or 28.2% of net sales. This
decrease was primarily attributable to lower advertising expenses at Farah
U.S.A. as well as reductions in personnel, professional fees and insurance at
Farah U.S.A. and Farah International. These decreases were partially offset by
costs associated with the planned realignment of store operations, including
labor costs and depreciation expense associated with opening new stores in the
United States and increased advertising.
Other Income (Expense). Net interest expense decreased 13.3% to $3.2
million in fiscal 1996, or 1.3% of net sales, from net interest expense of $3.7
million in fiscal 1995, or 1.5% of net sales. Other income in fiscal 1996
included a pre-tax gain of approximately $9.3 million realized on the sale of
Farah's Piedras Negras, Mexico facility.
Income Tax Expense (Benefit). Farah's effective tax rate was 30.6% in
fiscal 1996 compared with 15.3% in fiscal 1995.
Net Income. As a result of the above factors, net income increased to $6.8
million in fiscal 1996, or 2.7% of net sales, from a loss of $12.9 million in
fiscal 1995, or 5.4% of net sales.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources of TSI
The Company's principal liquidity needs have historically been funding
growth in operations and capital expenditures. The Company has financed these
needs through cash flow from operations, borrowings under its credit facilities
and the net proceeds from its October 1997 initial public offering. Following
consummation of the Transactions, the Company expects that its principal needs
for liquidity will be to fund working capital and meet debt service
requirements, and expects that these needs will be funded primarily through cash
flow from operations and borrowings under the New Credit Facility.
As of July 4, 1998, the Company's consolidated debt was approximately
$183.4 million. In addition, on a pro forma basis after giving effect to the
Transactions, the Company's earnings would have been insufficient to cover fixed
charges by approximately $6.4 million for the forty weeks ended July 4, 1998.
The Company's significant debt service obligations following consummation of the
Transactions could, under certain circumstances, have material adverse
consequences to security holders of the Company. See "Risk Factors --
Substantial Leverage."
During fiscal 1997, the Company generated $7.0 million of cash from
operations. This was primarily the result of net income of $8.3 million and a
decrease in inventories of $1.9 million, offset by an increase in accounts
receivable of $5.1 million and a decrease in accounts payable of $1.1 million.
The increase in accounts receivable was primarily the result of a 17.0% increase
in net sales in the fourth quarter of fiscal 1997 as compared to the fourth
quarter of fiscal 1996. The decreases in accounts payable and inventories were
primarily due to a seasonal reduction in production activity. During the forty
weeks ended July 4, 1998, the Company used $15.9 million of cash in operations,
primarily due to seasonal increases in inventory of $12.8 million and the
payment of $5.9 million to Farah's former lender as a deposit for letters of
credit outstanding under Farah's Terminated Credit Facility. These were offset
in part by net income of $7.6 million (which includes non-cash expenses of $2.3
million).
The Company's Terminated Credit Facility consisted of a $40.0 million
revolving credit line ($5.5 million of which could have been used for letters of
credit), a $3.0 million term note and a $5.0 million equipment loan facility. As
of June 10, 1998, debt outstanding thereunder accrued interest at a weighted
average rate of approximately 9.75% per annum. Although TSI's Terminated Credit
Facility was scheduled to expire by its terms in January 1999, both it and
Farah's $75.0 million Terminated Credit Facility were replaced by the New
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Credit Facility in connection with the consummation of the Transactions. The New
Credit Facility provides availability for revolving borrowings and letters of
credit in an aggregate principal amount of $110.0 million, subject to borrowing
base limitations. The borrowing base is defined to include the value of the
Company's inventory and accounts receivable, subject to customary limitations.
Borrowings under the New Credit Facility may be made by, or for the account of,
the Company and certain of its subsidiaries. As of July 4, 1998, approximately
$63.6 million of debt was outstanding under the New Credit Facility and, after
giving effect to borrowing base limitations, TSI had approximately $27.9 million
of additional borrowing availability thereunder. Revolving loans under the New
Credit Facility accrue interest at specified floating rates and, as of July, 4,
1998, debt outstanding thereunder accrued interest at a rate of approximately
9.2% per annum. The New Credit Facility has a five year term. See "Description
of Other Indebtedness -- New Credit Facility."
In addition, on June 10, 1998, the Company closed the Bridge Facility.
Borrowings of $100.0 million under the Bridge Facility and approximately $70.4
million under the New Credit Facility were incurred to finance the purchase
price for the Farah Acquisition, the repayment of the Terminated Credit
Facilities and the redemption of the Convertible Debentures. The Bridge Facility
was repaid on June 24, 1998, as discussed below. A funding fee of $500,000 was
paid to the Bridge Lender, which was amortized to expense over the 14 day life
of the loan.
On June 24, 1998, the Company closed the issuance and sale of $100 million
aggregate principal amount of the Notes. The net proceeds of the Offering of
approximately $95.6 million, together with borrowings of approximately $4.4
million under the New Credit Facility, were used to repay all debt of the
Company outstanding under the Bridge Facility. Under the terms of the Indenture,
the Company is obligated to pay interest on the Notes at a rate of 11% per
annum, payable semiannually in arrears on June 15 and December 15 of each year,
commencing December 15, 1998. The Notes mature on June 15, 2008. See
"Description of the Notes."
Capital expenditures were $5.2 million and $3.8 million for fiscal 1997 and
the forty weeks ended July 4, 1998, respectively. During fiscal 1996 the Company
spent $6.2 million to acquire the building and land in Tampa, Florida which
houses its distribution and administration functions as well as additional
adjacent property for the purpose of constructing an approximately 110,000
square foot cutting facility. During fiscal 1997, the Company's cutting facility
was completed at a cost of $5.4 million, a portion of which was incurred in
fiscal 1996. The building and land acquisitions and construction of the new
cutting facility were financed primarily through a loan (the "Real Estate Loan")
obtained from SouthTrust Bank of Alabama, National Association ("SouthTrust")
pursuant to the Construction and Term Loan Agreement dated as of May 7, 1996, as
amended (the "Real Estate Loan Agreement"). During fiscal 1997, the Company
converted the Real Estate Loan into a ten-year term loan. As of July 4, 1998,
the outstanding principal amount of the Real Estate Loan was $9.6 million and
the Real Estate Loan accrued interest at a rate of 7.38% per annum. See
"Description of Other Indebtedness -- Real Estate Loan."
Capital expenditures are expected to approximate $7.0 million for the
balance of fiscal 1998. The expenditures for the forty weeks ended July 4, 1998
and expected expenditures for the remainder of fiscal 1998 primarily relate to
the upgrade or replacement of the Company's existing computer systems. During
fiscal 1999, the Company plans to spend up to $12.0 million for capital
expenditures to upgrade or replace various equipment and systems of the combined
companies. These expenditures will be funded through a combination of cash flow
from operations, borrowings under the New Credit Facility or purchase money
financing. Capital expenditure plans of the Company are frequently reviewed and
are modified from time to time depending on cash availability and other economic
factors.
Pursuant to the Factoring Agreement dated October 1, 1995 (the "TSI
Factoring Agreement") between the Company and Heller Financial, Inc. (the "TSI
Factor"), the Company factors substantially all of its accounts receivable,
other than accounts receivable of Farah. The TSI Factoring Agreement provides
that the TSI Factor will pay the Company an amount equal to the gross amount of
the Company's accounts receivable from customers reduced by certain offsets,
including, among other things, discounts, returns and a commission payable by
the Company to the TSI Factor. The commission equals 0.30% of the gross amount
of the accounts receivable factored. For fiscal 1997 and the forty weeks ended
July 4, 1998, the Company paid commissions to
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the TSI Factor aggregating $504,000 and $620,000, respectively. The TSI
Factoring Agreement expires on September 30, 1998. The Company intends to
replace the TSI Factoring Agreement with a similar arrangement following such
expiration.
Following the closing of the Farah Acquisition, Farah entered into the
Factoring Agreement dated as of June 9, 1998 (the "Savane Factoring Agreement")
with NationsBanc Commercial Corporation (the "Savane Factor"), pursuant to which
Farah factors substantially all of its accounts receivable. The Savane Factoring
Agreement provides that the Savane Factor will pay Farah an amount equal to the
gross amount of Farah's accounts receivable from customers reduced by certain
offsets, including, among other things, discounts, returns and a commission
payable by Farah to the Savane Factor. The commission is equal to (i) for
accounts receivable having payment terms equal to or less than 90 days, 0.28% of
the gross amount of the receivables factored (the "Standard Commission") or (ii)
for accounts receivable having payment terms of more than 90 days, the sum of
(A) the Standard Commission and (B) an additional 0.15% of the gross amount of
the accounts receivable factored for each 30 day period (or part thereof) by
which the payment terms of such accounts receivable exceed 90 days (such
additional amount being referred to as the "Long Term Commission"). However, no
Standard Commission is payable by Farah until the day after the aggregate amount
of the factored accounts receivable exceeds $125.0 million. The Factoring
Agreement expires on June 9, 2001, but it may be terminated at any time by the
Savane Factor upon 60 days prior written notice to Farah. See "Description of
Other Indebtedness -- Factoring Arrangements."
As of September 27, 1997 and July 4, 1998, the Company had working capital
of $30.2 million and $115.5 million, respectively. The increase in working
capital was due primarily to the addition of Farah's working capital of $74.2
million and, to a lesser extent, seasonal and volume related increases in
accounts receivable and inventory, offset in part by a seasonal and volume
related increase in accounts payable. The Company expects its working capital
needs will continue to fluctuate based on seasonal increases in sales and
accounts receivable and seasonal decreases in trade accounts payable.
The Company received $17.3 million in net proceeds from its October 1997
initial public offering. Of the net proceeds, $3.9 million were used to redeem
the Company's preferred stock, $10.6 million were used to reduce amounts
outstanding under the Company's Terminated Credit Facility and the remainder was
used for other working capital purposes.
The ability of the Company to fund working capital needs and meet debt
service requirements will depend on the future operating performance and
financial results of the Company, which will be subject in part to factors
beyond the control of the Company. In addition, the Company's future performance
will depend upon its ability to successfully integrate Farah's operations into
those of the Company in a timely and efficient manner and to achieve estimated
cost savings and business synergies resulting therefrom. Although the Company
believes that cash flow from operations and borrowing availability under the New
Credit Facility will be adequate to fund its short-term and long-term liquidity
needs, there can be no assurance that the Company will generate sufficient cash
flow from operations or that borrowing availability under the New Credit
Facility will be sufficient to fund working capital needs and meet debt service
requirements. See "Risk Factors -- Substantial Leverage."
Liquidity and Capital Resources of Farah
Farah's principal liquidity needs have historically been funding growth in
operations and capital expenditures. Farah has financed its liquidity needs
through cash flow from operations, borrowings under its credit facilities and
borrowings under long-term debt arrangements.
During fiscal 1997, Farah used $17.0 million of cash in its operations.
This primarily resulted from increases in inventories and receivables and a
decrease in trade payables. The growth in inventories resulted from expanding
the number of products Farah offers and increasing shelf stock to meet customer
demand. During the twenty-six weeks ended May 3, 1998, Farah generated $5.4
million of cash from operations, primarily resulting from a decrease in trade
receivables. The decrease in trade receivables was consistent with the normal
seasonality of Farah's business. The decrease in trade payables in fiscal 1997
resulted mainly from a decrease in payables for piece goods.
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Farah's working capital decreased by $2.5 million to $56.1 million in
fiscal 1997 from $58.6 million in fiscal 1996. Increases in short-term
borrowings and the current portion of long-term debt, partially offset by
increased inventory and decreased accounts payable, were the primary factors
reducing Farah's working capital. Farah's working capital decreased $8.0 million
to $45.2 million in the twenty-six weeks ended May 3, 1998 from $53.2 million in
the twenty-six weeks ended May 4, 1997. This resulted primarily from increases
in short-term debt and the current portion of long-term debt, offset in part by
increased inventory levels.
Net cash from financing activities was $27.1 million in fiscal 1997.
Short-term borrowings increased by $14.8 million during fiscal 1997, driven
primarily by Farah's use of $11.6 million in cash to purchase property and
equipment, a $12.8 million increase in inventories and a $3.4 million decrease
in accounts payable. The growth in inventories resulted from expanding the
number of products Farah offers and increasing shelf stock to meet customer
demand. Farah used $7.2 million of proceeds from the early retirement of a note
receivable and related certificate of deposit that was previously pledged to
reduce the outstanding revolving loans under its Existing Credit Agreement.
Approximately $5.0 million of the note receivable was previously classified as
non-current. In addition, Farah received a $10.0 million term loan under its
Terminated Credit Facility which was also used to reduce the outstanding
revolving loans under its Terminated Credit Facility. Net cash used in financing
activities was $976,000 for the twenty-six weeks ended May 3, 1998. This
resulted primarily from the repayment of long-term debt.
During fiscal 1997, Farah established its Terminated Credit Facility, which
was comprised of (i) a revolving credit facility which provided availability for
borrowings and letters of credit in an aggregate principal amount of $75.0
million, subject to borrowing base limitations, and (ii) a term loan payable in
monthly installments of $208,333, with the remaining balance due at the end of a
48 month period. As of May 3, 1998, (i) outstanding debt under the revolving
credit facility was $39.8 million and (ii) the outstanding balance of the term
loan was and $7.9 million. In addition, as of May 3, 1998, Farah had
approximately $10.1 million available for additional borrowings under the
revolving credit facility. No additional borrowings were available under the
term loan. As of May 3, 1998, debt outstanding under Farah's Terminated Credit
Facility accrued interest at a weighted average interest rate of approximately
8.6% per annum. Although Farah's Terminated Credit Facility was scheduled to
expire by its terms in July 2001, it was replaced by the New Credit Facility in
connection with the consummation of the Transactions.
Capital expenditures for fiscal 1997 were $18.3 million, primarily
consisting of $7.2 million for manufacturing equipment and plant improvements,
$3.9 million for new shelving, equipment and other leasehold improvements at its
new distribution facility and $3.5 million in leasehold improvements and
furnishings for its new corporate headquarters. Capital expenditures for the
twenty-six weeks ended May 3, 1998 were approximately $6.9 million, primarily
for additional leasehold improvements at the new distribution facility and
expenditures for replacement of the Company's enterprise-wide computer systems.
Most of Farah U.S.A.'s major fabric suppliers provide 60-day payment terms,
subject to certain limits. During fiscal 1997 and the twenty-six weeks ended May
3, 1998, Farah's maximum outstanding balance at any month-end under these
payment terms was $9.4 million. Inflation did not materially effect Farah in
fiscal 1997 or the twenty-six weeks ended May 3, 1998.
BACKLOG
As of May 3, 1998 and July 4, 1998, Farah and TSI had unfilled customer
orders of approximately $140.7 million and $86.5 million, respectively. All such
orders are scheduled for shipment within the next 12 months. As of May 4, 1997
and June 28, 1997, Farah and TSI had unfilled customer orders of approximately
$137.1 million and $81.2 million, respectively. Fulfillment of orders is
affected by a number of factors, including revisions in the scheduling of
manufacture and shipment of the product which, in some instances, depends on the
demands of the retail customer. Accordingly, a comparison of unfilled orders
from period to period is not necessarily meaningful, and the level of unfilled
orders at any given time may not be indicative of eventual actual shipments. See
"Risk Factors -- Reliance on Key Customers."
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IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
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 the Company intends to adopt it in fiscal 1999.
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 the Company. This statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is encouraged. The Company intends
to adopt this statement for fiscal 1998.
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. The Company intends to adopt this
statement in fiscal 1998.
INFLATION
To date, the Company believes inflation has not had a material impact on
its operations.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer programs and systems having
been designed and developed to use two digits, rather than four, to define the
applicable year. As a result, these computer programs and systems may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The new or upgraded management information systems which TSI began
implementing in the second quarter of fiscal 1998 will, among other things,
address problems resulting from the Year 2000 Issue. The Year 2000 Issue impacts
TSI's main operating system which includes subsystems related to customer
analysis, order processing, planning, procurement, production and sales. While
the new management information system, which is Year 2000 compliant, will not be
operational until approximately the third quarter of fiscal 1999, TSI plans to
have all existing systems Year 2000 compliant by the first quarter of fiscal
1999 and plans to spend up to $500,000 for this portion of its systems upgrade.
Based on assessments made during fiscal 1996 and 1997, Farah decided to
replace its entire inventory management, warehouse distribution and order
processing systems so that those systems will be Year 2000 compliant. Farah will
utilize both internal and external resources to reprogram or replace and test
the software for Year 2000 modifications. The Company plans to complete the
inventory management and order processing portions of Farah's Year 2000 project
no later than December 31, 1998 and plans to complete the remainder of the
project by June 30, 1999. Farah incurred $1.0 million in costs attributable to
Year 2000 compliance in fiscal 1997 and expects to incur an additional $2.6
million in fiscal 1998 (including the periods before and after the Farah
Acquisition). The majority of these costs have been and will continue to be
capitalized, as they relate to software purchases and development.
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The Company and Farah are currently communicating with all significant
suppliers and large customers to determine the extent to which the Company and
Farah are vulnerable to those third parties' failure to remediate their own Year
2000 Issues. The Company believes that the modifications and conversions that it
and Farah are making and plan to make will allow it to mitigate problems
resulting from the Year 2000 Issue. However, if such modifications and
conversions are not made or are not completed timely, the Year 2000 Issue could
have a material adverse effect on the Company's business, results of operations
and financial condition.
EURO CONVERSION ISSUE
On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to establish fixed conversion rates between their existing currencies
and the euro and to adopt the euro as their common legal currency (the "Euro
Conversion"). The Company has begun consideration of the effects of the Euro
Conversion on its operations, but it is currently unsure of the potential impact
that the Euro Conversion will have on its business, financial condition and
results of operations, particularly as the Euro Conversion relates to the
Company's European operations.
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BUSINESS
GENERAL
TSI
TSI produces and markets high quality casual pants, jeans, shorts and dress
pants principally for men, which are marketed under TSI brands, private brands
and licensed brand names. In addition, in fiscal 1998 TSI introduced lines of
women's sportswear and men's and women's shirts marketed under its brands and
private brands. TSI's major brands include private brands such as Flyers(TM),
TSI brands such as Bay to Bay(R), Banana Joe(TM), Two Pepper(R) and Texas
Jeans(TM) and licensed brands such as Bill Blass(R) and Van Heusen(R). TSI
markets its apparel to leading apparel retailers in most major retail
distribution channels, including department and specialty stores, catalog
retailers, discount merchants and wholesale clubs. Key customers include Costco
Companies, Inc. ("Costco"), Dayton Hudson Corporation ("Dayton Hudson"),
Dillard's Department Stores, Inc. ("Dillard's"), Eddie Bauer Int'l ("Eddie
Bauer"), Federated Department Stores, Inc. (including Bloomingdale's and Macy's)
("Federated Department Stores"), J.C. Penney Company, Inc. ("J.C. Penney"), May
Department Stores Company ("May Co."), Nordstrom, Inc. ("Nordstrom"),
Phillips-Van Heusen Corporation ("Phillips-Van Heusen"), Sam's Club (a division
of Wal-Mart Stores, Inc. ("Wal-Mart")) ("Sam's Club") and Sears, Roebuck and Co.
("Sears").
Farah
Farah is a leading manufacturer and marketer of high quality casual and
dress pants, shorts, sportcoats, suit separates (matching pants and sportcoats),
skirts and shirts principally marketed under the well-known Savane(R), Farah(R)
and John Henry(R) brands. Farah operates three divisions: Farah U.S.A., Farah
International and Savane Direct. Farah U.S.A., which accounted for approximately
75.7% of Farah's fiscal 1997 net sales, produces branded and private label
casual and dress apparel marketed to retailers throughout the United States.
Farah International, which accounted for approximately 18.1% of Farah's fiscal
1997 net sales, manufactures, sources and markets apparel primarily in the
United Kingdom, Australia and New Zealand. Savane Direct, which accounted for
approximately 6.2% of Farah's fiscal 1997 net sales, operates 32 United States
retail stores that sell first quality, close-out and second quality Farah
apparel and a limited amount of merchandise purchased from third parties. Key
customers include Belks Stores Services, Incorporated ("Belks"), Dillard's,
Federated Department Stores, Frederick Atkins Incorporated ("Frederick Atkins"),
May Co., Proffitt's, Inc. ("Proffitt's"), Sears and Wal-Mart.
INDUSTRY
The United States apparel industry (including soft-line home furnishings)
totaled approximately $181.0 billion in retail sales in 1997. Of this amount,
the men's apparel business represented 28.1%, while the women's apparel business
represented 49.4%. In 1996 and 1997, the apparel industry grew approximately
5.8% and 3.5%, respectively. Over the same period, the men's bottoms (i.e.,
pants and shorts) business, representing approximately 7.4% of the total apparel
market, grew approximately 10.5% and 3.4%, respectively, and the women's bottoms
(i.e., pants and shorts) business, representing 8.1% of the total apparel
market, grew approximately 5.0% and 8.0%, respectively. TSI believes that the
apparel industry is characterized by the following trends:
Trend Toward Retail Merchandise Management Programs. The Company
believes that major apparel retailers are increasingly outsourcing apparel
merchandise management programs to minimize inventory risks and increase
profitability. In addition, the Company believes that major apparel
retailers are consolidating their suppliers to increase profitability by
improving customer service and enhancing economies of scale. The Company
believes that its ability to offer leading brands, including those acquired
in the Farah Acquisition, combined with TSI's private brand programs,
position it well to capitalize on these trends.
Retail Consolidation of Branded Merchandise. The Company believes
that major apparel retailers are reducing the number of brands they offer
in favor of a few of the most well-recognized consumer
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brands. Department, chain and discount store retailers have allocated
increasing retail space to "in-store" apparel shops featuring individual
brands merchandised with custom fixturing supplied by the branded
producers. The Company believes that Farah's Savane(R), Farah(R) and
licensed John Henry(R) brands are favored by their respective customers and
are well-positioned to gain market share by investing in enhanced
point-of-sale merchandising.
Trend Toward High Quality Private Brand Apparel. The Company believes
that there is a trend toward using high quality, private brand apparel to
complement branded programs. Private brand apparel bears the retailer's own
name or a proprietary brand name exclusive to the retailer. Producers are
able to sell these garments at lower wholesale prices due to certain
economies, including lower advertising and promotional costs, lack of brand
name license fees and royalties, and reduced markdown and other risks and
expenses inherent in the brand-name apparel industry. As a result of the
lower wholesale prices, private brand apparel generally provides higher
margins for the retailer than brand name products. TSI believes that this
shift is due primarily to the education of consumers and retailers as to
the quality and value of private brand products. TSI believes consumers
increasingly regard private brand products as less expensive than brand
name products, but of equal or better quality. This increase in consumer
demand for private brand garments, coupled with retailers' demands for
higher margins, has resulted in retailers allocating more space to private
brand products.
Trend Toward Casual Dress. TSI believes that there is a growing trend
in the United States toward casual dress, as reflected in the
implementation of policies such as "casual Fridays." In addition, TSI
believes that the number of people who work at home is increasing
substantially and that outside of the workplace, people's social activities
are focusing on a more casual lifestyle.
Expansion of Caribbean, Mexican and Latin American Production. Until
recently, most apparel was produced domestically or in Pacific Rim
countries. Since the passage of Section 807 of the Harmonized Tariff
Schedule ("HTS") of the United States (now found under tariff subheading
9802.00.80, but herein referred to as "Section 807"), United States apparel
companies have increasingly used production facilities located in the
Caribbean Basin, including the Dominican Republic. TSI believes that the
Dominican Republic offers certain competitive advantages, including
favorable pricing and better quality production, a long-standing and
relatively stable production network, and shorter transportation periods as
compared to goods assembled in the Pacific Rim. Under Section 807, customs
duties on apparel products assembled in the Caribbean Basin may be offset
by the costs incurred in the production of components in the United States
(plus freight and insurance). More recently, the North American Free Trade
Agreement ("NAFTA"), effective in 1994, has permitted Mexican manufacturers
to ship finished apparel products into the United States duty-free or at
reduced duties. 1996 marked the first year in which apparel products
exported to the United States from Mexico exceeded products exported from
any other country, including China.
EXPECTED BENEFITS OF THE FARAH ACQUISITION
The Company believes that the combination of TSI and Farah will position it
to offer major retailers complete private label and branded merchandise
management programs in core apparel lines featuring both Farah's well-known
brands and TSI's brands and private brand programs. The Company intends to apply
TSI's proven production technology, comprehensive planning, control and customer
service systems and innovative operating policies and procedures to integrate
and substantially improve the profitability of Farah's operations. Anticipated
benefits of the Farah Acquisition include the following:
Complementary Branded and Private Label Product Line. TSI believes
the Savane(R), Farah(R) and John Henry(R) brands complement TSI's brands
and private brands, positioning the Company to offer differentiated branded
and private label program in core apparel lines. The Company believes that
it can leverage its strength in these categories to develop customized
merchandise management programs featuring branded and private brand men's
shirts, women's basic sportswear and products in other core apparel
categories.
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Expanded Customer Base and Increased Customer Penetration. The
Company believes that its customized merchandise management programs and
customer service capabilities, together with the strength of the Farah
brands, will enable the Company to increase sales to existing accounts and
establish new accounts. The Company believes that substantial cross selling
opportunities exist to market TSI brand products to Farah's customers and
Farah brand products to TSI's customers. The Company intends to market
merchandise management programs to increase sales to these existing
customers, as well as generate sales to new customers.
Greater Critical Mass. The Farah Acquisition will significantly
increase the Company's revenue base. On a pro forma basis after giving
effect to the Transactions, the Company's net sales for the forty weeks
ended July 4, 1998 would have been approximately $335.6 million. The
Company believes that its increased size, marketing resources, production
capacity and product offerings will enhance its relationships with key
suppliers and retailers and strengthen its competitive position in the
apparel industry.
Cost Savings. As part of its integration plan for the Farah
Acquisition, the Company believes that it can achieve at least $23.2
million of annual cost savings by the end of fiscal 1999. These cost
savings include (i) a reduction of selling, general and administrative
expenses (including distribution expenses) resulting in approximately $2.5
million of annual cost savings, (ii) the realization of production
efficiencies resulting in approximately $15.2 million of annual cost
savings and (iii) improvements in inventory management resulting in
approximately $5.5 million of annual cost savings.
Potential Divestiture Opportunities. Following the Farah Acquisition,
the Company intends to evaluate Farah's assets in light of TSI's strategic
and financial objectives and, to the extent such assets do not fit within
those objectives, dispose of or discontinue operating such assets. The
Company is currently considering its alternatives with respect to the Farah
International business and is currently engaged in negotiations with a
potential buyer regarding the sale of the Savane Direct business. Following
the closing of the Farah Acquisition, the Company closed the remainder of
Farah's sewing operations in San Jose, Costa Rica, and is currently seeking
a buyer for the facility which housed such operations. There can be no
assurance that any disposition or that additional closures will be
consummated.
BUSINESS AND GROWTH STRATEGY
The Company believes that the Farah Acquisition will position it to take
advantage of key industry trends including: (i) an increasing emphasis by major
apparel retailers on outsourced merchandise management programs for core apparel
lines; (ii) a reduction by major retailers in the number of brands offered in
favor of a few of the most well-recognized consumer brands; (iii) an increase in
retailer and consumer demand for high-quality private brand apparel; (iv) a
shift in consumer preference toward casual dress; and (v) a shift in trade
policy which favors the manufacture of products in Mexico, the Caribbean and
Latin America. The key elements of the Company's business and growth strategies
include:
Advanced Planning and Control Systems and Procedures. The Company
employs advanced technology and comprehensive operating systems and
procedures which integrate and monitor each operation to reduce
inefficiencies, increase productivity and enhance customer service.
High-Quality Products. The Company applies stringent quality
standards throughout its operations, from the design of its products
through the shipment of customer orders. In fiscal 1997, the application of
these standards resulted in a rate of production of second quality finished
goods of 1.1% of total production.
Low-Cost and Flexible Operations. The Company is organized to effect
a short production cycle from the receipt of raw materials through the
shipment of a customer order. TSI believes its "chassis" production concept
allows it to execute more cost-effective production runs than those of its
competitors. The Company outsources labor intensive garment assembly and
finishing operations to independent manufacturers on a fixed cost per unit
basis. This strategy reduces the personnel and capital resources invested
in the production process and enables TSI to vary production levels with
changes in customer demand.
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<PAGE> 55
Minimized Inventory Risk. The Company believes that it minimizes its
inventory risks by (i) producing focused lines of core apparel products,
(ii) minimizing the production cycle and maximizing production flexibility
and (iii) tracking customer demand trends by SKU on a per store basis. In
fiscal 1997, TSI's production cycle averaged 38 days and average inventory
turnover was approximately five times.
Customer Service. The Company provides customer satisfaction through
high-quality products and customized merchandise management programs. These
programs serve to increase retailer margins by outsourcing traditional
retailer merchandising functions and reducing inventory risk and excessive
markdowns.
Expand Private Brand Programs for Major Retailers. The Company
believes its high-quality and low-cost products, strong customer service
and merchandise management capabilities position it to increase private
brand market share as retailers consolidate and outsource private brand
programs.
New Product Introductions. The Company intends to develop and market
products that complement existing core product lines. Targeted product
categories include lines of men's casual shirts and women's sportswear. All
new product lines will employ the Company's "chassis" production concept.
Acquisitions. The Company will consider the acquisition of additional
established brands as well as the acquisition of producers of complementary
new product lines. The Company regularly evaluates acquisition
opportunities, but currently has no agreements, arrangements or
understandings with respect to any acquisitions, and there can be no
assurance that any acquisitions will be consummated. See "Risk
Factors -- Acquisitions."
INTEGRATION PLAN
TSI and Farah produce similar products and use similar production
operations. Because Farah principally markets branded products, the Company
expects that it will realize higher average unit selling prices and higher gross
margins on sales of Farah products than sales of products generated by TSI's
private label programs. Because of the similarity of TSI's and Farah's product
lines, the Company believes that operations and unit production costs will
generally be comparable for TSI's and Farah's products.
Following the Farah Acquisition, TSI intends to implement a comprehensive
plan to integrate Farah's products and operations into its existing systems. As
part of this integration strategy, TSI intends to take the following actions:
Rationalize Farah Product Offerings. TSI intends to reduce the number
of styles and SKU's of Farah branded products to concentrate on only those
products which TSI believes generate appropriate levels of sales and
profitability. TSI believes that this reduction of Farah's product line
will reduce inventory levels and costly markdown and close-out sales and
improve customer service. The Company also intends to integrate Farah's
private label programs with those of TSI. In addition, the Company intends
to develop new products to merchandise under the Farah brands, which will
conform to TSI's "chassis" production concept.
Develop Independent Brand Strategies. TSI intends to manage the TSI
brands and each of the Farah owned Savane(R) and Farah(R) brands and the
licensed John Henry(R) brand as separate businesses with distinct brand
management programs. The Savane(R) brand will continue to be marketed to
the department store channel with key targeted customers including
Federated Department Stores, May Co., Dillard's and Proffitt's. The John
Henry(R) brand will continue to be marketed exclusively through Sears, and
Farah(R) brand pants, shorts and jeans will continue to be marketed through
the mass merchant channel. TSI intends to invest in cooperative advertising
and merchandising programs with certain key customers to enhance demand for
the Farah brands. The Company plans to apply TSI's proven merchandise
management and customer service capabilities to improve Farah's
partnerships with its key accounts.
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<PAGE> 56
Focus on Market Analysis and Sales Forecasting. Farah has
historically forecasted sales based on customer-specific and market data on
a monthly basis. TSI generally forecasts sales once per week. TSI intends
to initiate semi-weekly sales forecasting for the Farah businesses and
integrate the resulting sales forecasts with TSI's purchasing and
production planning and control systems. TSI believes that the application
of TSI's sales forecasting systems and procedures to Farah's businesses
will reduce the amount of excess, slow moving and obsolete Farah inventory.
Joint Sales and Marketing. The Company intends to consolidate TSI's
and Farah's sales management and market Farah's branded products to TSI's
customers and TSI's private brand programs to Farah's customers. TSI's
sales mix is concentrated in the wholesale clubs and mass merchant channels
with modest penetration of chain stores and department stores. Farah's
sales mix is strongest with department stores through its Savane(R) line of
products. The Company believes that it can increase net sales through
focused joint sales and marketing programs targeting the entire TSI and
Farah customer base.
Rationalize Production. The Company intends to apply TSI's
sophisticated production planning and control systems and procedures,
integrated with its sales forecasting system, to manage Farah's production.
TSI intends to integrate and consolidate Farah's cutting, assembly and
finishing operations to realize economies of scale, balance production
operations and reduce unit production costs. The Company also intends to
convert Farah's assembly and finishing operations to modular work teams to
reduce work in process inventories and increase productivity. The Company
also intends to apply TSI's production planning and control systems to
reduce shipping costs and improve customer order execution.
Consolidate Purchasing. The Company intends to combine TSI's and
Farah's raw materials purchasing to realize economies of scale, improve raw
materials quality and reduce raw materials inventories. The Company expects
to consolidate raw materials suppliers, institute its just-in-time
inventory management programs with its leading suppliers and inspect raw
materials at supplier mills before receipt.
Distribution. Farah recently opened its new distribution facility and
has experienced difficulties in processing orders which has led to
substantial customer order cancellations. The Company intends to apply its
comprehensive operating systems and procedures to Farah's distribution
system. The Company believes these changes will be implemented by the end
of fiscal 1999.
Reduce General and Administrative Expenses. TSI intends to
consolidate Farah into TSI's general and administrative infrastructure,
which TSI believes will result in cost savings by eliminating redundancies
and nonrecurring activities associated with Farah's public company
reporting and administrative costs, insurance coverages and professional
fees. Farah's financial reporting and internal control procedures will be
integrated with TSI's systems. TSI's chief financial officer and controller
will assume supervisory responsibility for Farah's accounting, financial
reporting and internal controls.
Integrate MIS Functions. TSI intends to operate Farah's information
systems in parallel with TSI's, evaluate the best practices of both systems
and integrate systems functions as appropriate on an
application-by-application basis. The separate information systems staffs
will be supervised by TSI's chief information officer.
Potential Divestiture Opportunities. Following the Farah Acquisition,
the Company intends to evaluate Farah's assets in light of TSI's strategic
and financial objectives and, to the extent such assets do not fit within
those objectives, dispose of or discontinue operating such assets. The
Company is currently considering its alternatives with respect to Farah
International business and is currently engaged in negotiations with a
potential buyer regarding the sale of the Savane Direct business. During
the first quarter of fiscal 1998, Farah decided to close its finishing
facility in Cartago, Costa Rica and reduce its sewing operations in San
Jose, Costa Rica. Following the closing of the Farah Acquisition, the
Company closed the remainder of Farah's sewing operations in San Jose,
Costa Rica, and is currently seeking a buyer for the facility which housed
such operations. There can be no assurance that any such disposition or
that additional closures will be consummated.
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<PAGE> 57
Farah International sells apparel primarily in the United Kingdom,
Australia and New Zealand, under the Savane(R) and Farah(R) labels. Farah
International's product lines include principally dress and casual slacks,
and shirts and sweaters manufactured by third parties and made from
polyester fabrics or polyester blended fabrics. The United Kingdom is Farah
International's principal market and in fiscal 1997 accounted for
approximately 63.0% of its sales. Farah Australia and Farah New Zealand
accounted for approximately 36.0% of Farah International's sales in fiscal
1997. Farah sells most of its products in the Australian and New Zealand
markets under the Savane(R) and Farah(R) labels. In fiscal 1997, net sales
and EBITDA attributable to Farah International were $49.7 million and $1.9
million, respectively. Farah's retail store division, Savane Direct,
currently operates 34 stores in the United States, most of which are
located in outlet malls. In fiscal 1997, net sales and EBITDA attributable
to Savane Direct were $16.8 million and $86,000, respectively.
PRODUCTS
TSI
TSI produces and markets high quality casual pants, jeans, shorts and dress
pants principally for men, which are marketed under TSI brands, private brands
and licensed brand names. Most of TSI's apparel line focuses on basic, recurring
styles that TSI believes are less susceptible to fashion obsolescence and less
seasonal in nature than fashion styles. Key fabrics include 100% cotton and
synthetic blends using rayon, wool and polyester. Key fabric constructions
include twill, denim, corduroy and wrinkle-free fabrications. The table below
sets forth sales mix, expressed as a percentage of net sales, and retail price
points per product category:
<TABLE>
<CAPTION>
THIRTY-NINE FORTY
FISCAL YEAR WEEKS ENDED WEEKS ENDED
--------------------- JUNE 28, JULY 4, CURRENT RETAIL
1995 1996 1997 1997 1998 PRICE RANGE
----- ----- ----- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Casual pants......... 48.5% 56.8% 53.9% 42.8% 49.4% $17.99 - $39.99
Shorts (including
denim)............. 42.8 34.4 32.1 45.8 41.4 11.99 - 24.99
Dress casual pants... 0.9 1.7 8.6 7.7 4.8 24.99 - 39.99
Denim jeans.......... 7.8 7.1 5.4 3.7 4.4 16.99 - 24.99
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
TSI's design staff examines domestic and international trends in the
apparel industry as well as industries completely outside the sphere of clothing
manufacture, including the automobile, grocery and home furnishings industries,
to determine trends in consumer preferences for styling, color, labeling and
packaging, quality and general lifestyle. Virtually all of TSI's products are
designed by its in-house staff using CAD technology, which enables TSI to
produce computer simulated samples that display how a particular style will look
in a given color and fabric. The use of CAD technology reduces the time and
costs associated with producing actual sewn samples prior to customer approval
and allows TSI to create custom designed products meeting the specific needs of
a customer. Product design and development is integrated with production
planning and control operations to ensure that individual garment construction
specifications are consistent with TSI's "chassis" production strategy and its
product quality and production efficiency standards.
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<PAGE> 58
Farah
Farah U.S.A. manufactures and markets high quality, medium priced, branded
and private label apparel for men, boys and women. Products include casual and
dress pants, sportcoats, suit separates, skirts and shirts consisting of 100%
cotton and blended fabrics that emphasize comfort, fit and performance. The
table below sets forth sales mix, expressed as a percentage of net sales, and
retail price points per product category:
<TABLE>
<CAPTION>
TWENTY-SIX
WEEKS ENDED
FISCAL YEAR ---------------
--------------------- MAY 4, MAY 3, CURRENT RETAIL
1995 1996 1997 1997 1998 PRICE RANGE
----- ----- ----- ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Casual pants............... 72.1% 70.5% 68.3% 60.8% 60.7% $ 17.96 - $ 55.00
Dress pants................ 17.7 19.1 20.0 19.7 18.7 19.96 - 60.00
Suit coats/sportcoats...... 6.3 5.2 3.6 3.7 2.7 125.00 - 150.00
Shirts..................... -- 0.8 3.6 4.1 3.5 30.00 - 48.00
Shorts..................... 3.8 3.2 3.5 11.5 13.4 19.99 - 35.00
Denim jeans................ 0.1 1.2 0.6 0.2 0.4 17.99 - 24.99
Skirts..................... -- -- 0.4 -- 0.6 30.00 - 32.00
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Farah U.S.A.'s products are sold under three primary labels: Savane(R),
Farah(R) and John Henry(R). Farah owns the Savane(R) and Farah(R) labels and
licenses the John Henry(R) label.
Farah has positioned products marketed under the Savane(R) label as high
quality garments using better fabrics and finer workmanship. Savane(R) casuals
include pants and shorts for men and boys and pants, shorts, shirts and skirts
for women made primarily from 100% cotton fabrics. Savane(R) dress wear includes
men's pants, sportcoats and suit separates made primarily of polyester/wool and
polyester/wool/lycra blend fabrics. Products sold under its Farah(R) label
include men's casual and dress pants. Dress pants are made from blended fabrics,
while casual pants are mainly 100% cotton. The John Henry(R) label is primarily
used for dress pants, suit separates and sportcoats produced from blended
fabrics.
CUSTOMERS AND CUSTOMER SERVICE
TSI
TSI markets its products to approximately 75 department and specialty
stores, catalog retailers, discount merchants and wholesale clubs. TSI's
products are sold at over 6,000 outlets throughout the United States, Canada,
Mexico and Central America. Sales to TSI's five largest customers represented
69.8% and 65.5% of net sales during fiscal 1997 and the forty weeks ended July
4, 1998, respectively. Sales to Wal-Mart (substantially all of which represent
sales to Sam's Club), Costco and Phillips-Van Heusen accounted for approximately
28.7%, 17.0%, and 11.0% respectively, of net sales for fiscal 1997 and
approximately 28.7%, 14.8% and 8.3%, respectively, of net sales for the forty
weeks ended July 4, 1998. TSI also sells its products to other major retailers,
including Dayton Hudson, Federated Department Stores, J.C. Penney, May Co. and
Nordstrom, none of which accounted for more than 10.0% of the Company's net
sales in fiscal 1997 or the forty weeks ended July 4, 1998. TSI believes that
its innovative business strategies, customer service capabilities and focus on
aggressive inventory management have resulted in large part from servicing the
quick response merchandise management demands of Sam's Club and Costco. See
"Risk Factors -- Reliance on Key Customers."
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<PAGE> 59
Set forth below are comparative sales mix data, expressed as a percentage
of net sales, by marketing channel:
<TABLE>
<CAPTION>
THIRTY-NINE FORTY
FISCAL YEAR WEEKS ENDED WEEKS ENDED
--------------------- JUNE 28, JULY 4,
CHANNEL 1995 1996 1997 1997 1998
- ------- ----- ----- ----- ----------- -----------
<S> <C> <C> <C> <C> <C>
Wholesale club........................... 29.8% 42.3% 46.1% 48.5% 45.5%
Discount and mass merchant............... 31.3 21.4 21.1 22.9 20.4
National chain........................... 20.9 14.5 12.3 11.3 15.3
Department store......................... 8.8 14.4 10.9 10.9 10.7
Specialty store.......................... 4.9 4.7 5.4 4.4 6.0
Catalog.................................. 2.5 1.1 0.2 .1 .3
Other.................................... 1.8 1.6 4.0 1.9 1.8
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
TSI offers its customers comprehensive merchandise management programs,
which include: (i) product development and design; (ii) customized planning of
store-level merchandise assortments and inventories by SKU; (iii) consistently
high quality and high value products; (iv) custom labeling and packaging design;
(v) quick response electronic order execution and automatic store-level
merchandise replenishment programs; (vi) real time analysis of store-level sales
by SKU to predict consumer demand trends; (vii) retail profitability analysis by
style and overall assortment; and (viii) access to sophisticated sales
forecasting and inventory management systems. The Company intends to continue to
promote these capabilities aggressively to increase sales.
Farah
Farah U.S.A. markets its brands in three distinct markets. Savane(R)
products are sold to major department stores, John Henry(R) products are sold
exclusively to Sears and Farah(R) products are sold to mass-merchants,
principally Wal-Mart. During fiscal 1997, Farah's ten largest customers
accounted for approximately 66.0% of Farah's net sales. Sales to Federated
Department Stores, Dillard's and Wal-Mart accounted for approximately 13.1%,
12.8% and 10.0% respectively, of net sales for fiscal 1997 and approximately
11.1%, 13.8% and 16.2% of net sales for the twenty-six weeks ended May 3, 1998.
See "Risk Factors -- Reliance on Key Customers."
Set forth below are comparative sales mix data, expressed as a percentage
of net sales, by marketing channel:
<TABLE>
<CAPTION>
TWENTY-SIX
WEEKS ENDED
FISCAL YEAR ---------------
--------------------- MAY 4, MAY 3,
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Department store............................ 64.5% 62.7% 63.1% 65.4% 60.9%
Discount and mass merchant.................. 10.7 15.6 20.7 22.2 19.0
Wholesale club.............................. -- -- 1.1 -- 7.3
National chain.............................. 7.6 7.5 7.2 6.2 7.3
Specialty store............................. 13.4 11.4 6.0 4.3 4.9
Other....................................... 3.8 2.8 1.9 1.9 0.6
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
MARKETING AND SALES
TSI
TSI employs sales representatives located in eight states having an average
of over 16 years of experience in the apparel industry. TSI also maintains a
sales and marketing support staff in Tampa dedicated to
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<PAGE> 60
analyzing sales and marketing data. Using its market data and industry
experience, TSI offers each of its existing and prospective customers a
marketing plan tailored to the customer's market niche, which details by SKU
optimal product assortments and inventory levels, retail sales performance and
trends, pricing strategies and profit margins. TSI operates a sophisticated
electronic data interchange ("EDI") system to execute customer orders on a quick
response basis. In fiscal 1997, TSI processed substantially all of its customer
orders via its EDI system and typically shipped customer orders within 72 hours
of receiving the purchase order.
Farah
Farah U.S.A.'s sales force consists of regional corporate account
executives who are directly responsible for certain major retail accounts,
including Federated Department Stores, May Co., Dillard's, Sears and Wal-Mart,
and regional sales representatives who report to the corporate account
executives and assist them with the major retail accounts. The regional sales
representatives are also responsible for sales to smaller retailers. Farah
U.S.A. employs merchandise coordinators who visit retail stores that carry
Farah's branded products to train store personnel to sell Farah products, ensure
proper point-of-sale merchandising and presentation of the Farah products, and
enhance customer satisfaction with the Farah brands. Farah U.S.A.'s marketing
and advertising program consists of point-of-sale merchandising fixtures and
materials, national print advertising and participation in cooperative
advertising programs with retailers.
Farah U.S.A. fills retailers' orders from inventory at its distribution
center and ships orders directly to retailers' stores or their distribution
centers. During the first quarter of fiscal 1998, Farah opened its new
distribution center in Santa Teresa, New Mexico. Farah has implemented an EDI
system with selected large retailers and, in fiscal 1997, substantially all of
its customer orders were processed through its EDI system.
PRODUCTION
TSI
Overview. TSI inventories, spreads, marks and cuts virtually all of the
fabric used in the manufacture of its products at its owned facility in Tampa,
Florida. The components are then assembled by independent manufacturers outside
the United States, principally in the Dominican Republic, and shipped back to
TSI's Tampa facilities for labeling, packaging and distribution. TSI also
imports finished goods, principally denim jeans, shorts and shirts from Mexico,
the Pacific Rim and the Middle East. TSI believes that the use of independent
garment assembly and finishing contractors enables it to provide customers with
high quality goods at significantly lower prices than if it operated its own
assembly facilities. In fiscal 1997, products originating from TSI's Tampa
cutting facility and imported finished goods represented approximately 83.4% and
16.6%, respectively, of the products sourced by TSI. In fiscal 1997, the
production cycle from receipt of raw materials through the availability for
shipping of finished goods averaged 38 days compared to 43 days in fiscal 1996
and 52 days in fiscal 1995. In fiscal 1997, TSI's average finished goods
inventories, expressed as days of net sales, were 45 days, compared to 57 days
in fiscal 1996 and 50 days in fiscal 1995. TSI believes that it is organized to
maximize manufacturing productivity and minimize inventory risk. See "Risk
Factors -- International Sourcing and Manufacturing."
Production Planning and Control. TSI applies stringent production planning
and control systems and procedures throughout the production process to increase
productivity, reduce unit production costs and mitigate inventory risk. Detailed
production plans by SKU are developed based on individual long-range customer
merchandise plans and are reset twice per week based on TSI's retail sales
demand forecasting and market trend analysis. The production plan governs each
stage of garment fabrication to enhance high-quality and low-cost production. In
fiscal 1997, TSI's average work-in-process inventories, expressed as days of net
sales, were 18 days, compared to 25 days in fiscal 1996 and 35 days in fiscal
1995.
Raw Materials Sourcing. Based on its production plan, TSI purchases raw
materials, including fabrics, thread, trim and labeling and packaging materials,
on virtually a just-in-time basis from domestic sources based on quality,
pricing and availability. TSI's personnel inspect raw materials quality at
suppliers' facilities to avoid the handling costs and production plan disruption
of receiving off-quality materials. TSI has no long-term contracts with any of
its suppliers and maintains multiple sources of supply for key raw materials,
which
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<PAGE> 61
include generally available fabric constructions and trim components. In fiscal
1997 and 1996, TSI's average raw materials inventories, expressed as days of net
sales, were 10 days in each fiscal year, compared to 7 days in fiscal 1995. See
"Risk Factors -- Price and Availability of Raw Materials."
Cutting. Since 1989, TSI has invested in computerized equipment for
spreading, marking and cutting fabric to ensure color consistency and maximize
fabric utilization. In fiscal 1997, TSI's fabric utilization averaged
approximately 92.0% compared with an industry average of approximately 87.0%.
TSI has also invested in state-of-the-art fabric handling and cutting
technology, including 12 air table handling systems, 11 Niebuhr spreaders, and
three Gerber computerized cutting systems. TSI has organized its cutting
facility with utilities and infrastructure located outside the cutting room to
permit conversion of the facility to a distribution center as off-shore cutting
capabilities develop.
Assembly and Finishing. Cut fabric and components (buttons, zippers, etc.)
are shipped by common carrier to independent manufacturers, principally in the
Dominican Republic, for garment assembly and finishing. TSI currently uses
approximately 15 manufacturers in the Dominican Republic that specialize in
assembling and finishing products on one or more "chassis" and adhere to TSI's
specific operating procedures. TSI has converted all of its contractors to
modular work teams from the traditional assembly line production, which TSI
believes has improved productivity. In addition, TSI's production planning and
control system tracks production at each assembly and finishing stage to
identify production difficulties as they occur and thereby increase efficiency
and minimize costly rework and off-quality finished goods. TSI's team of 14
quality control personnel inspects production by the independent manufacturers
on a daily basis to ensure strict adherence to operating procedures and quality
standards. TSI has used these manufacturers for an average of more than three
years and enjoys, in effect, exclusive relations with 10 of them.
TSI believes that manufacturing in the Dominican Republic offers TSI
certain competitive advantages, including favorable pricing and better quality
production, a long-standing and relatively stable production network, and much
shorter transportation periods than goods assembled in the Pacific Rim. In
addition, United States customs duties programs, such as Section 807, facilitate
assembly in the Caribbean Basin by completely eliminating or substantially
reducing the customs duties on the import of assembled United States components.
TSI arranges for assembly and finishing on a per unit basis and does not have
any long-term contracts with any of its independent contractors. TSI is able to
shift its sources of supply depending upon production and delivery requirements
and cost, while at the same time reducing the need for significant capital
expenditures, work-in-process inventory and a large production work force. TSI
believes that its relations with its contractors are generally good.
Labeling, Packaging and Shipping. Finished goods are shipped from the
Dominican Republic and other sources via common carrier to TSI's Tampa
distribution center. Quality inspections occur both before shipment to Tampa and
when the finished garments are received by the distribution center. TSI
currently employs 20 full-time quality control personnel in its Tampa
facilities. Upon confirmation of a customer order, TSI picks the appropriate
items from its common inventory, applies customer-specific tags, labels and
packaging, and prepares shipments in accordance with the customer's
specifications. TSI's advanced finished goods processing and distribution
systems enable TSI to process a customer order in less than 12 hours, if
necessary, and TSI generally ships orders within three days of receipt. The
customer pays the applicable freight charges. See "Risk Factors -- Dependence on
Independent Manufacturers."
TSI has implemented comprehensive customer order processing and shipping
procedures to enhance customer service and reduce costly customer chargebacks
for order execution deficiencies. Cartons containing garments are bar coded,
weighed and electronically sorted based on weight standards for each individual
garment. Cartons not meeting specifications are removed from order processing
for review. Approved cartons are shrink-wrapped together for delivery to
customers. As a result of these quality control procedures, customer returns
were approximately 1.2% in fiscal 1997.
Farah
Farah U.S.A.'s operations are organized similarly to TSI's with domestic
cutting and finished goods distribution and foreign garment assembly and
finishing. Farah operates one cutting facility in the United
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<PAGE> 62
States, one sewing/finishing and one finishing facility in Mexico, and one
sewing/finishing facility in Costa Rica. Farah also has a long-term joint
venture arrangement in a Mexican finishing facility with a third party Mexican
corporation. In fiscal 1998, Farah announced its intention to close its
finishing facility in Cartago, Costa Rica, reduce its sewing operations in its
San Jose, Costa Rica facility, and move production to its Mexican facilities and
independent manufacturers. Finished products are delivered to Farah's United
States distribution center for storage, customer order execution, and
distribution to Farah customers in the United States. In fiscal 1997, the
production cycle from receipt of raw materials through the availability for
shipping of finished goods averaged 60 days compared with 51 days in fiscal 1996
and 64 days in fiscal 1995. For fiscal 1997, Farah U.S.A.'s average finished
goods inventories, expressed as days of net sales, were 61 days compared to 66
days for fiscal 1996 and 82 days for 1995. In fiscal 1997, Farah U.S.A.'s
average work-in-process inventories, expressed as days of net sales, were 40
days compared to 32 days in fiscal 1996 and 41 days in fiscal 1995. In fiscal
1997, Farah U.S.A.'s average raw materials inventories, expressed as days of net
sales, were 20 days compared to 19 days in fiscal 1996 and 23 days in fiscal
1995.
IMPORTS AND IMPORT REGULATIONS
Each of TSI and Farah presently imports garments under three separate
scenarios having distinct customs and trade consequences: (i) imports of
finished goods (mostly from the Pacific Rim and the Middle East); (ii) imports
from the Caribbean Basin and Central America; and (iii) imports from Mexico. See
"Risk Factors -- International Sourcing and Manufacturing" and "-- Imports and
Import Restrictions."
For direct imports (mostly from the Pacific Rim and the Middle East),
duties on imported garments are normally imposed at most favored nation ("MFN")
tariffs rates and are subject to a series of bilateral quotas that regulate the
number of garments that may be imported annually into the United States. The
tariffs for most of the countries from which TSI and Farah currently import or
intend to import have been set by international negotiations under the auspices
of the World Trade Organization ("WTO"). These tariffs generally range between
17.0% and 35.0%, depending upon the nature of the garment (e.g., shirt, pant),
its construction and its chief weight by fiber. The principal sourcing
alternatives that do not enjoy MFN rates in the Far East are Vietnam and Laos.
In addition to these tariff rates, merchandise from virtually all the
countries from which TSI and Farah import is also subject to bilateral quota
restraints pursuant to United States domestic law or the multi-lateral Agreement
on Textile and Clothing, which is under the auspices of the WTO. Bilateral
quotas are implemented on a calendar year basis. After the United States and a
particular country agree to a particular level of exports in a particular quota
category (for instance, cotton men's bottoms (category 347)), the country that
receives the quota has the right to determine the method by which such quota is
assigned to its manufacturers. Some jurisdictions, such as Hong Kong, have a
free market under which quotas are bought and sold. Most countries, however,
assign it to the factories that actually produce the garments. Shipments which
are exported to the United States must, in addition to the usual commercial
documentation, have appropriate and official textile visas, in either an
electronic or paper format, which confirm their quota status. This documentation
must be filed prior to the admission and clearance of the merchandise into the
United States. Accordingly, TSI and Farah usually demand that this paperwork be
submitted prior to payment.
TSI and Farah also import garments from countries in the Caribbean Basin
and Central America. Although much merchandise imported from these jurisdictions
is subject to the identical tariff and quota consequences described above for
Pacific Rim imports, there are special circumstances which provide a unique
tariff and quota preference for some merchandise sourced from the Caribbean
Basin or Central America. The principal tariff advantage is the so-called "807"
program. Under this program, merchandise produced under tariff subheading
9802.00.80, HTS, is admitted into the United States with a substantial tariff
reduction. Specifically, this tariff provision provides a reduction in duty
based on the value of exported United States components assembled into a product
in a foreign jurisdiction which is subsequently reimported into the United
States. In essence, the duty reduction is equal to the value of United States
components incorporated into these assembled goods plus southbound international
freight and insurance. For apparel products, such United States components
normally consist of cut-to-shape United States fabric parts, finishing and trim
(buttons, thread, etc.). In addition, if the fabric which is cut to create the
cut component parts is also knitted,
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<PAGE> 63
woven or formed in the United States, there is a special quota provision which
provides for more liberalized access to the United States marketplace. This
special quota provision is applicable only to certain Caribbean Basin, Central
American and northern Latin American countries which have signed special
agreements with the United States. Under the terms of these agreements, such
products, known in the trade as "807A" or "Super 807" or "Guaranteed Access
Level" products, are controlled through a much more liberal quota system.
Accordingly, a country such as the Dominican Republic would have a regular quota
for men's cotton bottoms produced through a normal cut, make and trim operation
or through the traditional 807 process; at the same time, it would have a much
larger and, therefore, more liberal quota for merchandise produced from United
States cloth under this Super 807 or 807A program. TSI and Farah produce
significant garments under one or both of these programs. In those circumstances
where garments qualify for both preferences, "807" and "807A," the merchandise
is accorded both quota and tariff advantage over Pacific Rim, Middle Eastern or
non-qualifying Western hemisphere goods.
TSI and Farah also import finished goods from Mexico under the North
American Free Trade Agreement, commonly known as NAFTA. Under NAFTA, merchandise
which qualifies is accorded reduced or duty-free access, depending upon the type
of merchandise selected. The key requirement for NAFTA qualification for such
garments is that the yarn, cloth, cut, sew and finish of the garments all take
place within North America. This is commonly known as the "yarn-forward rule."
Merchandise produced pursuant to these rules enters the United States at a
preferential or at a zero rate and is not subject to any quota.
In addition to the regular NAFTA program, certain imports made by the
Company are also subject to a tariff preference which was created and enacted as
part of the NAFTA-enabling legislation. This tariff provision, subheading
9802.00.90, HTS, provides for immediate duty-free and quota-free entry into the
United States from Mexico of garments made from components which are cut to
shape in the United States from United States knit, woven or formed cloth. This
duty-free, quota-free entry would be available for pant products sourced from
United States components cut from United States knitted/woven fabric. This
merchandise, therefore, has an even more favorable treatment than merchandise
being imported from the Caribbean Basin. The Company currently imports a limited
amount of such merchandise from Mexico, but Farah imports a more significant
amount from Mexico.
Finally, non-NAFTA qualifying goods may be imported from Mexico. Such
merchandise could be imported at reduced duty rates under the 807 (9802.00.80)
program (cut in the United States), or special tariff rate quotas called "TPLs."
Otherwise, it is subject to full duty. Such merchandise may also be subject to
Mexican quotas which are effective for some products until 2004.
PERSONNEL
At August 1, 1998, TSI had approximately 3,403 employees (2,640 of which
were employees of Farah and its subsidiaries), including 16 in the Dominican
Republic, 1,560 in Mexico, 42 in Costa Rica, 39 in Australia and New Zealand,
and 126 in the United Kingdom. Of the remainder, approximately 190 are employed
in the Company's retail stores, 283 hold executive and administrative positions,
approximately 25 are engaged in design and merchandising, approximately 612 are
engaged in production (e.g., marking, cutting and labeling), approximately 94
are engaged in sales, approximately 344 are engaged in distribution and
approximately 72 are engaged in quality control. Approximately 125 of Farah's
United States employees are members of the Union of Needletrades, Industrial and
Textile Employees (formerly, Amalgamated Clothing and Textile Union) and
approximately 780 of its employees are members of a union in Mexico. The
collective bargaining agreement with Farah's United States employees expires in
February 2000. The collective bargaining agreement for Farah's employees in
Mexico expires in December 1998. The Company considers its relations with its
employees to be generally good.
MANAGEMENT INFORMATION SYSTEMS
TSI
TSI believes that advanced information processing is important to maintain
its competitive position. The Company began implementation of a new, integrated
management information system in the second quarter of fiscal 1998 and continues
to integrate additional functions. The Company's new management information
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<PAGE> 64
system, which will cost approximately $5.0 million, will include client server
based hardware and the implementation of the latest version of SAP. The SAP
software, which will include the apparel specific "AFS" component, will allow
the Company to fully integrate functions such as finance, manufacturing,
distribution and inventory management. The new system will enable TSI to
streamline information entry, enhance analytical and inventory management
capabilities, strengthen customer service capabilities and provide a better flow
of information throughout its operations.
The Company's management information systems facilitate inventory and
operating controls by providing, among other things, comprehensive order
processing, production, accounting and management information for the marketing,
manufacturing, importing and distribution functions of TSI's business. TSI has
also purchased and implemented a software program that enables TSI to track,
among other things, orders, manufacturing schedules, inventory and unit sales of
its products. In addition, to support TSI's flexible inventory replenishment
program, TSI has an EDI system through which customer inventories can be tracked
and orders automatically placed by the retailer with TSI. See "Risk
Factors -- Management Information Systems" and "-- Year 2000" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of the Year 2000 Issue."
Farah
Farah has implemented programs to ensure technical competence in the areas
of information systems, financial reporting, electronic commerce, order
processing, inventory control, computer controlled/assisted warehousing,
distribution, manufacturing and Year 2000 compliance. Farah is currently
migrating the business systems from an IBM ES 9000 mainframe (operating an
enterprise wide software program known as CAMP -- Comprehensive Apparel
Manufacturing Package), to an IBM A/S 400 RISC mid-range system (operating an
enterprise wide system known as ACS -- Apparel Computing System). The A/S 400
offers operational stability, responsiveness, flexibility, reduced operational
costs, increased integration for internet, data warehousing, and electronic
commerce technologies and an advanced system security. ACS offers an integrated
suite of tools to support EDI, order processing, operations planning, sales,
marketing, inventory management, and accounts receivable. The new system will
also provide interfaces with other key business systems such as the JD Edwards
financial reporting and accounting system and the PkMS warehouse management
system. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Impact of the Year 2000 Issue."
COMPETITION
The apparel industry is highly competitive and TSI and Farah compete with
numerous apparel manufacturers, including brand name and private label
producers, and retailers which have established, or may establish, internal
product development and sourcing capabilities. TSI's and Farah's products also
compete with a substantial number of designer and non-designer product lines.
Many of TSI's and Farah's competitors and potential competitors have greater
financial, manufacturing and distribution resources than TSI. TSI believes that
it competes favorably on the basis of quality and value of its programs and
products, price, the production flexibility that it enjoys as a result of its
"chassis" production concept, cutting and labeling capabilities, sourcing
network and the long-term customer relationships it has developed. The Company
believes that producers of apparel generally compete on the basis of quality,
price and service. Nevertheless, any increased competition from manufacturers or
retailers, or any increased success by existing competition, could result in
reductions in unit sales or prices, or both, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Risk Factors -- Competition."
SEASONALITY
Historically, TSI's and Farah's businesses have been seasonal, with
slightly higher sales and income in their respective second and fourth fiscal
quarters, just prior to and during the two peak retail selling seasons for
spring and fall merchandise. In addition, certain of TSI's and Farah's products,
such as shorts and corduroy pants, tend to be seasonal in nature. In the event
such products represent a greater percentage of the Company's sales in the
future, the seasonality of the Company's sales may be increased. See "Risk
Factors -- Seasonality."
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TRADEMARKS AND LICENSES
TSI
TSI holds or has applied for over 75 United States trademark registrations
covering its various brands. TSI believes that its Flyers(TM) and Bay to Bay(R)
trademarks are material to its business. Bay to Bay(R) is registered with the
United States Patent and Trademark Office. This registration expires in 2001 and
is subject to renewal. There are applications pending with the United States
Patent and Trademark Office for trademarks which include the Flyers(TM) name.
Two of these applications have been opposed. Pursuant to separate license
agreements, TSI has the exclusive rights to use (i) the Bill Blass(R) trademark
with respect to casual pants and shorts, jeans and prehemmed dress pants
distributed or sold in the United States, Mexico and Canada, (ii) the Van
Heusen(R) trademark with respect to men's pants, jeans and shorts distributed or
sold in the United States and its possessions and territories and (iii) the
Generra(R) trademark with respect to the design, manufacture and wholesale in
the United States and Canada of men's casual pants, shorts and dress slacks
(excluding open bottom construction) and men's jean-constructed bottoms made of
denim or heavy weight fabrics (excluding open bottom construction). The Bill
Blass(R) license expires in calendar 2000, and the Van Heusen(R) license expires
in calendar 1999. The license agreement with respect to the Generra(R) trademark
is subject to two renewal options that expire September 30, 2002 and 2005,
respectively. TSI believes that it has the exclusive use of all of its owned and
licensed trademarks. See "Risk Factors -- Dependence on Intellectual Property;
Risk of Infringement Claims."
Farah
Farah owns many United States and foreign trademark registrations,
including Savane(R), Savane Elements(R), PROCESS 2000(R), Farah(R) and Farah
Clothing Company(R), and has several other trademark applications pending in the
United States and foreign countries. The John Henry(R) trademark is licensed
from Zodiac International Trading Corporation, an affiliate of Salant
Corporation, with respect to the manufacture, advertisement, promotion and sale
in the United States and Canada of men's slacks and trousers, blazers,
sportcoats and jackets, shorts and jeans. The John Henry(R) license is renewable
by Farah through 2038. See "Risk Factors -- Dependence on Intellectual Property;
Risk of Infringement Claims."
FACILITIES
TSI
TSI's corporate headquarters, cutting and warehouse facilities are located
in Tampa, Florida and are owned by TSI. In fiscal 1997, TSI completed an
approximately 110,000 square foot state-of-the-art cutting facility designed to
provide an environment that would increase efficiencies and accommodate TSI's
increasing volume. The new facility is located adjacent to TSI's administration
and distribution facility (approximately 190,000 square feet). During fiscal
1997, TSI's cutting and labeling, packaging and shipping facilities operated at
approximately 65.0% of capacity. TSI's facilities are subject to a mortgage
securing the debt outstanding under the Real Estate Loan Agreement, which had an
outstanding balance of $9.6 million as of July 4, 1998. TSI also leases
approximately 4,000 square feet of showroom offices in New York City. This lease
expires in April 2004. TSI believes that its existing facilities are adequate to
meet its current and foreseeable needs. TSI also believes its existing
facilities are well maintained and in good operating condition. See "Description
of Other Indebtedness -- Real Estate Loan" and Note 6 to TSI's Consolidated
Financial Statements.
Farah
Farah's principal executive offices and United States distribution facility
are located in El Paso, Texas. Farah considers both its domestic and
international facilities to be suitable and adequate and to have sufficient
productive capacity for current operations. Farah leases its corporate
headquarters in El Paso, Texas. Farah also leases a new distribution warehouse
located in Santa Teresa, New Mexico. Relocation to the new warehouse was
completed during the second quarter of fiscal 1998.
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The following table reflects the general location, use and approximate size
of Farah's significant real properties currently in use:
<TABLE>
<CAPTION>
APPROXIMATE SQUARE
FOOTAGE
LOCATION USE OWNED/LEASED
-------- --- ------------------
<S> <C> <C>
El Paso, Texas...................... Warehouse 116,000 Owned(1)
Chihuahua, Mexico................... Garment manufacturing plant 73,800 Owned
San Jose, Costa Rica................ Garment manufacturing plant 124,000 Owned
Cartago, Costa Rica................. Garment manufacturing plant 77,000 Owned
Auckland, New Zealand............... Office/Warehouse 9,000 Owned
El Paso, Texas...................... Corporate offices 43,500 Leased
El Paso, Texas...................... Garment manufacturing plant 201,000 Leased
Sydney, Australia................... Office/Warehouse 29,000 Leased
Suva, Fiji.......................... Two garment manufacturing plants 35,000 Leased(2)
Witham, United Kingdom.............. Office/Warehouse 57,000 Leased
Santa Teresa, New Mexico............ Distribution Warehouse 250,000 Leased
Juarez, Mexico...................... Garment manufacturing plant 73,500 Leased
Queretaro, Mexico................... Warehouse 32,700 Leased
Torreon, Mexico..................... Garment manufacturing plant 25,000 Leased(3)
</TABLE>
- ---------------
(1) The facility was formerly a garment manufacturing plant. The underlying land
is leased through February 2002.
(2) The facilities are leased by a joint venture in which Farah is a 50%
participant.
(3) The facilities are leased by Farah and a co-lessee.
LEGAL PROCEEDINGS
TSI
On March 21, 1997, Levi Strauss & Co. brought suit against TSI in United
States District Court for the Northern District of California. The complaint
alleges, among other things, that TSI's Flyers(TM) trademark and certain trade
dress used in the labeling and packaging of TSI's Flyers(TM) and Bay to Bay(R)
products infringe upon certain of plaintiff's proprietary trademark and trade
dress rights in violation of the federal Lanham Act and California law. The
complaint seeks injunctive relief, as well as treble damages and attorneys'
fees. Levi Strauss & Co. has filed opposition proceedings in the United States
Patent and Trademark Office against TSI's trademark applications for two marks
in the Flyers(TM) family of marks. These oppositions proceeding have been
suspended pending resolution of the litigation. In addition, plaintiff has
indicated that it believes that certain trade dress used in the labeling and
packaging of TSI's licensed Bill Blass(R) brand slacks also infringes upon
certain of plaintiff's proprietary trade dress rights. Although the outcome of
the litigation cannot be determined at this time, TSI has engaged in settlement
discussions with Levi Strauss & Co. Nevertheless, in an attempt to limit TSI's
liability, if any, with respect to such alleged infringement, TSI has
unilaterally altered the trademark and trade dress which are currently the
subject of this litigation.
On July 3, 1997, Out-of-Mexico Apparel, Ltd. brought suit against TSI in
California Superior Court for, among other things, breach of contract, breach of
a noncircumvention agreement, and violation of the California Unfair Business
Practices Act. The complaint alleges that TSI entered into contracts for the
manufacture of apparel with certain manufacturers in contravention of a customer
non-disclosure and non-circumvention agreement between Out-of-Mexico Apparel,
Ltd. and TSI. The complaint seeks compensatory damages and prejudgment interest,
and the costs of suit. Although the outcome of the litigation cannot be
determined at this time, TSI would consider reasonable settlement opportunities.
TSI is vigorously defending the lawsuit.
On December 30, 1997, TSI brought suit against Bremen Trouser's, Inc.
("Bremen") in the State Circuit Court in Tampa, Florida seeking a declaratory
judgment that TSI has the right to manufacture and sell casual pants with
"busted seams" using the Bill Blass label pursuant to a license agreement (the
"Pincus
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<PAGE> 67
License Agreement") between the Company and Pincus Bros., Inc. ("Pincus").
Bremen is a licensee of Pincus under a separate license agreement. In March
1998, TSI filed an amended complaint, which added Pincus as a defendant,
alleging breach of contract against Pincus and tortious interference with
business relations against Bremen. Also in March 1998, Pincus and Bremen filed a
separate complaint against TSI, alleging, among other things, that TSI violated
the terms of the Pincus License Agreement by manufacturing "busted seam" pants.
Pincus and Bremen have sought unspecified damages and other non-monetary relief.
TSI's state claim has been removed to the United States District Court for the
Middle District of Florida and consolidated with Pincus and Bremen's complaint.
Pincus has taken the position that the Pincus License Agreement gives it the
authority to resolve disputes between the Company and Pincus' other licensees,
and it claims to have resolved the dispute which is the subject of the
litigation in favor of Bremen. Although the outcome of the litigation cannot be
determined at this time, TSI intends to vigorously pursue the litigation. The
Company does not believe that this litigation will have a material adverse
effect on its business, results of operations or financial condition.
TSI is not involved in any other legal proceedings which TSI believes could
reasonably be expected to have a material adverse effect on TSI's business,
results of operations or financial condition.
Farah
Farah is involved in certain legal proceedings in the normal course of
business. Farah does not believe that the outcome of such legal proceedings
could reasonably be expected to have a material adverse effect on Farah's
business, results of operations or financial condition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
TSI's Board of Directors consists of nine members divided into three
classes, with the members of each class serving three-year terms. The following
table sets forth information, as of August 17, 1998, regarding the directors and
executive officers of TSI.
<TABLE>
<CAPTION>
TERMS AS
DIRECTOR
NAME AGE POSITION EXPIRES
---- --- -------- --------
<S> <C> <C> <C>
William W. Compton(1)................. 55 Chairman of the Board, Chief Executive 2000
Officer and Director
Richard J. Domino..................... 50 President --
Michael Kagan......................... 60 Executive Vice President, Chief 2001
Financial Officer, Secretary and
Director
N. Larry McPherson.................... 34 Executive Vice President -- Finance --
and Operations and Treasurer
Richard C. Allender(2)(3)............. 52 Executive Vice President -- Global 1999
Affairs and Director
Eloy S. Vallina-Laguera(1)(4)......... 60 Director 1999
Jesus Alvarez-Morodo(5)............... 51 Director 2000
Leslie J. Gillock(1)(4)(5)............ 42 Director 1999
Donald H. Livingstone(5).............. 55 Director 1999
Leon H. Reinhart(1)(4)................ 56 Director 2001
Charles J. Smith(3)................... 71 Director 1999
</TABLE>
- ---------------
(1) Member of the Compensation Committee of the Company's Board of Directors.
(2) In connection with the consummation of the Farah Acquisition, Mr. Allender
became the Executive Vice President -- Global Affairs of the Company.
(3) In connection with the consummation of the Farah Acquisition, Messrs.
Allender and Smith were elected by expansion to the Company's Board of
Directors and will serve as directors until the next annual meeting of TSI's
shareholders.
(4) Member of the Stock Option Committee of the Company's Board of Directors.
(5) Member of the Audit Committee of the Company's Board of Directors.
William W. Compton has served as Chairman of the Board, Chief Executive
Officer and a Director of TSI since November 1989. He also served as President
of TSI from November 1989 to November 1994. Mr. Compton has over 28 years of
experience in the apparel industry. Prior to joining TSI, he served as President
and Chief Operating Officer of Munsingwear, Inc., an apparel manufacturer and
marketer, President/Executive Vice President of Corporate Marketing for five
apparel divisions of McGregor/Faberge Corporation and President, U.S.A. and a
director of Farah, a men's apparel manufacturer. Mr. Compton currently serves on
the Board of Directors of the Brigham Young University Marriott School of
Management, and on the Board of Directors of the American Apparel Manufacturers
Association.
Richard J. Domino joined TSI in 1988 and has served as President of TSI
since November 1994. Mr. Domino served as Senior Vice President of Sales and
Marketing from January 1994 to October 1994 and Vice President of Sales from
December 1989 to December 1993. He has over 23 years experience in apparel-
related sales and marketing. Before joining TSI, Mr. Domino was employed by
Thomson Sportswear, Inc., a men's apparel manufacturer and marketer, as its
Sales Manager for the Northwest Territory, and by Haggar Corp., a men's apparel
manufacturer and marketer, as its New Jersey Salesman.
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Michael Kagan has served as Executive Vice President, Chief Financial
Officer, Secretary and a Director of TSI since November 1989. He was also
Treasurer of TSI from November 1989 to January 1998. Mr. Kagan has more than 30
years experience in the apparel industry. Prior to joining TSI, Mr. Kagan served
as Senior Vice President of Finance for Munsingwear, Inc. and as Executive Vice
President and Chief Operating Officer of Flexnit Company, Inc., a manufacturer
of women's intimate apparel.
N. Larry McPherson joined TSI in January 1998 as Executive Vice
President -- Finance and Operations and Treasurer. Prior to joining TSI, Mr.
McPherson spent ten years as an independent auditor and financial consultant
with Ernst & Young LLP while earning his M.B.A. and license as a C.P.A.
Richard C. Allender has served as the Chief Executive Officer of Farah
since July 1990, the Chairman of its Board of Directors since March 1993 and has
served as a Director of Farah since June 1988. In connection with the
consummation of the Farah Acquisition, Mr. Allender became the Executive Vice
President -- Global Affairs and a Director of the Company.
Eloy S. Vallina-Laguera has served as a Director of TSI since November
1989. He has been Chairman of the Board of Accel, and its predecessor, Grupo
Chihuahua S.A. de C.V. ("Grupo Chihuahua"), since its inception in 1979. Accel
is a publicly traded Mexican holding company having subsidiaries engaged in
warehousing, distribution and manufacturing. He has been Chairman of the Board
of Elamex, S.A. de C.V. ("Elamex"), a manufacturing company controlled by Accel,
since 1990. He is also Chairman of Kleentex Corp., and an advisory director of
Norwest Bank El Paso. Mr. Vallina-Laguera was Chairman of Banco Commercial
Mexicano, later Multibanco Comermex, one of Mexico's largest commercial banks at
that time, from 1971 until its expropriation in 1982.
Jesus Alvarez-Morodo has served as a Director of TSI since November 1989.
He has been Vice Chairman of the Board of Elamex since 1995 and President and
Chief Executive Officer of Accel since 1992. Mr. Alvarez-Morodo has been a
director of Elamex since 1990, and has held various positions with Accel and its
predecessor, Grupo Chihuahua and its subsidiaries since 1982, including Vice
President from 1989 to 1992.
Leslie J. Gillock has served as a Director of TSI since August 1997. She
has served in various capacities with Fruit of the Loom, Inc. since 1978,
including Vice President of Marketing since March 1995, Director of Marketing
from January 1993 through February 1995, and Marketing Manager for Intimate
Apparel from January 1989 through December 1992. She has over 19 years
experience in the apparel industry.
Donald H. Livingstone has served as a Director of TSI since August 1997. He
has been a Teaching Professor at the Brigham Young University Marriott School of
Management and the Director of its Center for Entrepreneurship since September
1994. Mr. Livingstone is also a member of the Board of Trustees of the Eureka
Funds. From 1976 through March 1995, he was a partner with Arthur Andersen LLP.
He joined Arthur Andersen LLP in 1966.
Leon H. Reinhart has served as a Director of TSI since August 1997. Mr.
Reinhart has been President, Chief Executive Officer and a director of First
National Bank based in San Diego, California since May 1996. Prior to such time,
he served as Chief Credit Officer and Deputy General Manager of Citibank Mexico
from 1988 through April 1996. Mr. Reinhart's experience includes more than
twenty years as a financial executive with Citibank, N.A. and its affiliates in
a variety of domestic and international positions.
Charles J. Smith has been a director of Farah since March 1994. For more
than five years prior to his retirement in 1994, Mr. Smith served in various
capacities with Crystal Brands, Inc., an apparel manufacturer and marketer, most
recently as an Executive Vice President. Since then, Mr. Smith has served as a
consultant to various apparel companies. In May, 1995, Mr. Smith became a
partner and director of Phoenix Apparel Group, Inc., a privately-held apparel
sourcing and consulting company. In connection with the Farah Acquisition, Mr.
Smith became a Director of the Company.
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid to or earned by TSI's Chief Executive Officer and each of TSI's two other
most highly compensated executive officers who earned more than $100,000 for
fiscal years 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL
FISCAL ------------------- OPTIONS/ OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SAR'S(#) COMPENSATION
- --------------------------- ------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
William W. Compton........................... 1997 $390,000 $429,000 23,500 $32,640(1)(2)
Chairman of the Board and 1996 336,985 387,200 -- 31,522(1)(2)
Chief Executive Officer
Richard J. Domino............................ 1997 $225,000 $225,000 8,000 --
President 1996 191,346 200,000 -- --
Michael Kagan................................ 1997 $215,000 $172,000 13,800 $19,343(2)(3)
Executive Vice President, 1996 192,000 153,600 -- 19,343(2)(3)
Chief Financial Officer
and Secretary
</TABLE>
- ---------------
(1) Includes $25,000 in director's fees for each of fiscal 1997 and fiscal 1996
and $7,640 and $6,522 in grossed up premiums for term life insurance for
fiscal 1997 and fiscal 1996, respectively, for the benefit of Mr. Compton
and his family.
(2) Directors who are executive officers of TSI no longer receive compensation
as such for service as members of either the Board of Directors or
committees thereof.
(3) Includes $15,000 in director's fees for each of fiscal 1997 and fiscal 1996
and $4,343 in grossed up premiums for term life insurance for each of fiscal
1997 and fiscal 1996, respectively, for the benefit of Mr. Kagan and his
family.
The following table sets forth information with respect to grants of stock
options during fiscal 1997 to the executive officers named in the Summary
Compensation Table and the year-end value of unexercised options held by such
executive officers. No options were outstanding prior to such fiscal year and no
options were exercised during such fiscal year.
OPTION GRANTS IN FISCAL 1997 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
PERCENT OF ANNUAL RATES OF
TOTAL STOCK PRICE VALUE OF
NUMBER OF OPTIONS APPRECIATION FOR UNEXERCISABLE
SECURITIES GRANTED TO OPTION TERM UNEXERCISABLE IN-THE-MONEY
UNDERLYING EMPLOYEES EXERCISE ----------------- OPTIONS OPTIONS AT
OPTIONS IN FISCAL PRICE PER EXPIRATION 5% 10% AT YEAR YEAR END
NAME GRANTED(#) 1997 SHARE DATE ($)(2) ($)(2) END(3) ($)(3)(4)
- ---- ---------- ---------- --------- ---------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William W. Compton......... 23,500 39.2 $10.50 12/18/06 155,100 393,155 23,500 35,250
Richard J. Domino.......... 8,000 13.3 10.50 12/18/06 52,800 133,840 8,000 12,000
Michael Kagan.............. 13,800 23.0 10.50 12/18/06 91,080 230,874 13,800 20,700
</TABLE>
- ---------------
(1) Options granted under TSI's 1996 Stock Option Plan are exercisable by the
named executive officer to the extent of 33 1/3% of the shares subject to
such options each year beginning one year after the date of grant subject to
certain conditions.
(2) Assumes rates of Common Stock price appreciation that are prescribed by the
Commission.
(3) All options issued were unexercisable at fiscal 1997 year-end.
(4) Represents the number of shares of Common Stock that may be acquired upon
the exercise of options, multiplied by the difference between (i) the
initial public offering price of the Common Stock on October 28, 1997
($12.00) and (ii) the exercise price per share.
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<PAGE> 71
EMPLOYMENT AGREEMENTS
TSI has employment agreements with each of Messrs. Compton, Kagan and
Domino, which became effective as of the completion of the initial public
offering in October 1997. The employment agreement with Mr. Compton provides for
an initial term ending in 2002, with automatic renewals beginning at the end of
the third year such that there shall remain at all times thereafter a rolling
two-year term of employment. Notwithstanding the foregoing, in the event the
agreement has not otherwise been terminated, it will terminate automatically at
the end of TSI's fiscal year in which Mr. Compton reaches age 65. The agreement
provides for an annual base salary (currently $448,500) subject to a minimum
annual increase equal to the increase in the Consumer Price Index for all Urban
Consumers -- All Items Index for Tampa, Florida ("CPI") for the immediately
preceding twelve months. Mr. Compton is also entitled to an annual performance
bonus of up to 110% of his base salary based on a comparison of TSI's average
return on total capital employed over a four-year period as compared to an
average target return on total capital as calculated for a select group of
publicly traded apparel companies over the same period. To the extent authorized
by the Company's Board of Directors, Mr. Compton also shall be entitled to
participate in such bonus programs and other benefit plans as are generally made
available to other executive officers of TSI.
The agreement may not be terminated by TSI prior to January 1, 1999 for any
reason other than cause (as defined therein) or Mr. Compton's death or
disability. If the agreement is terminated by TSI on or after January 1, 1999,
for any reason other than cause or Mr. Compton's death or disability, TSI shall
pay Mr. Compton a one-time, lump sum severance payment equal to the product of
(i) the greater of two and the number of years (rounded to the nearest 1/12 of a
year) remaining in the initial five-year term and (ii) the sum of Mr. Compton's
average annual base salary and average annual bonus for the preceding three
years. During the two-year period following termination of employment other than
as a result of disability, Mr. Compton shall not engage in or have any
impermissible financial interest in any business that is engaged in the
merchandising, manufacturing, distribution or marketing of men's casual pants,
shorts or jeans.
The agreement also provides for a one-time, lump sum severance payment, in
lieu of any other severance payment, if Mr. Compton elects to terminate his
employment with TSI either for "good reason" (as defined therein) or upon a
"change of control" of TSI. Upon termination for "good reason," the severance
payment will equal the product of (i) the greater of two and the number of years
(rounded to the nearest 1/12th of a year) remaining in the initial five-year
term and (ii) the sum of Mr. Compton's average annual base salary and average
annual bonus for the preceding three years. Upon termination upon a "change of
control," the severance payment will equal, depending on the extent of the
change of control, either (a) two times Mr. Compton's average annual base salary
for the preceding three years or (b) two times the sum of Mr. Compton's average
annual base salary and average annual bonus for the preceding three years. Under
the agreement, a "change of control" shall be deemed to have occurred if (i) any
person (other than certain exempt persons, including Messrs. Compton and Kagan,
Accel, TSI and their respective affiliates and associates) beneficially owns 25%
(or, in certain cases, 33%) or more of the outstanding shares of voting capital
stock or (ii) immediately following the sale or transfer of substantially all of
TSI's assets, or the merger or consolidation of TSI with or into another person,
any person (other than certain exempt persons) shall beneficially own 25% (or,
in certain cases, 33%) or more of the surviving or acquiring person.
TSI's employment agreement with Mr. Kagan is substantially the same as Mr.
Compton's except that Mr. Kagan's current annual base salary is $247,250 and his
maximum annual performance bonus equals 80% of his base salary.
TSI's employment agreement with Mr. Domino provides for an initial term
ending in 2000, with automatic renewals beginning at the end of the second year
such that there shall remain at all times thereunder a rolling one-year term of
employment. Notwithstanding the foregoing, in the event the agreement has not
been otherwise terminated, it will terminate automatically at the end of TSI's
fiscal year in which Mr. Domino reaches age 65. The agreement provides for an
annual base salary (currently $258,750) subject to a minimum annual increase
equal to the increase in the CPI for the immediately preceding twelve months.
Mr. Domino is also entitled to an annual performance bonus of up to 100% of his
base salary.
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The agreement provides that, if Mr. Domino's employment is terminated
without cause (as defined therein) by TSI, he shall be entitled to severance
payments, payable biweekly, at his annual base salary rate at the time of
termination until the end of the remaining term under the employment agreement.
The agreement further provides that, if Mr. Domino is terminated by TSI for
cause, Mr. Domino will not be entitled to any separation benefits and Mr.
Domino's salary, bonus, benefits and business expense reimbursements shall cease
as of the date of termination, except that payments due to Mr. Domino and not
paid up to the date of such termination will be paid to Mr. Domino within
forty-five (45) days of such termination.
In connection with the Farah Acquisition, TSI and Richard C. Allender
entered into an Employment Agreement (the "Employment Agreement") to provide for
the employment of Mr. Allender following the consummation of the Tender Offer.
The term of the Employment Agreement commenced at the effective time of the
Merger, and will continue for a three (3) year term (the "Initial Term"), after
which the Employment Agreement will be renewed automatically on a daily basis so
that the term after the Initial Term will continue for a twelve (12) month term.
During each year that the Employment Agreement is in effect, TSI and/or its
subsidiaries will pay to Mr. Allender a minimum annual salary of $300,000 ("Base
Salary"). The Employment Agreement also provides that during each year that the
Employment Agreement is in effect, TSI will pay to Mr. Allender an annual bonus
of at least $100,000. On the first day of the Initial Term, TSI will grant to
Mr. Allender options to purchase 15,000 shares of Common Stock at an exercise
price equal to the fair market value of the shares on the date of grant of such
option. The options will be vested and immediately exercisable. During each year
that the Employment Agreement is in effect, TSI will grant additional options to
Mr. Allender upon such terms as are generally available to senior executive
officers of TSI or its subsidiaries.
During the term of his employment, Mr. Allender is entitled to participate
in or receive all benefits under TSI's employee benefit plans and arrangements,
including, without limitation, TSI's 401(k) plan and all benefits which are
available to senior executive officers of TSI or its subsidiaries. TSI will pay
the cost of premiums for Mr. Allender's existing split-dollar life insurance
policy, not to exceed $121,000 per annum unless otherwise agreed by TSI. Except
as otherwise provided in the Employment Agreement, TSI will be obligated from
and after the date of the Employment Agreement to pay a minimum of three annual
premium payments of $121,000, or an aggregate amount of premiums of $363,000,
including any payments made during the Initial Term or any term after the
Initial Term (the "Minimum Premium Commitment").
On the first day of the Initial Term and as an inducement to surrender his
rights under his existing employment contract and to remain with the Company
following the closing, TSI paid Mr. Allender a bonus of $600,000. In addition,
if Mr. Allender is employed by TSI or any of its subsidiaries on the last day of
the Initial Term, TSI will pay to Mr. Allender on such date an additional bonus
of $500,000 (the "Final Bonus"). During the term of his employment, Mr. Allender
will be entitled to receive all perquisites which are available to senior
executive officers of TSI or its subsidiaries including, without limitation,
country club membership dues of approximately $350 per month; a car allowance of
$1,000 per month; and a gas allowance of $250 per month.
TSI may terminate Mr. Allender's employment at any time for "cause," and
Mr. Allender may terminate his employment at any time for "good reason" (each as
defined in the Employment Agreement) by giving written notice to TSI which sets
forth in reasonable detail the facts and circumstances constituting good reason.
If Mr. Allender's employment is terminated by reason of death, his estate will
be paid all salary, bonus or other benefits, otherwise payable to Mr. Allender
through the end of the month in which his death occurred, and TSI and its
subsidiaries will have no further obligations to Mr. Allender under the
Employment Agreement. If Mr. Allender's employment is terminated for cause, TSI
or its subsidiaries will pay Mr. Allender his Base Salary and benefits through
the date of termination specified in the notice of termination, and TSI and its
subsidiaries will have no further obligations to Mr. Allender under the
Employment Agreement, including, but not limited to, any obligations in respect
of the Minimum Premium Commitment.
If Mr. Allender's employment is terminated (i) by TSI other than as a
result of death or for cause, or (ii) by Mr. Allender for good reason, Mr.
Allender will be entitled to the following: (a) Mr. Allender's earned
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but unpaid Base Salary through the date of termination; (b) the Base Salary in
effect immediately prior to the date of termination for the remainder of the
current term of the Employment Agreement; (c) an annual bonus for the current
fiscal year prorated through the date of termination equal to the greater of (x)
the annual bonus awarded to Mr. Allender with respect to TSI's most recent
fiscal year ending prior to the date of termination or (y) $100,000; (d) the
amount of the Minimum Premium Commitment which has not been paid as of the date
of termination; and (e) the Final Bonus; and (ii) after such termination, TSI
will continue to provide Mr. Allender with those benefits he was entitled to
immediately prior to his termination, for thirty-six months.
To the extent Mr. Allender is an optionee under any of TSI's stock option
plans (the "Plans"), if Mr. Allender's employment is terminated without cause or
Mr. Allender terminates his employment for good reason, all options held by Mr.
Allender will automatically vest and become exercisable in accordance with the
Plans.
DIRECTOR COMPENSATION
Directors who are executive officers of TSI receive no compensation as such
for service as members of either the Company's Board of Directors or committees
thereof. Directors who are not executive officers of TSI receive $1,000 per
Board and/or committee meeting attended, plus reimbursement of reasonable
expenses. The outside directors are also eligible to receive options to purchase
Common Stock under TSI's Non-Employee Director Stock Option Plan.
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<PAGE> 74
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of August 17, 1998 with respect to: (i) each of
TSI's directors and the executive officers named in the Summary Compensation
Table; (ii) all directors and officers of TSI as a group; and (iii) each person
known by TSI to own beneficially more than 5% of the Common Stock. Unless
otherwise indicated, each of the shareholders listed below has sole voting and
investment power over the shares beneficially owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS
- ---- ------------------ --------
<S> <C> <C>
William W. Compton(1)....................................... 946,233 12.4%
Richard J. Domino(2)........................................ 4,767 *
Michael Kagan(3)............................................ 567,100 7.5
N. Larry McPherson(4)....................................... -- *
Jesus Alvarez-Morodo(4)(5).................................. 1,600,450 21.1
Eloy S. Vallina-Laguera(4)(5)............................... 1,600,450 21.1
Leslie J. Gillock(4)........................................ 200 *
Donald H. Livingstone(4).................................... 1,000 *
Leon H. Reinhart(4)......................................... 2,000 *
Richard C. Allender(6)...................................... 15,000 *
Charles J. Smith............................................ -- *
Accel, S.A. de C.V.(5)...................................... 1,600,450 21.1
All directors and officers as a group (11 persons).......... 3,136,750 41.0
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 216,000 shares held by the Compton Family Limited Partnership and
7,833 shares of Common Stock issuable upon the exercise of vested stock
options. Does not include 120,067 shares of Common Stock issuable upon the
exercise of nonvested stock options. The business address of Mr. Compton is
4902 W. Waters Avenue, Tampa, Florida 33634.
(2) Includes 2,667 shares of Common Stock issuable upon the exercise of vested
stock options. Does not include 40,633 shares of Common Stock issuable upon
the exercise of nonvested stock options. Includes 100 shares held as
custodian for the benefit of his minor children.
(3) Includes 562,500 shares held by the Kagan Family Limited Partnership and
4,600 shares of Common Stock issuable upon the exercise of vested stock
options. Does not include 70,300 shares of Common Stock issuable upon the
exercise of nonvested stock options. The business address of Mr. Kagan is
4902 W. Waters Avenue, Tampa, Florida 33634.
(4) Does not include 10,000 shares of Common Stock issuable upon the exercise of
nonvested stock options.
(5) Consists of shares held by Accel. Mr. Vallina-Laguera owns directly
130,862,957 shares, or 37.6%, of the outstanding common stock of Accel, and
he controls companies that hold an additional 46,414,851 shares, or 13.3%,
of the outstanding common stock of Accel. Mr. Alvarez-Morodo is the
President and Chief Executive Officer of Accel. The business address of Mr.
Vallina-Laguera is Ave. Zarco No. 2401, Chihuahua, Chih., Mexico 31020, and
the business address of Mr. Alvarez-Morodo and Accel is Virginia Fabregas
No. 80, Col. San Rafael, 06470 Mexico, D.F. 06470.
(6) Includes 15,000 shares of Common Stock issuable upon the exercise of vested
stock options.
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CERTAIN TRANSACTIONS
The Audit Committee of the Company's Board of Directors is responsible for
reviewing all transactions between TSI and any officer or director of TSI or any
entity in which an officer of director has a material interest. Any such
transactions must be on terms no less favorable than those that could be
obtained on an arms-length basis from independent third parties.
Pursuant to an underwriting agreement (the "IPO Underwriting Agreement")
among TSI, Accel and Shakale International, S.A., as selling shareholders (the
"Selling Shareholders"), and certain underwriters which was entered into in
connection with TSI's initial public offering in October 1997, TSI and the
Selling Shareholders jointly and severally agreed to indemnify such underwriters
or to contribute to losses arising out of certain liabilities, including
liabilities under the Securities Act. TSI and the Selling Shareholders entered
into a separate agreement which allocates between them certain liabilities which
may arise under the IPO Underwriting Agreement or otherwise in connection with
TSI's initial public offering. Such liabilities have been allocated to TSI,
except to the extent that such liabilities arise out of certain information
supplied by the Selling Shareholders or their affiliates in writing in
connection with the initial public offering or out of certain representations
and warranties or covenants and agreements made by them in the IPO Underwriting
Agreement.
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DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes offered hereby will be issued under the Indenture dated
as of June 24, 1998 among the Company, the Subsidiary Guarantors named therein
and SunTrust Bank, Atlanta, as Trustee, a copy of the form of which is available
upon receipt from the Company. The form and terms of the Exchange Notes will be
identical in all material respects to the form and terms of the Old Notes,
except that (i) the Exchange Notes will bear a different CUSIP Number from the
Old Notes, (ii) the issuance of the Exchange Notes will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof, and (iii) holders of the Exchange Notes will
not be entitled to certain rights of holders of Old Notes under the Registration
Rights Agreement, including the provisions thereof which provide for an increase
in the interest rate on the Old Notes in certain circumstances relating to the
timing of the Exchange Offer, which rights will terminate when the Exchange
Offer is consummated. The Exchange Notes will evidence the same debt as the Old
Notes (which they replace). Upon the issuance of the Exchange Notes or the
effectiveness of the Shelf Registration Statement, as the case may be, the
Indenture will be subject to and governed by the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The following summary of the material
provisions of the Indenture does not purport to be complete and is subject to,
and qualified in its entirety by, reference to the provisions of the Indenture,
including the definitions of certain terms contained therein and those terms
made part of the Indenture by reference to the Trust Indenture Act. For
definitions of certain capitalized terms used in the following summary, see
"-- Certain Definitions" below.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on June 15, 2008, will be limited initially in
aggregate principal amount to $100,000,000 and will be unsecured senior
subordinated obligations of the Company. The Indenture provides for the issuance
of up to $40,000,000 million aggregate principal amount of additional Notes
having identical terms and conditions to the Notes offered hereby (the
"Additional Notes"), subject to compliance with the covenants contained in the
Indenture. Any Additional Notes will be part of the same issue as the Notes
offered hereby and in the Offering and will vote on all matters with the Notes
offered hereby and in the Offering. Unless otherwise indicated, references
herein to the Notes do not include the Additional Notes. No offering of any such
Additional Notes is being or shall be deemed to be made by this Prospectus. In
addition, there can be no assurance as to when or whether the Company will issue
any such Additional Notes or as to the aggregate principal amount of such
Additional Notes.
Each Note will bear interest at the rate set forth on the cover page hereof
from June 24, 1998 or from the most recent interest payment date to which
interest has been paid or duly provided for, payable semiannually in arrears on
June 15 and December 15 of each year, commencing December 15, 1998, until the
principal thereof is paid or duly provided for, to the person in whose name the
Note (or any predecessor Note) is registered at the close of business on the
June 1 or December 1 next preceding such interest payment date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
The principal of and premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in The City of New York maintained for such purposes
(which initially will be the office of the Trustee located at SunTrust Bank,
Atlanta, c/o First Chicago Trust Company, 14 Wall Street, Suite 4607, New York,
New York 10005); provided, however, that, at the option of the Company, interest
may be paid by check mailed to the address of the Person entitled thereto as
such address appears in the security register. The Old Notes have been, and the
Exchange Notes will be, issued only in registered form without coupons, and only
in denominations of $1,000 or an integral multiple of $1,000 in excess thereof.
No service charge will be made for any registration of transfer or exchange or
redemption of Notes, but the Company may require payment in certain
circumstances of a sum sufficient to cover any tax or other governmental charge
that may be imposed in connection therewith.
As of the Closing Date, all of the Company's Subsidiaries were Restricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current and future Subsidiaries as Unrestricted
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Subsidiaries, subject to certain limitations. Unrestricted Subsidiaries will not
be subject to any of the restrictive covenants set forth in the Indenture.
Any Old Notes that remain outstanding after the consummation of the
Exchange Offer and Exchange Notes issued in connection with the Exchange Offer
will be treated as a single class of securities under the Indenture.
The Notes will not be entitled to the benefit of any sinking fund.
SUBSIDIARY GUARANTEES
Payment of the principal of and premium, if any, and interest on the Old
Notes, when and as the same become due and payable, have been, and the payment
thereof on the Exchange Notes, when and as the same become due and payable, will
be, guaranteed, jointly and severally, on an unsecured senior subordinated basis
by the Subsidiary Guarantors referred to below. The Subsidiary Guarantees are
and shall be, to the extent set forth in the Indenture, subordinated in right of
payment to the prior payment in full of all Senior Debt of the Subsidiary
Guarantors, upon terms substantially comparable to the subordination of the
Notes to all Senior Debt. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee are and will be limited so as not to constitute a
fraudulent conveyance under applicable law. See "Risk Factors -- Limitation on
Subsidiary Guarantees; Fraudulent Conveyance Concerns."
The Indenture requires that each Domestic Restricted Subsidiary (other than
a Receivables Subsidiary) be a Subsidiary Guarantor, as well as each other
Restricted Subsidiary that guarantees any other Debt of the Company or of a
Domestic Restricted Subsidiary.
Subject to the provisions of the following paragraph, the Indenture
provides that no Subsidiary Guarantor may consolidate with or merge with or into
any other Person or convey, sell, assign, transfer, lease or otherwise dispose
of its properties and assets substantially as an entirety to any other Person
unless: (a) the Person formed by or surviving such consolidation or merger (if
other than such Subsidiary Guarantor) or to which such properties and assets are
transferred assumes all of the obligations of such Subsidiary Guarantor under
the Indenture and its Subsidiary Guarantee, pursuant to a supplemental indenture
in form and substance reasonably satisfactory to the Trustee, (b) immediately
after giving effect to such transaction, no Default or Event of Default has
occurred and is continuing and (c) immediately after giving effect to such
transaction, the Person formed by or surviving such consolidation or merger (if
other than such Subsidiary Guarantor) or to which such properties and assets are
transferred could incur at least $1.00 of additional Debt (other than Permitted
Debt) pursuant to the first paragraph of the covenant described under
"-- Certain Covenants -- Limitation on Debt and Issuance of Disqualified Stock."
The Indenture provides that, in the event of (a) a conveyance, sale,
assignment, transfer or other disposition of all of the Capital Stock of a
Subsidiary Guarantor to any Person (by way of merger, consolidation or
otherwise), (b) a conveyance, sale, assignment, transfer or other disposition of
all or substantially all of the assets of such Subsidiary Guarantor to any
Person (by way of merger, consolidation or otherwise), (c) the designation of
such Subsidiary Guarantor as an Unrestricted Subsidiary, in any such case in
compliance with the terms of the Indenture, then such Subsidiary Guarantor will
be deemed automatically and unconditionally released and discharged from all of
its obligations under its Subsidiary Guarantee without any further action on the
part of the Trustee or any Holder of the Notes or (d) the release or discharge
of the guarantee that resulted in the creation of such guarantee of the Notes,
except a discharge or release by or as a result of payment under the guarantee;
provided that the Net Cash Proceeds of such conveyance, sale, assignment,
transfer or other disposition (if any) are applied in accordance with the
covenant described under "-- Certain Covenants -- Limitation on Asset Sales."
SUBORDINATION
The Old Notes are, and the Exchange Notes will be, unsecured senior
subordinated obligations of the Company. The Old Notes are, and the Exchange
Notes will be, to the extent set forth in the Indenture, subordinate in right of
payment to the prior payment in full of all Senior Debt, whether outstanding on
the
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Closing Date or thereafter incurred. Upon any payment or distribution of assets
of the Company to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors, marshalling of assets
or any bankruptcy, insolvency or similar proceedings of the Company, whether
voluntary or involuntary (except in connection with the consolidation or merger
of the Company or its liquidation or dissolution following the conveyance,
transfer or lease of its properties and assets substantially as an entirety,
upon the terms and conditions described under "-- Consolidation, Merger and Sale
of Assets"), the holders of Senior Debt will first be entitled to receive
payment in full, in cash or cash equivalents, of all amounts due or to become
due on or in respect of such Senior Debt (including interest accruing after the
commencement of any such proceeding at the rate specified in the applicable
Senior Debt whether or not such interest is an allowed claim in such proceeding)
before the Holders of Notes are entitled to receive any payment of principal of
and premium, if any, and interest on the Notes or on account of the purchase or
redemption or other acquisition of Notes by the Company or any Subsidiary of the
Company. In the event that, notwithstanding the foregoing, the Trustee or the
Holder of any Note receives any payment or distribution of assets of the Company
of any kind or character (excluding equity or subordinated securities of the
Company provided for in a plan of reorganization or readjustment that, in the
case of subordinated securities, are subordinated in right of payment to all
Senior Debt to at least the same extent as the Notes are so subordinated),
before all the Senior Debt is paid in full, then such payment or distribution
will be held in trust for the holders of Senior Debt and will be required to be
paid over or delivered forthwith to the trustee in bankruptcy or other Person
making payment or distribution of assets of the Company for application to the
payment of all Senior Debt remaining unpaid, to the extent necessary to pay the
Senior Debt in full. Notwithstanding the foregoing, following the commencement
of a proceeding under the Bankruptcy Code and if the holders of Senior Debt
receive less than payment in full, the Holders may retain any payment or
distribution paid by the Company with respect to the Notes pursuant to a plan of
reorganization if
(a) the holders of claims for Designated Senior Debt (who are entitled
to vote for such plan in accordance with the Bankruptcy Code) approve such
plan by a vote which equals at least (x) 66 2/3% in principal amount of
such claims and (y) one-half in number of such claims or
(b) in the event that there is more than one class of Designated
Senior Debt in such proceeding, the holders of claims for each such class
(who are entitled to vote for such plan in accordance with the Bankruptcy
Code) approve such plan by a vote which equals at least (x) 66 2/3% in
principal amount of such claims of such class and (y) one-half in number of
such claims of such class.
The Company may not make any payments on account of the Notes or on account
of the purchase or redemption or other acquisition of Notes if a default in the
payment of principal of (or premium, if any) or interest on Designated Senior
Debt has occurred and is continuing or a default in the payment when due of any
other obligation under Designated Senior Indebtedness has occurred and is
continuing (a "Senior Payment Default"). In addition, if any default (other than
a Senior Payment Default) has occurred and is continuing with respect to any
Designated Senior Debt permitting the holders thereof (or a trustee or agent on
behalf thereof) to accelerate the maturity thereof (a "Senior Nonmonetary
Default") and the Company and the Trustee have received written notice thereof
from the agent under the New Credit Facility or from an authorized Person on
behalf of any holder of Designated Senior Debt, then the Company may not make
any payments on account of the Notes or on account of the purchase or redemption
or other acquisition of Notes for a period (a "blockage period") commencing on
the date the Company and the Trustee receive such written notice (a "Blockage
Notice") and ending on the earliest of (x) 179 days after the date on which the
applicable Blockage Notice is received unless a Senior Payment Default has
occurred and is continuing at the end of such 179-day period, (y) the date, if
any, on which the Designated Senior Debt to which such default relates is
discharged or such default is waived or otherwise cured and (z) the date, if
any, on which such blockage period has been terminated by written notice to the
Company or the Trustee from the agent under the New Credit Facility or from the
Person who gave the Blockage Notice. However, the Company may make payments on
the Notes without regard to the foregoing if the Company and the Trustee receive
written notice approving such payment from a representative of the Designated
Senior Debt affected by such Senior Payment Default or Senior Nonmonetary
Default. In any event, not more than one blockage period may be commenced during
any period of 360 consecutive days, and there must be a period of at least 181
consecutive
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days in each period of 360 consecutive days when no blockage period is in
effect. No Senior Nonmonetary Default that existed or was continuing on the date
of the commencement of any blockage period with respect to the Designated Senior
Debt initiating such blockage period will be, or can be, made the basis for the
commencement of a subsequent blockage period, unless such default has been cured
or waived for a period of not less than 90 consecutive days. In the event that,
notwithstanding the foregoing, the Company makes any payment to the Trustee or
the Holder of any Note prohibited by these blockage provisions, then such
payment will be held in trust for the holders of Senior Debt and will be
required to be paid over and delivered forthwith to the holders of the Senior
Debt remaining unpaid, to the extent necessary to pay in full all the Senior
Debt.
Whenever the Company is prohibited from making any payment on or in respect
of the Notes, the Company will also be prohibited from making, directly or
indirectly, any legal defeasance or covenant defeasance of the Notes as
described under "-- Legal Defeasance or Covenant Defeasance" and from making any
payment of any kind on account of the redemption, purchase or other acquisition
of the Notes.
The Subsidiary Guarantees are and will be, to the extent set forth in the
Indenture, subordinated in right of payment to the prior payment in full of all
Senior Debt of the Subsidiary Guarantors upon terms substantially comparable to
the subordination of the Notes to all Senior Debt.
The subordination provisions described above will cease to be applicable to
the Notes upon any defeasance or covenant defeasance of the Notes as described
under "-- Legal Defeasance or Covenant Defeasance."
As a result of the subordination provisions described above, in the event
of an insolvency, bankruptcy, reorganization or liquidation of the Company,
creditors of the Company who are holders of Senior Debt may recover more,
ratably, than the holders of the Notes, and assets which would otherwise be
available to pay obligations in respect of the Notes will be available only
after all Senior Debt has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes. See "Risk
Factors -- Ranking of Notes and the Subsidiary Guarantees."
As of July 4, 1998, the Company and the Subsidiary Guarantors had an
aggregate of approximately $83.4 million of Debt outstanding ranking senior to
the Notes, and the Company had borrowing availability of $46.4 million under the
New Credit Facility (subject to borrowing base limitations), all of which would
be Senior Debt, if borrowed. The terms of the Indenture permit the Company and
its Restricted Subsidiaries to incur additional Senior Debt, subject to certain
limitations, including Debt that may be secured by Liens on property of the
Company and its Restricted Subsidiaries. See the discussion below under
"-- Certain Covenants -- Limitation on Debt and Issuance of Disqualified Stock"
and "-- Certain Covenants -- Limitation on Liens." In addition, the Old Notes
are, and the Exchange Notes will be, effectively subordinated to all existing
and future Debt and other liabilities (including trade payables) of the
Company's subsidiaries that are not Subsidiary Guarantors (the "Non-Guarantor
Subsidiaries"). As of July 4, 1998, the Non-Guarantor Subsidiaries had an
aggregate of approximately $3.8 million of accounts payable and third-party debt
outstanding. See "Risk Factors -- Ranking of the Notes and the Subsidiary
Guarantees."
OPTIONAL REDEMPTION
Except as provided below, the Old Notes are not, and the Exchange Notes
will not be, redeemable at the Company's option prior to June 15, 2003.
Thereafter, the Notes will be redeemable at the option of the Company, as a
whole or from time to time in part, on not less than 30 nor more than 60 days'
prior notice to the Holders at the redemption prices (expressed as percentages
of principal amount) set forth below, together with accrued and unpaid interest,
if any, to the redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period beginning on June 15 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003........................................................ 105.500%
2004........................................................ 103.667
2005........................................................ 101.833
2006 and thereafter......................................... 100.000%
</TABLE>
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Notwithstanding the foregoing, at any time or from time to time prior to
June 15, 2001, the Company may redeem, on one or more occasions, up to 35% of
the sum of (i) the initial aggregate principal amount of the Notes and (ii) the
initial aggregate principal amount of any Additional Notes with the net proceeds
of one or more Public Equity Offerings at a redemption price equal to 111% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided that, immediately after giving effect to any such redemption at least
$65.0 million aggregate principal amount of the Notes (including any Additional
Notes) remains outstanding; provided further that such redemptions occur within
90 days of the date of closing of the related Public Equity Offering.
If less than all the Notes or Additional Notes are to be redeemed, the
particular Notes to be redeemed will be selected not more than 60 days prior to
the redemption date by the Trustee by lot or such other method as the Trustee
deems fair and appropriate.
REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL
If a Change of Control occurs at any time, then each Holder will have the
right to require that the Company purchase such Holder's Notes and Additional
Notes, if any, in whole or in part at a purchase price in cash equal to 101% of
the principal amount of such Notes and Additional Notes, if any, plus accrued
and unpaid interest, if any, to the date of purchase, pursuant to the offer
described below (the "Change of Control Offer") and the other procedures set
forth in the Indenture.
Within 30 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of Notes and Additional Notes by first-class mail, postage prepaid, at its
address appearing in the security register, stating, among other things, (i) the
purchase price and the purchase date, which will be a Business Day no earlier
than 30 days nor later than 60 days from the date such notice is mailed or such
later date as is necessary to comply with requirements under the Exchange Act;
(ii) that any Note not tendered will continue to accrue interest; (iii) that,
unless the Company defaults in the payment of the purchase price, any Notes or
Additional Notes accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest after the Change of Control purchase date; and
(iv) certain other procedures that a Holder must follow to accept a Change of
Control Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes and Additional Notes that might be tendered by Holders of the Notes
and Additional Notes seeking to accept the Change of Control Offer. The New
Credit Facility restricts such a purchase of Notes and Additional Notes by the
Company prior to repayment in full of Debt outstanding under the New Credit
Facility and a Change of Control Offer would require the approval of the lenders
thereunder. In addition, certain events involving a Change of Control may be an
event of default under the New Credit Facility or other Debt of the Company that
may be incurred in the future. Accordingly, the right of the Holders of the
Notes and Additional Notes, if any, to require the Company to repurchase the
Notes and Additional Notes, if any, may be of limited value if the Company
cannot obtain the required approval under the New Credit Facility. There can be
no assurance that in the event of a Change in Control the Company will be able
to obtain the necessary consents from the lenders under the Credit Facility to
consummate a Change of Control Offer. The failure of the Company to make or
consummate the Change of Control Offer or pay the applicable Change of Control
purchase price when due would result in an Event of Default and would give the
Trustee and the Holders of the Notes and Additional Notes, if any, the rights
described under "-- Events of Default and Remedies."
The existence of a Holder's right to require the Company to purchase such
Holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford Holders of Notes or Additional
Notes, if any, the right to require the Company to repurchase such Notes or
Additional Notes, if any, in the event of a highly leveraged transaction or
certain
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transactions with the Company's management or its affiliates, including a
reorganization, restructuring, merger or similar transaction involving the
Company (including, in certain circumstances, an acquisition of the Company by
management or its affiliates) that may adversely affect Holders of the Notes or
Additional Notes if such transaction is not a transaction defined as a Change of
Control. See "-- Certain Definitions" below for the definition of "Change of
Control."
The Company will comply with the applicable tender offer rules including
Rule l4e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
CERTAIN DEFINITIONS
"Acquired Debt" means Debt of a Person (a) existing at the time such Person
is merged with or into the Company or becomes a Restricted Subsidiary or (b)
assumed in connection with the acquisition of assets from such Person.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person that
owns, directly or indirectly, 10% or more of such specified Person's Capital
Stock or any executive officer or director of any specified Person or other
Person or, with respect to any natural Person, any Person having a relationship
with such Person by blood, marriage or adoption no more remote than first
cousin. For the purposes of this definition, "control," when used with respect
to any specified Person, means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer") by the Company or a
Restricted Subsidiary, directly or indirectly, in one transaction or a series of
related transactions, of (a) any Capital Stock of any Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted Subsidiary), (b) all
or substantially all of the properties and assets of the Company and its
Restricted Subsidiaries representing a division or line of business or (c) any
other properties or assets of the Company or any Restricted Subsidiary, other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" does not include any transfer of properties or assets (i)
that is governed by the provisions of the Indenture described under
"-- Consolidation, Merger and Sale of Assets," (ii) between or among the Company
and its Restricted Subsidiaries pursuant to transactions that do not violate any
other provision of the Indenture, (iii) to any Person to the extent it
constitutes a Restricted Payment that is permitted under the covenant described
under "-- Certain Covenants -- Limitation on Restricted Payments," (iv)
consisting of inventory or wornout, obsolete or permanently retired equipment
and facilities, (v) consisting of Receivables and Related Assets transferred
pursuant to a Receivables Program, (vi) consisting of Receivables and Related
Assets transferred pursuant to a Factoring Agreement provided that such transfer
is non-recourse to the Company or any Restricted Subsidiary with respect to not
less than 99.85% of the face amount of such Receivables and Related Assets,
(vii) the gross proceeds of which do not exceed $1.0 million in connection with
any transfer or $2.0 million in the aggregate for any fiscal year of the Company
or (viii) that constitutes a Permitted Investment.
"Bankruptcy Code" means Title 11, United States Code, as amended.
"Banks" means the banks and other financial institutions that from time to
time are lenders under the New Credit Facility.
"Board of Directors" means, as the context requires, either the board of
directors of the Company or a Subsidiary Guarantor, as the case may be, or any
duly authorized committee of that board.
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
75% of the aggregate book value of the accounts receivable of the Company and
its Restricted Subsidiaries (net of bad debt reserves) and (b) 50% of the
aggregate net book value of the inventory of the Company and its Restricted
Subsidiaries, all
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calculated on a consolidated basis in accordance with GAAP as of the last day of
the immediately preceding fiscal quarter for which internal financial statements
are available.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" of any Person means any and all shares, partnership
interests, participations, rights in or other equivalents of, or interests in,
the equity of such Person, but excluding any debt securities convertible into
such equity.
"Cash Equivalents" means (a) any evidence of Debt with a maturity of 180
days or less issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof (provided that the
full faith and credit of the Untied States of America is pledged in support
thereof); (b) certificates of deposit or acceptances or Eurodollar time deposits
with a maturity of 180 days or less of, and overnight bank deposits and demand
accounts with, any financial institution that is a member of the Federal Reserve
System having combined capital and surplus and undivided profits of not less
than $500 million; (c) commercial paper with a maturity of 180 days or less
issued by a corporation that is not an Affiliate of the Company and is organized
under the laws of any state of the United States or the District of Columbia and
rated at least A-1 by S&P or at least P-1 by Moody's; and (d) funds which invest
in any of the foregoing.
"Change of Control" means the occurrence of any of the following events:
(a) Any Person or "group" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a Person will be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the voting power of all
classes of Voting Stock of the Company;
(b) During any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board of Directors,
or whose nomination for election by the stockholders of the Company, was
approved by a vote of 66 2/3% of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or
(c) The Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution, other than a transaction that complies with the
provisions of the covenant described under "-- Consolidation, Merger and
Sales of Assets."
"Closing Date" means June 24, 1998, the date on which the Notes were
originally issued under the Indenture.
"Consolidated EBITDA" means, for any period, the sum of, without
duplication, (a) cash dividends paid on Disqualified Stock by the Company or any
Restricted Subsidiary (to any Person other than the Company and its Restricted
Subsidiaries) plus (b) Consolidated Net Income for such period, plus (or, in the
case of clause (iv) below, plus or minus) the following items to the extent
included in computing Consolidated Net Income for such period (i) Fixed Charges
for such period, plus (ii) the federal, state, local and foreign income tax
expense of the Company and its Restricted Subsidiaries for such period, plus
(iii) the depreciation and amortization expense of the Company and its
Restricted Subsidiaries for such period, plus (iv) any other non-cash charges
for such period and minus non-cash credits for such period, other than non-cash
charges or credits resulting from changes in prepaid assets or accrued
liabilities in the ordinary course of business; provided that income tax
expense, depreciation and amortization expense and non-cash charges and credits
of
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a Restricted Subsidiary will be included in Consolidated EBITDA only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income for such period.
"Consolidated Net Income" means, for any period, the net income (or net
loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any net
after-tax extraordinary gains or losses (less all fees and expenses relating
thereto), (b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to Asset Sales, (c) the net income (but not the
net loss) of any Person (other than the Company or a Restricted Subsidiary), in
which the Company or any Restricted Subsidiary has an equity interest, except
that the aggregate amount of dividends or other distributions actually paid to
the Company or any Restricted Subsidiary in cash during such period will be
included in such Consolidated Net Income, (d) the net income (or loss) of any
Person acquired by the Company or any Restricted Subsidiary in a "pooling of
interests" transaction attributable to any period prior to the date of such
acquisition, and (e) the net income (but not the net loss) of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is at the date of
determination restricted, directly or indirectly, except that the aggregate
amount of such net income that could be paid to the Company or a Restricted
Subsidiary thereof by loans, advances, intercompany transfers, principal
repayments or otherwise will be included in such Consolidated Net Income.
"Consolidated Net Worth" means, at any date of determination, the
stockholders' equity of the Company and its Restricted Subsidiaries as set forth
on the most recently available quarterly or annual consolidated balance sheet of
the Company and its Restricted Subsidiaries, less any amounts attributable to
Disqualified Stock or any equity security convertible into or exchangeable for
Debt, the cost of treasury stock and the principal amount of any promissory
notes receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries and less, to the extent included in calculating such
stockholders' equity of the Company and its Restricted Subsidiaries, the
stockholders' equity attributable to Unrestricted Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Currency Agreements" means, with respect to any Person, any spot or
forward foreign exchange agreements and currency swap, currency option or other
similar financial agreements or arrangements entered into by such Person or any
of its Restricted Subsidiaries in the ordinary course of business and designed
to protect against or manage exposure to fluctuations in foreign currency
exchange rates.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (a) every obligation of such Person for money borrowed, (b) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, (c) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (d) every obligation of such Person issued or assumed as
the deferred purchase price of property or services, (e) every Capitalized Lease
Obligation of such Person, (f) all Disqualified Stock of such Person valued at
its maximum fixed repurchase price (including, without duplication, accrued and
unpaid dividends), (g) all obligations of such Person under or in respect of
Hedging Obligations to the extent such Hedging Obligations would appear as a
liability on the balance sheet of such Person prepared in accordance with GAAP
and (h) every obligation of the type referred to in clauses (a) through (g) of
another Person and all dividends of another Person the payment of which, in
either case, such Person has guaranteed. For purposes of this definition, the
"maximum fixed repurchase price" of any Disqualified Stock that does not have a
fixed repurchase price will be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date on
which Debt is required to be determined pursuant to the Indenture, and if such
price is based upon, or measured by, the fair market value of such Disqualified
Stock, such fair market value will be determined in good faith by the board of
directors of the issuer of such Disqualified Stock. Notwithstanding the
foregoing, trade accounts payable and accrued liabilities arising in the
ordinary course of business and any liability for federal, state or local taxes
or other taxes owed by such Person will not be considered Debt for purposes of
this definition.
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"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Assets" means the properties and assets used in Farah's
European, Far East and South Pacific operations identified in Note 10 to the
Consolidated Financial Statements of Farah for its fiscal year ended November 2,
1997 included elsewhere in this Prospectus.
"Designated Senior Debt" means (i) all Senior Debt under the New Credit
Facility and (ii) any other issue of Senior Debt or refinancing thereof
permitted by the definition of Senior Debt, having a principal amount of at
least $25.0 million and which has been designated by the Company as Designated
Senior Debt in the instrument evidencing or governing such Senior Debt.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors, to make a finding or otherwise
take action under the Indenture, a member of the Board of Directors who does not
have any material direct or indirect financial interest in or with respect to
such transaction or series of transactions.
"Disqualified Stock" means any class or series of Capital Stock that,
either by its terms, or by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise (a) is, or upon the
happening of an event or passage of time would be, required to be redeemed prior
to one year after the final Stated Maturity of the Notes, (b) is redeemable at
the option of the holder thereof at any time prior to one year after such final
Stated Maturity or (c) at the option of the holder thereof, is convertible into
or exchangeable for debt securities at any time prior to one year after such
final Stated Maturity; provided that any Capital Stock that would not constitute
Disqualified Stock but for provisions therein giving holders thereof the right
to cause the issuer thereof to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes will not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital Stock
are no more favorable to the holders of such Capital Stock than the provisions
contained in the covenants described under "-- Certain Covenants -- Limitation
on Asset Sales" and "-- Repurchase at the Option of Holders Upon Change of
Control" and such Capital Stock specifically provides that the issuer will not
repurchase or redeem any of such stock pursuant to such provision prior to the
Company's repurchase of such of the Notes as are required to be repurchased
pursuant to the covenants described under "-- Certain Covenants -- Limitation on
Asset Sales" and "Repurchase at the Option of Holders Upon Change of Control."
"Domestic Subsidiary" means any Subsidiary whose jurisdiction of
incorporation, organization or formation is the United States, any state thereof
or the District of Columbia.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Factoring Agreement" means (i) the Factoring Agreement dated October 1,
1995 between the Company and Heller Financial, Inc. or (ii) any other factoring
agreement between the Company and/or one or more Restricted Subsidiaries, on the
one hand, and a financial institution, on the other hand, on substantially
similar terms to the factoring agreement referred to in the foregoing clause (i)
pursuant to which the Company and/or such Restricted Subsidiaries factor
Receivables and Related Assets.
"Fixed Charges" means, for any period, without duplication, the sum of (a)
the amount that, in conformity with GAAP, would be set forth opposite the
caption "interest expense" (or any like caption) on a consolidated statement of
operations of the Company and its Restricted Subsidiaries for such period,
including, without limitation, (i) amortization of debt discount, (ii) the net
cost of Interest Rate Agreements (including amortization of discounts), (iii)
the interest portion of any deferred payment obligation, (iv) amortization of
debt issuance costs and (v) the interest component of Capitalized Lease
Obligations, plus (b) cash dividends paid on Preferred Stock and Disqualified
Stock by the Company and any Restricted Subsidiary (to any Person other than the
Company and its Restricted Subsidiaries), plus (c) all interest on any Debt of
any Person guaranteed by the Company or any of its Restricted Subsidiaries;
provided, however, that Fixed Charges will not include (i) any gain or loss from
extinguishment of debt, including the write-off of debt issuance costs and (ii)
the fixed charges of a Restricted Subsidiary to the extent (and in the same
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proportion) that the net income of such Subsidiary was excluded in calculating
Consolidated Net Income pursuant to clause (e) of the definition thereof for
such period.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of (a)
Consolidated EBITDA for such period to (b) Fixed Charges for such period.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, that
are in effect on the date of determination.
"guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of all or any part of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limitation, the payment of
amounts drawn down under letters of credit.
"Hedging Obligations" means the obligations of any Person under (i)
Interest Rate Agreements and (ii) Currency Agreements.
"Holder" means the Person in whose name a Note is, at the time of
determination, registered on the Registrar's books.
"Interest Rate Agreements" means any interest rate protection agreements
and other types of interest rate hedging agreements (including, without
limitation, interest rate swaps, caps, floors, collars and similar agreements)
and other related agreements entered into in the ordinary course of business and
designed to protect against or manage exposure to fluctuations in interest
rates.
"Investment" in any Person means (a) any direct or indirect advance, loan
or other extension of credit or capital contribution (by means of any transfer
of cash or other property to others or any payment for property or services for
the account or use of others) to, or any purchase, acquisition or ownership of
any Capital Stock, Debt or other securities issued by such Person, the
acquisition (by purchase or otherwise) of all or substantially all of the
business or assets of such Person, or the making of any investment of cash or
other property in such Person, (b) the designation of any Restricted Subsidiary
as an Unrestricted Subsidiary, (c) the transfer of any assets or properties from
the Company or a Restricted Subsidiary to an Unrestricted Subsidiary, other than
the transfer of assets or properties made in the ordinary course of business and
(d) the fair market value of the Capital Stock (or any other Investment), held
by the Company or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary. Investments exclude extensions of
trade credit on commercially reasonable terms in accordance with normal trade
practices.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents, including payments in respect
of deferred payment obligations, but only as and when received, in the form of,
or stock or other assets when disposed of for, cash or Cash Equivalents (except
to the extent that such obligations are financed or sold with recourse to the
Company or any Restricted Subsidiary), net of (a) brokerage commissions and
other fees and expenses (including fees and expenses of legal counsel,
accountants and investment banks) related to such Asset Sale, (b) provisions for
all taxes payable or required to be accrued in accordance with GAAP as a result
of such Asset Sale, (c) payments made to retire Debt where payment of such Debt
is secured by a Lien on the assets that are the subject of such Asset Sale, (d)
amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets that are
subject to the Asset Sale and (e) appropriate amounts to be provided by the
Company or any Restricted Subsidiary, as the case may be, as a reserve required
in accordance with GAAP against any liabilities associated with such Asset Sale
and retained by the seller after such Asset Sale, including pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
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"New Credit Facility" means the credit agreement dated as of June 10, 1998
among the Company, the Banks and Fleet Capital Corporation, as agent, as such
agreement may be amended, renewed, extended, substituted, replaced, restated,
refinanced, restructured, supplemented or otherwise modified from time to time
(including, without limitation, any successive amendments, renewals, extensions,
substitutions, replacements, restatements, refinancings, restructuring,
supplements or other modifications of the foregoing); provided that with respect
to any agreement providing for the refinancing, substitution or replacement of
Debt under the New Credit Facility (including any such agreement which increases
the principal amount thereof), such agreement shall be the New Credit Facility
for the purposes of this definition only if a notice to that effect is delivered
by the Company to the Trustee and there shall be at any time only one credit
agreement that is the New Credit Facility under the Indenture.
"Pari Passu Debt" means any Debt of the Company or any Subsidiary
Guarantor, whether outstanding at the date of the Indenture or incurred
thereafter, that ranks pari passu in right of payment with the Notes or any
Subsidiary Guarantee, as the case may be.
"Permitted Debt" means:
(i) Debt of the Company or any Restricted Subsidiary under the New
Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed the greater of (x) $110.0 million or (y) the
amount of the Borrowing Base, less in either case (A) any amounts applied
to the permanent reduction of the New Credit Facility pursuant to the
covenant described under "-- Certain Covenants -- Limitation on Asset
Sales" and (B) the amount of Debt of all Receivables Subsidiaries then
outstanding under clause (ix).
(ii) Debt of the Company or any Restricted Subsidiary outstanding on
the Closing Date, other than Debt described under clause (i) above.
(iii) Debt owed by the Company to any Wholly Owned Restricted
Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly
Owned Restricted Subsidiary (provided that such Debt is held by the Company
or such Wholly Owned Restricted Subsidiary); provided, however, that if the
Company is the obligor on such Debt, such Debt is unsecured and
subordinated in all respects to the Company's obligations under the Notes
and provided, further, however, that if any such Wholly Owned Restricted
Subsidiary ceases to be (for any reason) a Wholly Owned Restricted
Subsidiary, then this clause (iii) shall no longer be applicable to Debt
owed by the Company or any Restricted Subsidiary to such Restricted
Subsidiary that was formerly a Wholly Owned Restricted Subsidiary.
(iv) Debt represented by the Notes (other than any Additional Notes)
and the Subsidiary Guarantees.
(v) Debt of the Company or any Restricted Subsidiary in respect of
Hedging Obligations.
(vi) Capital Lease Obligations of the Company or any Restricted
Subsidiary, provided that the aggregate amount of Debt under this clause
(vi) does not exceed $5.0 million at any one time outstanding.
(vii) Debt of the Company or any Restricted Subsidiary under purchase
money mortgages or secured by purchase money security interests so long as
(x) such Debt is not secured by any property or assets of the Company or
any Restricted Subsidiary other than the property and assets so acquired
and (y) such Debt is created within 90 days of the acquisition of the
related property; provided that the aggregate amount of Debt under this
clause (vii) does not exceed $5.0 million at any one time outstanding.
(viii) guarantees by the Company or any Restricted Subsidiary of Debt
that was permitted to be incurred by the provisions of the covenant
described under "-- Certain Covenants -- Limitation on Debt and Issuance of
Disqualified Stock" and, with respect to guarantees by any Restricted
Subsidiary, made in accordance with the provisions of the covenant
described under "-- Certain Covenants -- Guarantees of Debt by Restricted
Subsidiaries."
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(ix) Debt incurred by a Receivables Subsidiary, other than Debt
described in clause (iii) above, in an amount not exceeding 95% of the
aggregate unpaid balance of the Receivables and Related Assets of such
Receivables Subsidiary at the time of such incurrence pursuant to a
Receivables Program.
(x) Debt of the Company or any Restricted Subsidiary, not otherwise
permitted by any other clause of this definition, in an aggregate principal
amount not to exceed $12.0 million at any one time outstanding.
(xi) Debt of one or more Foreign Subsidiaries under one or more credit
facilities in an aggregate principal amount not to exceed $7.0 million at
any one time outstanding.
(xii) Debt evidenced by letters of credit securing obligations entered
into in the ordinary course of business in an aggregate principal amount
not to exceed $10.0 million at any one time outstanding to the extent such
letters of credit are not drawn upon or, if and to the extent drawn upon,
such drawing is reimbursed not later than the fifth Business Day following
receipt of a demand for reimbursement following payment on such letter of
credit.
(xiii) Any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
outstanding Debt incurred pursuant to clause (ii) and (iv) above, including
any successive refinancings thereof, so long as (A) the principal amount of
such refinancing Debt does not exceed (1) the principal amount of the Debt
being refinanced, plus (2) the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Debt
refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing, plus (3) the amount of
the expenses of the Company reasonably estimated to be incurred in
connection with such refinancing, (B) in the case of any refinancing of
Subordinated Debt of the Company or any Subsidiary Guarantors, such
refinancing Debt is subordinated to the Notes or the Subsidiary Guarantees,
as the case may be, at least to the same extent as the Debt being
refinanced and (C) such refinancing Debt has a Weighted Average Life equal
to or greater than the Weighted Average Life of the Debt being refinanced
and has a final Stated Maturity no earlier than the final Stated Maturity
of the Debt being refinanced.
"Permitted Holders" means each of William W. Compton, Michael Kagan and
their respective Affiliates.
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents.
(b) Investments by the Company or any Restricted Subsidiary in another
Person, if as a result of such Investment such other Person (i) becomes a
Restricted Subsidiary or (ii) is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, the Company
or a Restricted Subsidiary.
(c) Investments by the Company or any of the Restricted Subsidiaries
in any one of the other of them.
(d) Investments existing on the Closing Date.
(e) Investments made as a result of the receipt of non-cash
consideration in an Asset Sale permitted under the covenant described under
"-- Certain Covenants -- Limitation on Asset Sales."
(f) Investments consisting of loans and advances to officers and
employees of the Company or any Restricted Subsidiary for reasonable
travel, relocation and business expenses in the ordinary course of business
or other loans or advances to officers or employees of the Company or a
Restricted Subsidiary in an aggregate principal amount not to exceed
$500,000 at any one time outstanding.
(g) Investments the payment for which consists exclusively of Capital
Stock (exclusive of Disqualified Stock) of the Company.
(h) Investments by the Company or a Restricted Subsidiary in a
Receivables Subsidiary.
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(i) Investments in any Person the primary business of which is
related, ancillary or complementary to the business of the Company and its
Restricted Subsidiaries on the date of such Investment not to exceed $5.0
million at any one time outstanding.
(j) Other Investments by the Company or a Restricted Subsidiary that
do not exceed $5.0 million in the aggregate at any one time outstanding.
"Person" means any individual, corporation, limited or general partnership,
limited liability company, joint venture, association, joint stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued after
the Closing Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Public Equity Offering" means an offer and sale of common stock (which is
Qualified Stock) of the Company pursuant to a registration statement that has
been declared effective by the Commission pursuant to the Securities Act (other
than a registration statement on Form S-8 or otherwise relating to equity
securities issuable under any employee benefit plan of the Company).
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any Person means any and all Capital Stock of such
Person, other than Disqualified Stock.
"Receivables and Related Assets" means accounts receivable, instruments,
chattel paper, obligations, general intangibles and other similar assets,
including interests in merchandise or goods, the sale or lease of which give
rise to the foregoing, related contractual rights, guarantees, insurance
proceeds, collections, other related assets and proceeds of all of the
foregoing.
"Receivables Program" means, with respect to any Person, any accounts
receivable securitization program pursuant to which such Person, directly or
indirectly, pledges, sells or otherwise transfers or encumbers its accounts
receivable, including to a trust, limited liability company, special purpose
entity or other similar entity.
"Receivables Subsidiary" means a Wholly Owned Restricted Subsidiary of the
Company (i) created for the purpose of financing receivables created in the
ordinary course of business of the Company and its Restricted Subsidiaries and
(ii) the sole assets of which consist of Receivables and Related Assets of the
Company and its Restricted Subsidiaries and related Permitted Investments.
"Restricted Payment" means any of the following:
(a) the declaration or payment of any dividend on, or the making of
any distribution to holders of, any shares of the Capital Stock of the
Company or any Restricted Subsidiary other than (i) dividends or
distributions payable solely in Qualified Equity Interests, (ii) dividends
or distributions by a Restricted Subsidiary payable to the Company or
another Restricted Subsidiary or (iii) pro rata dividends or distributions
on common stock of a Restricted Subsidiary held by minority stockholders,
provided that such dividends do not in the aggregate exceed the minority
stockholders' pro rata share of such Restricted Subsidiary's net income
from the first day of the Company's fiscal quarter during which the Closing
Date occurs;
(b) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly of any shares of Capital Stock (or any
options, warrants or other rights to acquire shares of Capital Stock) of
(i) the Company or any Unrestricted Subsidiary or (ii) any Restricted
Subsidiary held by any Affiliate of the Company (other than, in either
case, any such Capital Stock owned by the Company or any of its Restricted
Subsidiaries);
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(c) the making of any principal payment on, or the repurchase,
redemption, defeasance or other acquisition or retirement for value, prior
to any scheduled principal payment, sinking fund payment or maturity, of
any Subordinated Debt; or
(d) the making of any Investment (other than a Permitted Investment)
in any Person.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Senior Debt" means the principal of and premium, if any, and interest on
(including interest accruing after the filing of a petition initiating any
proceeding pursuant to any bankruptcy law, whether or not allowed) and other
amounts due on or in connection with any Debt of the Company (other than the
Notes or Pari Passu Debt), whether outstanding on the date of the Indenture or
thereafter Incurred, unless, in the case of such Debt, the instrument creating
or evidencing the same or pursuant to which the same is outstanding expressly
provides that such Debt will be pari passu with or subordinate in right of
payment to the Notes. Without limiting the generality of the foregoing, "Senior
Debt" includes the principal of and premium, if any, and interest (including
interest accruing after the occurrence of an event of default or after the
filing of a petition initiating any proceeding pursuant to any bankruptcy law,
whether or not allowed) on all obligations of every nature of the Company from
time to time owed to the Banks under the New Credit Facility, provided, however,
that any Debt under any refinancing, refunding or replacement of the New Credit
Facility will not constitute Senior Debt to the extent that the Debt thereunder
is by its express terms subordinate to any other Debt of the Company.
Notwithstanding the foregoing, "Senior Debt" will not include (a) Debt
represented by Disqualified Stock, (b) any trade payables, (c) Debt of or
amounts owed by the Company for compensation to employees or for services
rendered to the Company, (d) any liability for foreign, federal, state, local or
other taxes owed or owing by the Company, (e) Debt of the Company to a
Subsidiary of the Company or any other Affiliate of the Company or any of such
Affiliate's Subsidiaries, (f) that portion of any Debt that, at the time of the
incurrence, is incurred by the Company in violation of the Indenture, (g)
amounts owing under leases (other than Capital Lease Obligations) and (h) Debt
that is without recourse to the Company (regardless of any election under
Section 1111(b) of the Bankruptcy Code).
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that would be a "Significant Subsidiary" of the Company within the meaning of
Rule 1-02 under Regulation S-K promulgated by the Commission as such Rule is in
effect on the date of the Indenture.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable and, when used with respect to any other Debt, means the date
specified in the instrument governing such Debt as the fixed date on which the
principal of such Debt or any installment of interest thereon is due and
payable, and will not, in either case, include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Debt" means Debt of the Company or a Subsidiary Guarantor
that is subordinated in right of payment to the Notes or the Subsidiary
Guarantee issued by such Subsidiary Guarantor, as the case may be.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more Subsidiaries of the Company.
"Subsidiary Guarantee" means a guarantee of the Notes by a Restricted
Subsidiary in accordance with the provisions of the Indenture.
"Subsidiary Guarantor" means any Restricted Subsidiary that issues a
Subsidiary Guarantee.
"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary in accordance with the
covenant described under "-- Certain Covenants -- Unrestricted Subsidiaries" and
(b) any Subsidiary of an Unrestricted Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors,
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managers or trustees of any Person (irrespective of whether or not, at the time,
stock of any other class or classes has, or might have, voting power by reason
of the happening of any contingency).
"Weighted Average Life" means, as of the date of determination with respect
to any Debt or Disqualified Stock, the quotient obtained by dividing (a) the sum
of the products of (i) the number of years from the date of determination to the
date or dates of each successive scheduled principal or liquidation value
payment of such Debt or Disqualified Stock, respectively, multiplied by (ii) the
amount of each such principal or liquidation value payment by (b) the sum of all
such principal or liquidation value payments.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all
of the outstanding Capital Stock (other than directors' qualifying shares or
shares of foreign Restricted Subsidiaries required to be owned by foreign
nationals pursuant to applicable law) of which is owned, directly or indirectly,
by the Company.
CERTAIN COVENANTS
Limitation on Debt and Issuance of Disqualified Stock. The Company will
not, and will not permit any Restricted Subsidiary to, create, issue, assume,
guarantee or in any manner become directly or indirectly liable for the payment
of, or otherwise incur (collectively, "incur") any Debt (including Acquired
Debt), other than Permitted Debt, or issue any Disqualified Stock, except that
the Company or a Restricted Subsidiary may incur Debt or issue Disqualified
Stock if, at the time of such incurrence or issuance, the Fixed Charge Coverage
Ratio for the four full fiscal quarters (taken as one accounting period)
immediately preceding the incurrence of such Debt or the issuance of such
Disqualified Stock for which internal financial statements are available would
have been equal to at least 2.0 to 1.0 if such incurrence is on or prior to the
second anniversary of the Closing Date and 2.25 to 1.0 if thereafter.
In making the foregoing calculation for any four-quarter period that
includes the Closing Date, pro forma effect will be given to the Transactions as
if such transactions had occurred at the beginning of such four-quarter period.
In addition (but without duplication), in making the foregoing calculation, pro
forma effect will be given to: (i) the incurrence of such Debt and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Debt, as if such Debt was incurred and the application of such
proceeds occurred at the beginning of such four-quarter period, (ii) the
incurrence, repayment or retirement of any other Debt by the Company or its
Restricted Subsidiaries since the first day of such four-quarter period as if
such Debt was incurred, repaid or retired at the beginning of such four-quarter
period, (iii) the acquisition (whether by purchase, merger or otherwise) or
disposition (whether by sale, merger or otherwise) of any other company, entity
or business acquired or disposed of by the Company or any Restricted Subsidiary,
as the case may be, since the first day of such four-quarter period, as if such
acquisition or disposition occurred at the beginning of such four-quarter
period. In making a computation under the foregoing clause (i) or (ii), (A)
interest on Debt bearing a floating interest rate will be computed as if the
rate in effect on the date of computation had been the applicable rate for the
entire period (taking into account any Hedging Obligations applicable to such
Debt if such Hedging Obligations have a remaining term at the date of
determination in excess of 12 months), (B) if such Debt bears, at the option of
the Company, a fixed or floating rate of interest, interest thereon will be
computed by applying, at the option of the Company, either the fixed or floating
rate and (C) the amount of Debt under a revolving credit facility will be
computed based upon the average daily balance of such Debt during such
four-quarter period.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make any Restricted
Payment unless at the time of, and immediately after giving effect to, the
proposed Restricted Payment: (i) no Default or Event of Default has occurred and
is continuing, (ii) the Company could incur at least $1.00 of additional Debt
(other than Permitted Debt) pursuant to the first paragraph of the covenant
described under "-- Certain Covenants -- Limitation on Debt and Issuance of
Disqualified Stock," and (iii) the aggregate amount of all Restricted Payments
declared or made after the Closing Date does not exceed the sum of:
(A) 50% of the Consolidated Net Income of the Company accrued on a
cumulative basis during the period (taken as one accounting period)
beginning on the first day of the Company's fiscal quarter during which the
Closing Date occurs and ending on the last day of the Company's most
recently ended
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fiscal quarter for which internal financial statements are available at the
time of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income is a loss, minus 100% of such amount), plus
(B) the aggregate net cash proceeds received by the Company after the
Closing Date from the issuance or sale (other than to a Subsidiary) of, or
as a capital contribution in respect of, Qualified Equity Interests of the
Company (excluding from this computation proceeds of a Public Equity
Offering used to redeem Notes as discussed above), plus
(C) the aggregate net proceeds, including the fair market value of
property other than cash (as determined by the Board of Directors, whose
good faith determination will be conclusive), received by the Company after
the Closing Date from the issuance or sale (other than to a Subsidiary) of
debt securities or Disqualified Stock that have been converted into or
exchanged for Qualified Stock of the Company, together with the aggregate
net cash proceeds received by the Company at the time of such conversion or
exchange, plus
(D) $5.0 million.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take any of the following actions, so long as, with respect to
clauses (ii), (v) and (viii), no Default or Event of Default has occurred and is
continuing or would occur:
(i) The payment of any dividend within 60 days after the date of
declaration thereof, if at the declaration date such payment would not have
been prohibited by the foregoing provision;
(ii) The repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company, in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to a Subsidiary) of, Qualified Equity Interests of the
Company;
(iii) The purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Debt in exchange for, or out of
the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of Qualified Equity Interests of the Company;
(iv) The purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Debt in exchange for, or out of the
net cash proceeds of a substantially concurrent issuance or sale (other
than to a Subsidiary) of, new Subordinated Debt, so long as the Company or
a Restricted Subsidiary would be permitted to refinance such original
Subordinated Debt with such new Subordinated Debt pursuant to clause (xiii)
of the definition of Permitted Debt;
(v) The repurchase of any Subordinated Debt at a purchase price not
greater than 101% of the principal amount of such Subordinated Debt in the
event of a "change of control" in accordance with provisions similar to the
"Change of Control" covenant; provided that, prior to or simultaneously
with such repurchase, the Company has made the Change of Control Offer as
provided in such covenant with respect to the Notes and has repurchased all
Notes validly tendered for payment in connection with such Change of
Control Offer;
(vi) The purchase of any Capital Stock, or options to purchase Capital
Stock, of Farah pursuant to the Merger Agreement;
(vii) The payment of amounts to shareholders of Farah pursuant to
appraisal rights in respect of up to 33 1/3% of the Capital Stock of Farah
required by law in connection with the Merger; and
(viii) The repurchase of, or options to purchase, Qualified Equity
Interests of the Company or any of its Subsidiaries from employees, former
employees, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors or their respective estates), pursuant to the
terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors of the Company under
which such individuals purchase or sell or are granted the option or right
to purchase or sell such Qualified Equity Interests; provided further,
however, that the aggregate amount of such repurchases
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shall not exceed $1.0 million in any calendar year (excluding any such
repurchases funded with the proceeds of any life insurance policy or
policies maintained by the Company or under which the Company is the
beneficiary).
The payments described in clauses (ii), (iii), (v) and (viii) of this
paragraph will be Restricted Payments that will be permitted to be taken in
accordance with this paragraph (b) but will reduce the amount that would
otherwise be available for Restricted Payments under the clause (iii) of
paragraph (a) of this covenant and the payments described in clauses (i), (iv),
(vi) and (vii) of this paragraph (b) will be Restricted Payments that will be
permitted to be taken in accordance with this paragraph (b) and will not reduce
the amount that would otherwise be available for Restricted Payments under
clause (iii) of paragraph (a) of this covenant.
(c) For the purpose of making any calculations under the Indenture, (i) if
a Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company
will be deemed to have made an Investment in amount equal to the greater of fair
market value or net book value of the net assets of such Restricted Subsidiary
at the time of such designation as determined by the Board of Directors of the
Company, whose good faith determination will be conclusive, (ii) any property
transferred to or from an Unrestricted Subsidiary will be valued at fair market
value at the time of such transfer, as determined by the Board of Directors of
the Company, whose good faith determination will be conclusive and (iii) subject
to the foregoing, the amount of any Restricted Payment, if other than cash, will
be determined by the Board of Directors of the Company, whose good faith
determination will be conclusive.
If the aggregate amount of all Restricted Payments calculated under
paragraph (a) of this covenant includes an Investment in an Unrestricted
Subsidiary or other Person that thereafter becomes a Restricted Subsidiary, the
aggregate amount of all Restricted Payments calculated under the first paragraph
of this covenant will be reduced by the lesser of (x) the net asset value of
such Subsidiary at the time it becomes a Restricted Subsidiary and (y) the
initial amount of such Investment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under this covenant will
be reduced by the amount of any net reduction in such Investment (resulting from
the payment of interest or dividends, loan repayment, transfer of assets or
otherwise), to the extent such net reduction is not included in the Company's
Consolidated Net Income; provided that the total amount by which the aggregate
amount of all Restricted Payments may be reduced may not exceed the lesser of
(x) the cash proceeds received by the Company and its Restricted Subsidiaries in
connection with such net reduction and (y) the initial amount of such
Investment.
Limitation on Asset Sales. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any Asset Sale unless (i) the consideration
received by the Company or such Restricted Subsidiary for such Asset Sale is not
less than the fair market value of the assets sold (as determined by the Board
of Directors of the Company, whose good faith determination will be conclusive
and evidenced by a resolution of the Board of Directors) and (ii) the
consideration received by the Company or the relevant Restricted Subsidiary in
respect of such Asset Sale consists of at least 75% cash or Cash Equivalents;
provided that the amount of (x) any liabilities (as shown on the most recent
balance sheet of the Company or such Restricted Subsidiary) of the Company or
any of its Restricted Subsidiaries (other than liabilities that are by their
terms subordinated to the Notes or any guarantee thereof) that are assumed by
the transferee of any such assets pursuant to a customary novation agreement
that releases the Company or such Restricted Subsidiary from further liability
and (y) any securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are promptly converted
by the Company or such Restricted Subsidiary into cash or Cash Equivalents (to
the extent of the cash or Cash Equivalents received), shall be deemed to be cash
or Cash Equivalents, as the case may be, for purposes of this provision.
If the Company or any Restricted Subsidiary engages in an Asset Sale, the
Company may, at its option, within 360 days after such Asset Sale, (i) apply all
or a portion of the Net Cash Proceeds to the permanent reduction of amounts
outstanding under the New Credit Facility or to the repayment of other Senior
Debt of the Company or a Restricted Subsidiary or (ii) invest (or enter into a
legally binding agreement to invest or cause a Restricted Subsidiary to invest
or enter into such agreement to invest) all or a portion of such Net
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Cash Proceeds in properties and assets to replace the properties and assets that
were the subject of the Asset Sale or in properties and assets that will be used
in businesses of the Company or its Restricted Subsidiaries, as the case may be,
as such businesses are conducted prior to such Asset Sale. If any such legally
binding agreement to invest such Net Cash Proceeds is terminated, the Company
may, within 90 days of such termination or within 360 days of such Asset Sale,
whichever is later, invest such Net Cash Proceeds as provided in clause (i) or
(ii) (without regard to the parenthetical contained in such clause (ii)) above.
Notwithstanding clause (ii) of the immediately preceding paragraph, if the
Company or a Restricted Subsidiary engages in an Asset Sale of Designated Assets
within 365 days after the Closing Date, the Company or the relevant Restricted
Subsidiary shall be required to receive, with respect to consideration of up to
$11.0 million received in respect of such Asset Sale of Designated Assets, 25%
of such consideration in the form of cash and Cash Equivalents and, with respect
to consideration, if any, in excess of $11.0 million received in respect of such
Asset Sale of Designated Assets, 75% of such consideration in the form of cash
and Cash Equivalents. The amount of such Net Cash Proceeds not so used as set
forth above in this paragraph constitutes "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $5.0 million, the
Company will, within 30 days thereafter, make an offer to purchase from all
Holders of Notes and the Additional Notes, if any, on a pro rata basis, the
maximum principal amount (expressed as a multiple of $1,000) of the Notes and
the Additional Notes, if any, that may be purchased with the Excess Proceeds (an
"Asset Sale Offer"). The offer price as to each Note will be payable in cash in
an amount equal to 100% of the principal amount of such Note, plus in each case
accrued and unpaid interest, if any, to the date of repurchase. To the extent
that the aggregate principal amount of Notes and the Additional Notes, if any,
tendered pursuant to such Asset Sale Offer is less than the Excess Proceeds, the
Company may use the portion of the Excess Proceeds not required to be used to
repurchase the Notes and the Additional Notes, if any, for any other purpose as
determined by the Company which is not prohibited by the Indenture. If the
aggregate principal amount of Notes and the Additional Notes validly tendered
and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes and
the Additional Notes to be purchased will be selected on a pro rata basis (based
upon the principal amount of Notes). Upon completion of such Asset Sale Offer,
the amount of Excess Proceeds will be reset to zero.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, create, incur, affirm or suffer to exist any Lien of
any kind securing any Pari Passu Debt or Subordinated Debt (including any
assumption, guarantee or other liability with respect thereto by any Restricted
Subsidiary) upon any property or assets (including any intercompany notes) of
the Company or any Restricted Subsidiary now owned or acquired after the Closing
Date, or any income or profits therefrom, unless the Notes are directly secured
equally and ratably with (or prior to in the case of Subordinated Debt) the
obligation or liability secured by such Lien, and except for any Lien securing
Acquired Debt created prior to the incurrence of such Debt by the Company or any
Restricted Subsidiary, provided that any such Lien only extends to the assets
that were subject to such Lien securing such Acquired Debt prior to the related
acquisition by the Company or the Restricted Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise,
or make any other distributions on or in respect of its Capital Stock, (b) pay
any Debt owed to the Company or any other Restricted Subsidiary, (c) make loans
or advances to the Company or any other Restricted Subsidiary or (d) transfer
any of its properties or assets to the Company or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or by
reason of (i) the Indenture, the New Credit Facility, as originally executed and
any other agreement in effect on the Closing Date to the extent listed on a
schedule attached to the Indenture, (ii) applicable law, (iii) customary
non-assignment provisions of any lease governing a leasehold interest of the
Company or any Restricted Subsidiary, (iv) any agreement or other instrument of
a Person acquired by the Company or any Restricted Subsidiary in existence at
the time of such acquisition (but not created in contemplation thereof), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired,
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(v) any encumbrance or restriction contained in contracts for sales of Capital
Stock or assets permitted by the covenant described under "-- Certain
Covenants -- Limitation on Asset Sales" with respect to the assets to be sold
pursuant to such contract and (vi) any encumbrance or restriction existing under
any agreement that extends, renews, refinances or replaces the agreements
containing the encumbrances or restrictions in the foregoing clauses (i) and
(iv); provided that the terms and conditions of any such encumbrances or
restrictions are not materially less favorable to the Holders of Notes than
those under or pursuant to the agreement so extended, renewed, refinanced or
replaced.
Limitation on Layering Debt. The Company and each Subsidiary Guarantor
will not, directly or indirectly, incur or otherwise permit to exist any Debt
that is subordinate in right of payment to any Debt of the Company or such
Subsidiary Guarantor, as the case may be, unless such Debt is also pari passu
with, or subordinate in right of payment to, the Notes or the Subsidiary
Guarantee issued by such Subsidiary Guarantor, as the case may be, or
subordinate in right of payment to the Notes or such Subsidiary Guarantee, as
the case may be.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions with, or for
the benefit of, any Affiliate of the Company or any of its Restricted
Subsidiaries, unless (a) such transaction or series of related transactions is
on terms that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could have been obtained in an
arm's length transaction with third parties who are not Affiliates and (b)
either (i) with respect to any transaction or series of related transactions
involving aggregate payments in excess of $1.0 million, but less than $5.0
million, the Company delivers a resolution of the Board of Directors of the
Company set forth in an officers' certificate to the Trustee certifying that
such transaction or series of related transactions comply with clause (a) above
and that such transaction or transactions have been approved by the Board of
Directors (including a majority of the Disinterested Directors) of the Company
or (ii) with respect to a transaction or series of related transactions
involving aggregate payments equal to or greater than $5.0 million the Company
delivers to the Trustee (x) an officers' certificate certifying that such
transaction or series of related transactions have been approved by the Board of
Directors (including a majority of the Disinterested Directors) of the Company
and (y) a written opinion from a nationally recognized investment banking firm
to the effect that such transaction or series of related transactions are fair
to the Company or such Restricted Subsidiary from a financial point of view.
The foregoing covenant will not restrict any of the following:
(A) Transactions among the Company and/or its Restricted Subsidiaries.
(B) The Company from paying reasonable and customary regular
compensation or fees to, or entering into customary expense reimbursement,
indemnification or similar arrangements with, directors of the Company or
any Restricted Subsidiary who are not employees of the Company or any
Restricted Subsidiary.
(C) The issuance of securities or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans or incentive plans
approved by the Board of Directors.
(D) Transactions permitted by the provisions of the covenant described
under "-- Certain Covenants -- Limitation on Restricted Payments."
(E) In the case of joint ventures existing on the Closing Date in
which the Company has an interest, so long as other parties to the joint
venture that are not Affiliates of the Company own at least 50% of the
equity of such joint venture, transactions between such joint venture and
the Company or any Restricted Subsidiary.
(F) Transactions between a Receivables Subsidiary and any Person in
which the Receivables Subsidiary has an investment.
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Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue, convey, sell, assign, transfer,
lease or otherwise dispose of any shares of Capital Stock of a Restricted
Subsidiary (including options, warrants or other rights to purchase shares of
such Capital Stock) except (a) to the Company or a Wholly Owned Restricted
Subsidiary or (b) in a transaction or series of related transactions consisting
of a sale, provided that immediately after giving effect to such sale neither
the Company nor any of its Subsidiaries owns any shares of Capital Stock of such
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) and such sale complies with the covenant described
under "-- Certain Covenants -- Limitation on Asset Sales."
The Company will not permit any Restricted Subsidiary that is a Subsidiary
Guarantor to issue Preferred Stock.
Guarantees of Debt by Restricted Subsidiaries. All of the Company's
Domestic Restricted Subsidiaries (other than any Receivables Subsidiary) are and
will be Subsidiary Guarantors. As described above, the Indenture permits, under
certain circumstances, the release and discharge of the Subsidiary Guarantee
issued by a Subsidiary Guarantor. The Company will not permit any Restricted
Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to
guarantee, assume or in any other manner become liable for the payment of any
Debt of the Company or any Debt of any other Restricted Subsidiary unless (a)
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture providing for a guarantee of payment of the Notes by such Restricted
Subsidiary and (b) with respect to any guarantee of Subordinated Debt by a
Restricted Subsidiary, any such guarantee is subordinated to such Restricted
Subsidiary's guarantee with respect to the Notes at least to the same extent as
such Subordinated Debt is subordinated to the Notes, provided that the foregoing
provision will not be applicable to any guarantee by any Restricted Subsidiary
that existed at the time such Person became a Restricted Subsidiary and was not
incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary.
Unrestricted Subsidiaries. (a) The Board of Directors of the Company may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the Company
nor any Restricted Subsidiary is directly or indirectly liable for any Debt of
such Subsidiary, (ii) no default with respect to any Debt of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Debt of the Company or any Restricted Subsidiary to declare a default on such
other Debt or cause the payment thereof to be accelerated or payable prior to
its stated maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the covenant described under "-- Certain Covenants -- Limitation
on Restricted Payments," (iv) neither the Company nor any Restricted Subsidiary
has a contract, agreement, arrangement, understanding or obligation of any kind,
whether written or oral, with such Subsidiary other than those that might be
obtained at the time from Persons who are not Affiliates of the Company and (v)
neither the Company nor any Restricted Subsidiary has any obligation to
subscribe for additional shares of Capital Stock or other equity interest in
such Subsidiary, or to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results.
(b) The Board of Directors of the Company may designate any Unrestricted
Subsidiary as a Restricted Subsidiary; provided that (i) no Default or Event of
Default has occurred and is continuing following such designation and (ii) the
Company could incur at least $1.00 of additional Debt (other than Permitted
Debt) pursuant to the first paragraph of the covenant described under
"-- Certain Covenants -- Limitation on Debt and Issuance of Disqualified Stock"
(treating any Debt of such Unrestricted Subsidiary as the incurrence of Debt by
a Restricted Subsidiary).
Limitation on Conduct of Business. The Company will not, and will not
permit any of its Restricted Subsidiaries to, conduct any business other than
the business the Company and its Restricted Subsidiaries was conducting on the
Closing Date or businesses reasonably related or ancillary thereto, except to
such extent as would not be material to the Company and its Restricted
Subsidiaries taken as a whole.
Reports. The Company is required to file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered
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under the Exchange Act, the annual reports, quarterly reports and other
documents that the Company would be required to file if it were subject to
Section 13 or 15(d) of the Exchange Act. The Company is also required (a) to
supply to the Trustee and each Holder of Notes, or supply to the Trustee for
forwarding to each such Holder, without cost to such Holder, copies of such
reports and documents within 15 days after the date on which the Company files
such reports and documents with the Commission or the date on which the Company
would be required to file such reports and documents if the Company were so
required and (b) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, to supply at
the Company's cost copies of such reports and documents to any prospective
Holder of Notes promptly upon written request.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge with or into any other Person
(whether or not the Company is the surviving Person) or, directly or indirectly,
sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties or assets (determined on a consolidated
basis for the Company and its Subsidiaries taken as a whole) to any other Person
or Persons, in one transaction or a series of related transactions, unless each
of the following conditions is satisfied:
(a) Either (i) the Company is the surviving corporation or (ii) the
Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person that acquires by sale,
assignment, conveyance, transfer, lease or other disposition all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries on a consolidated basis (the "Surviving Entity")
(A) is a corporation, partnership limited liability company or trust duly
organized and validly existing under the laws of the United States, any
state thereof or the District of Columbia and (B) expressly assumes, by a
supplemental indenture in form satisfactory to the Trustee, all of the
Company's obligations under the Indenture and the Notes.
(b) Immediately after giving effect to such transaction or series of
transactions on a pro forma basis, no Default or Event of Default has
occurred and is continuing.
(c) Immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Consolidated Net Worth of the
Company (or of the Surviving Entity if the Company is not the continuing
obligor under the Indenture) is equal to or greater than the Consolidated
Net Worth of the Company immediately prior to such transaction or series of
transactions.
(d) Immediately after giving effect to such transaction or series of
transactions on a pro forma basis (on the assumption that the transaction
or series of transactions occurred at the beginning of the most recently
ended four full fiscal quarter period for which internal financial
statements are available), the Company (or the Surviving Entity if the
Company is not the continuing obligor under the Indenture) could incur at
least $1.00 of additional Debt (other than Permitted Debt) pursuant to the
first paragraph of the covenant described under "-- Certain
Covenants -- Limitation on Debt and Issuance of Disqualified Stock."
(e) If the Company is not the continuing obligor under the Indenture,
each Subsidiary Guarantor, unless it is the other party to the transaction
described above, has by supplemental indenture confirmed that its
Subsidiary Guarantee applies to the Surviving Entity's obligations under
the Indenture and the Notes.
(f) If any of the property or assets of the Company or its Restricted
Subsidiaries would thereupon become subject to any Lien, the provisions of
the covenant described under "-- Certain Covenants -- Limitation on Liens"
are complied with.
(g) The Company delivers, or causes to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
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In the event of a merger of a Wholly Owned Restricted Subsidiary into the
Company, the Company need not comply with the foregoing clauses (c) and (d).
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of related transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries that constitutes all or substantially all of the properties and
assets of the Company on a consolidated basis, will be deemed to be the transfer
of all or substantially all of the properties and assets of the Company.
In the event of any transaction or series of related transactions described
in and complying with the conditions listed in the first paragraph of this
covenant in which the Company is not the continuing obligor under the Indenture,
the Surviving Entity will succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture, and thereafter the
Company will, except in the case of a lease, be discharged from all its
obligations and covenants under the Indenture and Notes.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an "Event of Default" under the Indenture:
(a) Default in the payment of any interest on any Note when it becomes
due and payable, and continuance of such default for a period of 30 days
(whether or not prohibited by the subordination provisions of the
Indenture).
(b) Default in the payment of the principal of or premium, if any, on
any Note when due (whether or not prohibited by the subordination
provisions of the Indenture).
(c) Failure to perform or comply with the Indenture provisions
described under "Consolidation, Merger and Sale of Assets" or to make or
consummate a Change of Control Offer or Asset Sale Offer in accordance with
the provisions of the covenant described under "-- Repurchase at the Option
of the Holders Upon Change of Control" or "-- Certain
Covenants -- Limitation on Asset Sales," respectively.
(d) Default in the performance, or breach, of any covenant or
agreement of the Company or any Subsidiary Guarantor contained in the
Indenture or any Subsidiary Guarantee (other than as contemplated by
clauses (a), (b) and (c) above) and continuance of such default or breach
for a period of 60 days after written notice has been given (x) to the
Company by the Trustee or (y) to the Company and the Trustee by the Holders
of at least 25% in aggregate principal amount of the Notes then
outstanding.
(e) The occurrence of an event of default under any mortgage, bond,
indenture, loan agreement or other document evidencing Debt of the Company
or any Significant Subsidiary, which Debt has an aggregate outstanding
principal amount of $5.0 million or more, and such default (i) results in
the acceleration of such Debt prior to its Stated Maturity or (ii)
constitutes a failure to make any payment with respect to any such Debt
when due and payable after the expiration of any applicable grace period.
(f) Failure by the Company or any of its Restricted Subsidiaries to
pay one or more final judgments the uninsured portion of which exceeds in
the aggregate $5.0 million, which judgment or judgments are not paid,
discharged or stayed for a period of 60 days.
(g) Any Subsidiary Guarantee ceases to be in full force and effect or
is declared null and void or any Subsidiary Guarantor denies that it has
any further liability under any Subsidiary Guarantee, or gives notice to
such effect (other than by reason of the termination of the Indenture or
the release of any such Subsidiary Guarantee in accordance with the
Indenture), and such condition has continued for a period of 30 days after
written notice of such failure requiring the Subsidiary Guarantor and the
Company to remedy the same has been given (x) to the Company by the Trustee
or (y) to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding.
(h) The occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
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If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, the Trustee or the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such Holders will, declare the principal of and premium, if any, and
accrued and unpaid interest on all of the outstanding Notes immediately due and
payable and, upon any such declaration, all such amounts will become due and
payable immediately. If an Event of Default specified in clause (h) above occurs
and is continuing, then the principal and premium, if any, and accrued and
unpaid interest on all the outstanding Notes will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder of Notes.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the Holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration and its consequences if (i) the Company has paid or deposited
with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes,
(B) all unpaid principal of (and premium, if any, on) any outstanding Notes that
has become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes, (C) to the extent that payment of such
interest is lawful, interest upon overdue interest and overdue principal at the
rate borne by the Notes and, (D) all sums paid or advanced by the Trustee under
the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and (ii) all Events of Default,
other than the non-payment of amounts of principal of (or premium, if any, on)
or interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived. No such rescission will affect any
subsequent default or impair any right consequent thereon.
No Holder has any right to institute any proceeding with respect to the
Indenture or any remedy thereunder, unless the Holders of at least 25% in
aggregate principal amount of the outstanding Notes have made written request,
and offered reasonable indemnity, to the Trustee to institute such proceeding
within 60 days after receipt of such notice and the Trustee, within such 60-day
period, has not received directions inconsistent with such written request by
Holders of a majority in aggregate principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a Holder for the
enforcement of the payment of the principal of, premium, if any, or interest on
such Note on or after the respective due dates expressed in such Note.
The Holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the Holders of all of the Notes, waive
any past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the Holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each Holder of the Notes notice of the
Default or Event of Default within 90 days after the occurrence thereof. Except
in the case of a Default or an Event of Default in payment of principal of and
premium, if any, or interest on any Notes, the Trustee may withhold the notice
to the Holders of the Notes if a committee of its trust officers in good faith
determines that withholding such notice is in the interests of the Holders of
the Notes.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their respective
obligations under the Indenture and as to any default in such performance. The
Company is also required to notify the Trustee within five days of any Default.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE
The Company may, at its option and at any time, terminate the obligations
of the Company and any Subsidiary Guarantors with respect to the outstanding
Notes ("defeasance"). Such defeasance means that the Company will be deemed to
have paid and discharged the entire Debt represented by the outstanding Notes,
except for (i) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of and
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premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's obligations to issue temporary Notes, register the transfer or
exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes,
maintain an office or agency for payments in respect of the Notes and segregate
and hold such payments in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee and (iv) the defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to terminate
the obligations of the Company and any Subsidiary Guarantor with respect to
certain covenants set forth in the Indenture and described under "-- Repurchase
at the Option of the Holders Upon Change of Control" and "-- Certain Covenants"
above, and any omission to comply with such obligations would not constitute a
Default or an Event of Default with respect to the Notes ("covenant
defeasance").
In order to exercise either defeasance or covenant defeasance, (a) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the Holders of the Notes, money in an amount, or U.S.
Government Obligations (as defined in the Indenture) that through the scheduled
payment of principal and interest thereon will provide money in an amount, or a
combination thereof, sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay and discharge the principal of (and
premium, if any, on) and interest on the outstanding Notes at maturity (or upon
redemption, if applicable) of such principal or installment of interest; (b) no
Default or Event of Default has occurred and is continuing on the date of such
deposit or, insofar as an event of bankruptcy under clause (h) of "Events of
Default" above is concerned, at any time during the period ending on the 91st
day after the date of such deposit; (c) such defeasance or covenant defeasance
may not result in a breach or violation of, or constitute a default under, the
Indenture or any material agreement or instrument to which the Company or any
Subsidiary Guarantor is a party or by which it is bound; (d) in the case of
defeasance, the Company must deliver to the Trustee an opinion of counsel
stating that the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or since the date hereof there has been a
change in applicable federal income tax law, to the effect, and based thereon
such opinion must confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred; (e) in the case of covenant defeasance, the Company
must have delivered to the Trustee an opinion of counsel to the effect that the
Holders of the Notes outstanding will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; and (f) the Company must have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
Upon the request of the Company, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
the Notes, as expressly provided for in the Indenture) and the Trustee, at the
expense of the Company, will execute proper instruments acknowledging
satisfaction and discharge of the Indenture when (a) either (i) all the Notes
theretofore authenticated and delivered (other than destroyed, lost or stolen
Notes that have been replaced or paid and Notes that have been subject to
defeasance under "-- Legal Defeasance or Covenant Defeasance") have been
delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee for cancellation (A) have become due and payable, (B)
will become due and payable at maturity within one year or (C) are to be called
for redemption within one year under arrangements satisfactory to the Trustee
for the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company, and the Company has irrevocably deposited or caused to
be deposited with the Trustee funds in trust for the purpose in an amount
sufficient to pay and discharge the entire Debt on such Notes not theretofore
delivered to the Trustee for cancellation, for principal and premium, if any,
and interest on the Notes to the date of such deposit (in the case of Notes that
have become due and payable) or to the Stated Maturity or redemption date, as
the case may be; (b) the Company has paid or caused to be paid all sums payable
under the Indenture by the
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Company; and (c) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided in the Indenture relating to the satisfaction and discharge
of the Indenture have been complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Modifications and amendments of the Indenture and any Subsidiary Guarantee
may be made by the Company, any affected Subsidiary Guarantor and the Trustee
with the consent of the Holders of a majority in aggregate outstanding principal
amount of the Notes; provided, however, that no such modification or amendment
may, without the consent of the Holder of each outstanding Note affected
thereby:
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount thereof or the
rate of interest thereon or any premium payable upon the redemption
thereof, or change the place of payment where, or the coin or currency in
which any Note or any premium or the interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date);
(b) reduce the percentage in aggregate principal amount of outstanding
Notes required to consent to any amendment of, or waiver of compliance
with, any provision of or defaults under the Indenture;
(c) waive a Default or Event or Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of Notes by the Holders of at least a majority in aggregate
principal amount of the then outstanding Notes (including Additional Notes
issued under the Indenture, if any);
(d) release any Subsidiary Guarantor from any of its obligations under
its Subsidiary Guarantee or the Indenture, except in accordance with the
terms of the Indenture;
(e) amend, change or modify in any manner adverse to the Holders the
obligation of the Company to make and consummate a Change of Control Offer
or Asset Sale Offer in accordance with the provisions of the covenant
described under "-- Repurchase at the Option of the Holders Upon Change of
Control" and "-- Certain Covenants -- Limitation on Asset Sales,"
respectively.
(f) amend, change or modify any of the provisions of the Indenture
relating to the subordination of the Notes or the Subsidiary Guarantees in
a manner adverse to the Holders; or
(g) amend, change or modify any of the foregoing modification and
amendment provisions.
The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Without the consent of any Holders, the Company and the Trustee, at any
time and from time to time, may enter into one or more indentures supplemental
to the Indenture for any of the following purposes: (a) to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Notes or
to add any Subsidiary Guarantor of the Notes; or (b) to add to the covenants of
the Company for the benefit of the Holders, or to surrender any right or power
herein conferred upon the Company; or (c) to add additional Events of Default;
or (d) to provide for uncertificated Notes in addition to or in place of the
certificated Notes; or (e) to evidence and provide for the acceptance of
appointment under the Indenture by a successor Trustee; or (f) to secure the
Notes or any Subsidiary Guarantee; or (g) to cure any ambiguity, to correct or
supplement any provision in the Indenture that may be defective or inconsistent
with any other provision in the Indenture, or to make any other provisions with
respect to matters or questions arising under the Indenture, provided that such
actions pursuant to this clause (g) do not adversely affect the interests of the
Holders; or (h) to comply with any requirements of the Commission in order to
effect and maintain the qualification of the Indenture under the Trust Indenture
Act.
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THE TRUSTEE
SunTrust Bank, Atlanta, the Trustee under the Indenture, is the initial
paying agent and registrar for the Notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. Under the Indenture, the Holders of a majority in outstanding
principal amount of the Notes have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent Person would exercise under the circumstances in the conduct of such
Person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that, if it acquires any conflicting
interest (as defined), it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees are governed by, and
construed in accordance with, the laws of the State of New York.
FORM AND DENOMINATION
Except as provided below, the Old Notes offered and sold in the Offering to
Qualified Institutional Buyers in reliance on Rule 144A are represented by a
global note in definitive, fully registered form without interest coupons (the
"Rule 144A Global Note"), which was, on the Closing Date, deposited with the
Trustee, as custodian for DTC, and registered in the name of a nominee of DTC.
The Old Notes offered and sold in the Offering pursuant to Regulation S are
represented by a global note in definitive, fully registered form without
interest coupons (together with the Rule 144A Global Note, the "Restricted
Global Notes"), which was, on the Closing Date, deposited with the Trustee, as
custodian for DTC, for the accounts of the Euroclear System and Cedel Bank,
S.A., and registered in the name of a nominee of DTC. The Exchange Notes will be
issued in the form of one or more global notes in definitive, fully registered
form without interest coupons (the "Exchange Global Notes" and, together with
the Restricted Global Notes, the "Global Notes") and will be deposited on the
date of the closing of the Exchange Offer with or on behalf of DTC, or with the
Trustee, as custodian for DTC, and registered in the name of a nominee of DTC.
Except in the limited circumstances described below under "-- Certificated
Notes," owners of beneficial interests in Global Notes will not be entitled to
receive physical delivery of certificated Notes. The Notes are not issuable in
bearer form. The Notes have been and will be issued only in fully registered
form in denominations of $1,000 and integral multiples thereof. No service
charge will be made for any registration of transfer or exchange of Notes, but
the Company may require payment of a sum sufficient to cover any tax or other
government charge payable in connection therewith.
The Company has initially appointed the Trustee at its corporate trust
office as paying agent and registrar for the Notes. In such capacities, the
Trustee is responsible for, among other things, (i) maintaining a record of the
aggregate holdings by Holders of Notes represented by the Global Notes and
accepting Notes for exchange and registration of transfer; (ii) ensuring that
payments of principal, premium, if any, and interest in respect of the Notes
received by the Trustee from the Company are duly paid to DTC or its nominees;
and (iii) transmitting to the Company any notices from Holders.
The Company has agreed in the Indenture to cause to be kept at the office
of the registrar a register in which, subject to such reasonable regulations as
it may prescribe, the Company will provide for the registration of the Notes and
registration of transfers of the Notes. The Company may vary or terminate the
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appointment of any paying agent or registrar, or appoint additional or other
such agents or approve any change in the office through which any such agent
acts; provided that there shall at all times be a paying agent and registrar in
the Borough of Manhattan, The City of New York, New York. The Company will cause
notice of any resignation, termination or appointment of the Trustee or any
paying agent or registrar, and of any change in the office through which any
such agent will act, to be provided to Holders of the Notes.
GLOBAL NOTES
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to changes by DTC from time to
time. The Company takes no responsibility for these operations and procedures
and urges investors to contact DTC or its participants directly to discuss these
matters.
Upon the issuance of the Restricted Global Notes, DTC credited, and upon
the issuance of the Exchange Global Notes DTC will credit, on its internal
system, the respective principal amount of the individual beneficial interests
represented by such Global Notes to the accounts with DTC ("participants") or
persons who hold interests through participants. Ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
As long as DTC, or its nominee, is the registered holder of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner and
Holder of the Notes represented by such Global Note for all purposes under the
Indenture and the Notes. Unless DTC notifies the Company that it is unwilling or
unable to continue as a depositary for a Global Note, or ceases to be a
"Clearing Agency" registered under the Exchange Act, or announces an intention
permanently to cease business or does in fact do so, or an Event of Default
under the Indenture has occurred and is continuing with respect to a Global
Note, owners of beneficial interests in a Global Note will not be entitled to
have any portions of such Global Note registered in their names, will not
receive or be entitled to receive physical delivery of Notes in definitive form
and will not be considered the owners or Holders of the Global Note (or any
Notes represented thereby) under the Indenture or the Notes. In addition, no
beneficial owner of an interest in a Global Note will be able to transfer that
interest except in accordance with DTC's applicable procedures (in addition to
other restrictions set forth in the Indenture). In the event that owners of
beneficial interests in a Global Note become entitled to receive Notes in
certificated form, such Notes will be issued only in registered form in
denominations of $1,000 and integral multiples thereof.
Investors may hold their interests in the Global Notes directly through DTC
if they are DTC participants, or indirectly through organizations which are
participants in such system. All interests in a Global Note may be subject to
the procedures and requirements of such participants, as well as the procedures
and requirements of DTC.
Payments of the principal of, premium, if any, and interest on Global Notes
will be made to DTC or its nominee as the registered holder thereof. Neither the
Company, the Trustee nor any of their respective agents will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Subject to the following considerations, beneficial interests in the Global
Notes will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity in such interests will therefore settle in immediately
available funds. The Company expects that DTC or its nominee, upon receipt of
any payment of principal or interest in respect of a Global Note representing
any Notes held by it or its nominee, will immediately credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note for such Notes as shown on
the records of DTC or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in such Global Notes held through
such participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in "street name."
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Such payments will be the responsibility of such participants. Transfers between
participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account with DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC reserves the right to exchange
the Restricted Global Notes for legended Notes in certificated form and the
Exchange Global Notes for unlegended Notes in certificated form, and to
distribute such notes to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code, as amended, and a "Clearing Agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical transfer and delivery of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the Global Notes among
participants of DTC, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. None of
the Company, the Trustee nor any of their respective agents will have any
responsibility for the performance by DTC, its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations, including maintaining, supervising or reviewing the
records relating to, or payments made on account of, beneficial owner interests
in Global Notes.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the reasons set forth above under "-- Global Notes," the Company will issue
certificates for the Notes in definitive, fully registered, non-global form
without interest coupons in exchange for the applicable Global Notes. In all
cases, certificates for Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by DTC.
In the case of certificates for Old Notes in non-global form issued in
exchange for a Restricted Global Note, such certificates will, as provided in
the Indenture, bear legends restricting the transfer thereof (unless the Company
determines otherwise in accordance with applicable law). The holder of a Note in
non-global form may transfer such Note (subject, in the case of Old Notes, to
compliance with the provisions of such legend) by surrendering it at the office
or agency maintained by the Company for such purpose in the Borough of
Manhattan, The City of New York, which initially is the office of the Trustee.
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DESCRIPTION OF OTHER INDEBTEDNESS
The following summary of certain agreements and instruments of the Company
does not purport to be complete and is qualified in its entirety by reference to
the various agreements and instruments described, certain of which have been
included as exhibits to various filings by TSI and Farah with the Commission.
See "Available Information."
BRIDGE FACILITY
The Bridge Facility provided for aggregate borrowing availability of $100.0
million and was fully drawn on June 10, 1998, the date the Tender Offer was
consummated (the "Bridge Closing Date"). The Bridge Facility was an unsecured
senior subordinated obligation of the Company. Payment of all amounts
outstanding under the Bridge Facility was guaranteed, jointly and severally, on
an unsecured senior subordinated basis by each domestic subsidiary of the
Company and Farah. As of June 10, 1998, interest accrued thereunder at a rate of
9.7% per annum. Although the Bridge Facility would have matured by its terms on
the first anniversary of the Bridge Closing Date, it was repaid in full on June
24, 1998 with the net proceeds of the Offering, together with borrowings under
the New Credit Facility. See "Use of Proceeds."
NEW CREDIT FACILITY
In connection with the Farah Acquisition, concurrently with the
consummation of the Tender Offer, the Company entered into the New Credit
Facility, which replaced the Terminated Credit Facilities. The New Credit
Facility provides for revolving borrowings and letters of credit in an aggregate
principal amount of up to $110.0 million (the "Commitment") and permits
borrowings by, or for the account of, TSI, Tropical Sportswear Company, Inc.,
Apparel Network Corporation and Farah (each, a "Borrower"). The total amount of
(i) revolving borrowings, (ii) undrawn amounts of letters of credit and (iii)
reimbursement obligations under letters of credit, may not exceed the lesser of
the Commitment and the borrowing base. The borrowing base is defined to include
the value of the Company's inventory and accounts receivable, subject to
customary limitations. Each Borrower has effectively guaranteed on a senior
basis the obligations of each other Borrower under the New Credit Facility, and
each Borrower has granted a security interest in substantially all of its
current and future personal property to the lenders as collateral for its
obligations thereunder.
The New Credit Facility has a five-year term. In addition, subject to
certain limitations, the New Credit Facility requires that all or a portion of
the outstanding borrowings thereunder be repaid upon (i) certain non-ordinary
course asset sales by any Borrower, (ii) the issuance of any debt or equity
securities by any Borrower or (iii) the receipt by any Borrower of certain
insurance proceeds or condemnation awards.
Revolving loans accrue interest at a variable rate equal, at the option of
the Borrower to which a loan is made, to (i) a LIBOR-based rate plus a margin
which will be determined from time to time based on the Company's financial
performance (not exceeding 2.75% per annum) or (ii) the base rate (defined to
mean the higher of (a) Fleet Bank's publicly announced "prime rate" and (b) a
rate tied to the rates on overnight Federal funds transactions with members of
the Federal Reserve System) plus a margin that will be determined from time to
time based on the Company's financial performance (not exceeding 1.25% per
annum). All drawings under letters of credit which are not promptly reimbursed
will accrue interest at a variable rate equal to the base rate. Interest on base
rate loans and LIBOR loans will be payable monthly in arrears on the first day
of each month and, in the case of LIBOR loans, at the end of each interest
period. Upon the occurrence of an event of default, the rate at which interest
accrues on borrowings outstanding under the New Credit Agreement will increase
by 2.0% per annum. As of July 4, 1998, interest accrued on revolving loans
outstanding thereunder at a rate of 9.2% per annum and there were no
unreimbursed drawings under letters of credit.
The New Credit Facility contains a number of customary affirmative and
negative covenants, including, among others, covenants restricting the Borrowers
and their subsidiaries with respect to the incurrence of debt (including
guarantees); the creation of liens; substantially changing the nature of the
Borrowers' or their subsidiaries' businesses; the consummation of certain
transactions such as dispositions of substantial assets, mergers, acquisitions,
reorganizations and recapitalizations; the making of certain investments and
loans, non-
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ordinary course asset sales and capital expenditures; the making of dividends
and other distributions; and transactions with affiliates. The Borrowers are
also required to comply with certain financial tests and maintain certain
financial ratios. Certain of these financial tests and ratios include: (i)
maintaining a minimum tangible net worth; (ii) maintaining a maximum ratio of
debt to EBITDA; (iii) maintaining a maximum ratio of senior debt to EBITDA; and
(iv) maintaining a minimum ratio of earnings to fixed charges.
The New Credit Facility contains customary events of default. An event of
default under the New Credit Facility will allow the lenders thereunder to
accelerate or, in certain cases, will automatically cause the acceleration of,
the maturity of the debt under the New Credit Facility and will restrict the
ability of the Company and the Subsidiary Guarantors to meet their obligations
to the holders of the Notes.
REAL ESTATE LOAN
Pursuant to the Real Estate Loan Agreement, TSI obtained the Real Estate
Loan from SouthTrust to finance in part TSI's acquisition of the building and
land in Tampa, Florida which houses TSI's distribution and administration
functions, as well as the acquisition of adjacent property and the construction
thereon of an approximately 110,000 square foot cutting facility (collectively,
the "Land and Improvements"). All amounts outstanding under the Real Estate Loan
Agreement are secured by the Land and Improvements.
As of July 4, 1998, $9.6 million principal amount of the Real Estate Loan
was outstanding. The Real Estate Loan accrues interest at 7.38% per annum until
July 18, 2002 and, thereafter, the interest rate will be adjusted in accordance
with the Real Estate Loan Agreement. Accrued interest and principal payments of
$81,280 are payable monthly, with a final payment of $6.8 million due on May 7,
2006. In addition, the Company may, at its option, prepay the Real Estate Loan,
subject to certain prepayment premiums. If TSI fails to make any payment within
ten days of when such payment is due, the interest rate on the Real Estate Loan
will increase to the maximum rate permitted by applicable law.
The Real Estate Loan Agreement contains customary covenants and events of
default. An event of default under the Real Estate Loan Agreement will allow
SouthTrust to accelerate or, in certain cases, will automatically cause the
acceleration of, the maturity of the Real Estate Loan and will restrict the
ability of the Company to meet its obligations to the holders of the Notes.
FACTORING ARRANGEMENTS
Pursuant to the TSI Factoring Agreement between the Company and the TSI
Factor, the Company factors substantially all of its accounts receivable, other
than accounts receivable of Farah. The TSI Factoring Agreement provides that the
TSI Factor will pay the Company an amount (the "TSI Net Amount") equal to the
gross amount of the Company's accounts receivable from customers reduced by
certain offsets, including, among others, discounts, returns, and a commission
payable by the Company to the TSI Factor. The commission equals 0.3% of the
gross amount of the accounts receivable factored. For fiscal 1997 and the forty
weeks ended July 4, 1998, the Company paid commissions to the TSI Factor
aggregating $504,000 and $620,000, respectively. The TSI Factor reviews the
creditworthiness of the Company's customers prior to sales by the Company to
each customer. If the TSI Factor approves of the sale based on its credit
review, it assumes 99.85% of the credit risk for the accounts receivable
factored. If the TSI Factor disapproves of the sale and the Company then
proceeds with the sale, the TSI Factor will not purchase the account receivable
and the Company will bear the credit risk associated with the account
receivable. The TSI Factor will pay the Company the TSI Net Amount of the
factored account receivable upon the earlier of (i) receipt by the TSI Factor of
payment from the Company's customer and (ii) 120 days after the due date of such
account receivable. The TSI Factoring Agreement expires on September 30, 1998.
The Company intends to replace the TSI Factoring Agreement with a similar
arrangement following such expiration.
Following the closing of the Farah Acquisition, Farah entered into the
Savane Factoring Agreement with the Savane Factor, pursuant to which Farah
factors substantially all of its accounts receivable. The Savane Factoring
Agreement provides that the Savane Factor will pay Farah an amount (the "Savane
Net Amount") equal to the gross amount of Farah's accounts receivable from
customers reduced by certain offsets, including, among other things, discounts,
returns and a commission payable by Farah to the Savane Factor. The
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commission is equal to (i) for accounts receivable having payment terms equal to
or less than 90 days, the Standard Commission (i.e., 0.28% of the gross amount
of the receivables factored) or (ii) for accounts receivable having payment
terms of more than 90 days, the sum of (A) the Standard Commission and (B) the
Long Term Commission (i.e., an additional 0.15% of the gross amount of the
accounts receivable factored for each 30 day period (or part thereof) by which
the payment terms of such accounts receivable exceed 90 days). However, no
Standard Commission is payable by Farah until the day after the aggregate amount
of the factored accounts receivable exceeds $125.0 million. The Savane Factor
reviews the creditworthiness of Farah's customers prior to sales by Farah to
each customer. If the Savane Factor approves of the sale based on its credit
review, it assumes 99.90% of the credit risk for the accounts receivable
factored. For any such approved sale, the Savane Factor will pay Farah the
Savane Net Amount of the factored account receivable upon the earlier of (i) two
business days after receipt by the Savane Factor of payment from Farah's
customer and (ii) 120 days after the due date of such account receivable. For
any non-approved sales, Farah will bear the credit risk associated with the
factored account receivable. The Savane Factor will, however, pay Farah the
Savane Net Amount of the factored account receivable two business days after
such account receivable is paid. The Factoring Agreement expires on June 9,
2001, but it may be terminated at any time by the Savane Factor upon 60 days
prior written notice to Farah.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on June 24, 1998 to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently placed the Old Notes (i) with Qualified Institutional Buyers in
reliance upon Rule 144A and (ii) outside the United States in compliance with
Regulation S. In accordance with a condition set forth in the Purchase
Agreement, the Company and the Initial Purchaser entered into the Registration
Rights Agreement on the Closing Date pursuant to which the Company agreed, for
the benefit of the holders of the Old Notes, that it will, at its cost, (i) use
its best efforts to file, within 60 days after the Closing Date, a registration
statement (the "Exchange Offer Registration Statement") with the Commission with
respect to the Exchange Offer for the Exchange Notes and (ii) use its best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act within 150 days after the Closing Date.
Promptly after the Registration Statement of which this Prospectus is a part
(which is the Exchange Offer Registration Statement referred to above) has been
declared effective, the Company will offer the Exchange Notes in exchange for
surrender of the Old Notes. The Company will keep the Exchange Offer open for
not less than 20 business days (or longer if required by applicable law) after
the date on which notice of the Exchange Offer is mailed to the holders of the
Old Notes. For each Old Note validly tendered to the Company pursuant to the
Exchange Offer and not withdrawn by the holder thereof, the holder of such Old
Note will receive an Exchange Note having a principal amount equal to the
principal amount of such surrendered Old Note. Interest on each Exchange Note
will accrue from the last interest payment date on which interest was paid on
the Note surrendered in exchange therefor or, if no interest has been paid on
such Exchange Note, from the Closing Date.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several "no-action" letters to third parties and
unrelated to the Company and the Exchange Offer, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by the holders
thereof (other than any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without further
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of such Exchange Notes. Any holder who is an
affiliate of the Company or who intends to participate in the Exchange Offer for
the purpose of distributing the Exchange Notes (i) will not be able to rely on
the interpretation by the staff of the Commission set forth in the
above-mentioned "no action" letters, (ii) will not be able to tender its Old
Notes in the Exchange Offer and (iii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer transaction unless such sale or transfer is made pursuant to an
exemption from such requirements. Failure to comply with such requirements may
result in such holder incurring liability under the Securities Act for which the
holder is not indemnified by the Company.
A Participating Broker-Dealer holding Old Notes may participate in the
Exchange Offer provided that it acquired the Old Notes for its own account as a
result of market-making or other trading activities. In connection with any
resales of Exchange Notes, any Participating Broker-Dealer who receives Exchange
Notes for Old Notes pursuant to the Exchange Offer may be an "underwriter"
(within the meaning of the Securities Act) and must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of the
Exchange Notes. The Letter of Transmittal states that any acknowledgment by a
Participating Broker-Dealer that it will deliver a prospectus in connection with
any resale of Exchange Notes, and any such delivery of a prospectus, shall not
be deemed an admission by such Participating Broker-Dealer that it is an
underwriter. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Old Notes) with this Prospectus, as it may be amended or
supplemented from time to time. Under the Registration Rights Agreement, the
Company is required to allow Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements, to
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use this Prospectus, as it may be amended or supplemented from time to time, in
connection with the resale of such Exchange Notes for a period of 180 days.
Each holder of Old Notes wishing to accept the Exchange Offer must
represent to the Company (i) that any Exchange Notes to be received by it will
be acquired in the ordinary course of such holder's business, (ii) that it is
not an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (iii) that it has no arrangement with any person to participate
in the distribution (within the meaning of the Securities Act) of the Exchange
Notes and (iv) if such holder is a Participating Broker-Dealer that will receive
Exchange Notes for its own account in exchange for Old Notes that were acquired
as a result of market-making or other trading activities, that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. By executing the Letter of Transmittal, each
holder will make the foregoing representations.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or upon the request of the Initial Purchaser under certain circumstances,
the Company will, in lieu of effecting the registration of the Exchange Notes
pursuant to the Exchange Offer Registration Statement and at its cost, (i) as
promptly as practicable, file with the Commission the Shelf Registration
Statement covering resales of the Old Notes, (ii) use its best efforts to cause
the Shelf Registration Statement to be declared effective under the Securities
Act by the 180th day after the Closing Date (or promptly in the event of a
request by the Initial Purchaser) and (iii) use its best efforts to keep the
Shelf Registration Statement effective until two years after the Closing Date
(or until one year after the Closing Date if such Shelf Registration Statement
is filed at the request of the Initial Purchaser) or such shorter period ending
when all of the Old Notes registered pursuant to such Shelf Registration
Statement have been sold or are otherwise eligible for resale pursuant to Rule
144(k) under the Securities Act. The Company will, in the event of the filing of
the Shelf Registration Statement, provide to each holder of the Old Notes copies
of the prospectus which is a part of the Shelf Registration Statement, notify
each such holder when the Shelf Registration Statement for the Old Notes has
become effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of Old Notes that sells such Old
Notes pursuant to the Shelf Registration Statement generally will be required to
be named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions of the Securities Act in connection with such sales and will be bound
by the provisions of the Registration Rights Agreement which are applicable to
such a holder (including certain indemnification obligations). In addition, each
holder of the Old Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments
thereon, if any, within the time periods set forth in the Registration Rights
Agreement in order to have their Old Notes included in the Shelf Registration
Statement and to benefit from the provisions regarding liquidated damages set
forth in the following paragraph.
In the event that (a) the Exchange Offer is not consummated or a Shelf
Registration Statement with respect to the Old Notes is not declared effective
on or prior to the 180th day following the Closing Date or (b) any registration
statement required by the Registration Rights Agreement is filed and declared
effective but shall thereafter cease to be effective (except as specifically
permitted therein) without being succeeded immediately by an additional
registration statement filed and declared effective, then the interest rate
borne by the Old Notes shall be increased by 0.5% per annum following such
180-day period in the case of clause (a) above and following the date on which
the relevant registration statement ceases to be effective in the case of clause
(b) above (in any such case, a "Registration Default"). The amount of such
additional interest will increase by an additional 0.5% per annum for each
subsequent 90-day period until such Registration Default has been cured. The
aggregate amount of such increase from the original interest rate pursuant to
these provisions will in no event exceed 1.5% per annum. Upon (i) the
consummation of the Exchange Offer or the effectiveness of a Shelf Registration
Statement, as the case may be, after the 180-day period described in clause (a)
above or (ii) the effectiveness of a succeeding registration statement after the
date in clause (b) above, the interest rate borne by the Old Notes from the date
of such consummation or effectiveness, as the case may be, will be reduced to
the original interest rate thereof.
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The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, tenders of Old
Notes must be in a minimum principal amount of $1,000 or an integral multiple of
$1,000 in excess thereof.
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the Exchange
Notes will bear a different CUSIP Number from the Old Notes, (ii) the issuance
of the Exchange Notes will be registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof and (iii) the holders of the Exchange Notes will not be entitled to
certain rights under the Registration Rights Agreement, including the provisions
thereof which provide for an increase in the interest rate on the Old Notes in
certain circumstances relating to the timing of the Exchange Offer, which rights
will terminate when the Exchange Offer is consummated. The Exchange Notes will
evidence the same debt as the Old Notes (which they replace) and will be issued
under and be entitled to the benefits of the Indenture. See "Description of the
Notes."
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of Old Notes were outstanding. This Prospectus and the Letter of Transmittal are
being mailed to persons who were Holders of Old Notes on the close of business
on the date of this Prospectus. Holders of Old Notes do not have any appraisal
or dissenters' rights under the Business Corporation Act of Florida or the
Indenture in connection with the Exchange Offer. The Company intends to conduct
the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes for
Exchange Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 6, 1998, unless the Company in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" means the latest date and time
to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent thereof by written notice and will mail to the registered holders an
announcement of such extension, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
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<PAGE> 110
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner, whether before or after any tender of the Old Notes. Any
such delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice thereof to the registered
holders.
INTEREST ON EXCHANGE NOTES
Interest on each Exchange Note will accrue from the Closing Date, i.e.,
June 24, 1998, and be payable semiannually in arrears on June 15 and December 15
of each year, commencing December 15, 1998, at the rate of 11% per annum.
Holders whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any interest accrued on the Old Notes.
PROCEDURES FOR TENDERING OLD NOTES
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
Each such Holder wishing to accept the Exchange Offer must complete, sign and
date the accompanying Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and therein, have the
signatures thereon guaranteed if required by the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes and any other required documents, to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date. To be tendered
effectively, the Old Notes, the Letter of Transmittal and all other required
documents must be properly completed and received by the Exchange Agent at the
address set forth below under "Exchange Agent" prior to 5:00 p.m., New York City
time, on the Expiration Date. Delivery of the Old Notes may be made by
book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange Agent
prior to the Expiration Date.
By executing the Letter of Transmittal, each holder will make the
representations set forth above in the fourth paragraph under the heading
"-- Purpose and Effect of the Exchange Offer" to the Company. The tender by a
holder and the acceptance thereof by the Company will constitute an agreement
between such holder and the Company that such holder will participate in the
Exchange Offer in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF THE OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a firm which is a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., or is a savings institution, commercial bank or trust company
having an office or correspondent in the United States, or is otherwise an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act, and which is, in each case, a member of a recognized signature
guarantee program (i.e., Securities Transfer Agents Medallion Program, Stock
Exchange Medallion Program or New York Stock Exchange Medallion Signature
Program) (an "Eligible Institution"), unless the Old Notes tendered pursuant
thereto are tendered (i) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on the Letter of
108
<PAGE> 111
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantees must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish an account through the
facilities of DTC for receipt of the tender of Old Notes through book-entry
delivery thereof. For the purpose of facilitating the Exchange Offer, any
financial institution that is a DTC participant may participate in the Exchange
Offer through book-entry delivery of Old Notes by causing DTC to transfer such
Old Notes into the Exchange Agent's account for the Old Notes. Although delivery
of the Old Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, an appropriate Letter of Transmittal properly completed
and duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address and in the manner set forth below under
"-- Exchange Agent" and on the back cover of this Prospectus on or prior to the
Expiration Date, or, if the guaranteed delivery procedures described below are
complied with, within the time period provided under such procedures. Delivery
of documents to DTC does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as promptly as practicable following the
Expiration Date.
NO LETTER OF TRANSMITTAL, OLD NOTES, NOTICE OF GUARANTEED DELIVERY OR OTHER
DOCUMENTS SHOULD BE SENT TO THE COMPANY OR DTC. DELIVERY THEREOF TO THE COMPANY
OR DTC WILL NOT CONSTITUTE VALID DELIVERY.
109
<PAGE> 112
GUARANTEED DELIVERY PROCEDURES
Holders of Old Notes who wish to tender their Old Notes but who cannot,
prior to 5:00 p.m., New York City time, on the Expiration Date (i) deliver their
Old Notes, the Letter of Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent or (ii) deliver a confirmation of
the book-entry tender of their Old Notes into the Exchange Agent's account at
DTC and otherwise complete the procedures for book-entry transfer, may effect a
tender of Old Notes if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time, on the Expiration Date,
the Exchange Agent receives from such Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, registered or certified mail or hand delivery) setting forth
the name and address of the holder, the certificate number(s) of such Old
Notes and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificates(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Notes into the Exchange Agent's account at DTC), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and duly executed Letter of Transmittal
(or facsimile thereof), as well as the certificates(s) representing all
tendered Old Notes in proper form for transfer (or a confirmation of
book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC), and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, additional copies of the Notice of
Guaranteed Delivery will be sent to holders.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Old Notes. For a description of certain conditions to the Exchange Offer,
see "-- Conditions" below. For purposes of the Exchange Offer, the Company will
be deemed to have accepted properly tendered Old Notes for exchange when, as and
if the Company has given written notice thereof to the Exchange Agent. For each
Old Note accepted for exchange, the holder of such Old Note will receive an
Exchange Note having a principal amount equal to that of the surrendered Old
Note.
In all cases, issuance of Exchange Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes (or a timely
confirmation that such Old Notes have been transferred into the Exchange Agent's
account at DTC), a properly completed and duly executed Letter of Transmittal
and all other required documents. If any tendered Old Notes are not accepted for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at DTC pursuant to the
applicable book-entry procedures, such non-exchanged Old Notes will be credited
to an appropriate account maintained with DTC) as promptly as practicable after
the expiration or termination of the Exchange Offer.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
110
<PAGE> 113
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
DTC pursuant to the applicable book-entry procedures, the name and number of the
account at DTC to be credited), (iii) be signed by the holder in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Old Notes into the name of the person withdrawing the tender and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, which determination shall be final and
binding. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no Exchange Notes will be issued
with respect thereto unless the Old Notes so withdrawn are validly retendered.
Any Old Notes which have been tendered but which are not accepted for exchange
will be returned, without expense, to the holder thereof as promptly as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering Old Notes" at any
time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by any governmental or quasi-governmental agency which might materially
impair the ability of the Company or any Subsidiary Guarantor to proceed
with the Exchange Offer or any material adverse development has occurred in
any existing action or proceeding with respect to the Company or any
Subsidiary Guarantor;
(b) the Exchange Offer violates applicable law or any applicable
interpretation of the staff of the Commission; or
(c) any governmental or quasi-governmental approval has not been
obtained, which approval the Company shall deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the foregoing
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such Old
Notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions and accept all properly tendered Old Notes which have not been
withdrawn. In addition, the Company has reserved the right, notwithstanding the
satisfaction or failure of any or all of the foregoing conditions, to terminate
or amend the Exchange Offer in any manner it shall determine in its sole
discretion, which determination shall be binding.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered or accepted for exchange.
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<PAGE> 114
EXCHANGE AGENT
SunTrust Bank, Atlanta, which also acts as Trustee under the Indenture, has
been appointed as Exchange Agent for the Exchange Offer. Each holder wishing to
accept the Exchange Offer must deliver (i) a Letter of Transmittal, such
holder's tendered Old Notes and all other required documents or (ii) a Notice of
Guaranteed Delivery and all other documents described under "-- Guaranteed
Delivery Procedures," to the Exchange Agent as follows:
<TABLE>
<S> <C> <C>
By Hand or Registered or Certified Mail: By Facsimile Transmission: By Overnight Courier:
SunTrust Bank, Atlanta SunTrust Bank, Atlanta SunTrust Bank, Atlanta
c/o First Chicago Trust Company (404) 240-2030 Corporate Trust Division
of New York Attention: Susan Knight 3495 Piedmont Road
Corporate Trust Building 10
8th Floor Confirm by Telephone: Suite 810
14 Wall Street (404) 240-1952 Atlanta, Georgia 30305
New York, New York 10005 Attention: Susan Knight Attention: Susan Knight
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE
VALID DELIVERY.
Questions and requests for assistance, and requests for additional copies
of this Prospectus, the Letter of Transmittal or the Notice of Guaranteed
Delivery, should be directed to the Exchange Agent as follows:
For Information Call:
SunTrust Bank, Atlanta
(404) 240-1952
Attention: Susan Knight
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers,
employees or agents of the Company and its affiliates. The Company has not
retained any dealer-manager in connection with the Exchange Offer and will not
make any payments to brokers, dealers or others to solicit acceptances of the
Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection with the Exchange Offer. All other expenses
to be incurred in connection with the Exchange Offer will be paid by the
Company. Such expenses include fees and expenses of the Trustee, accounting and
legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, as reflected in the Company's accounting records on
the date of exchange. Accordingly, no gain or loss for accounting purposes will
be recognized by the Company in connection with the Exchange Offer. The expenses
of the Exchange Offer will be amortized over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may not be reoffered, resold, pledged or otherwise transferred except in
accordance with applicable securities laws of states of the United States and
(i) to a person whom the transferor reasonably believes is a Qualified
Institutional Buyer in a transaction meeting the requirements of Rule 144A, (ii)
in an offshore transaction meeting the requirements of Rule 903 or Rule 904
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of Regulation S, (iii) to an institution that is an "accredited investor" within
the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act in a transaction exempt from the registration requirements of the
Securities Act (if available), (iv) pursuant to an exemption from registration
under the Securities Act provided by Rule 144 thereunder (if available) or (v)
pursuant to an effective registration statement under the Securities Act.
Following consummation of the Exchange Offer, holders of the Old Notes who
were eligible to participate in the Exchange Offer but who did not tender their
Old Notes will generally not have any further registration rights under the
Registration Rights Agreement, and such Old Notes will continue to be subject to
restrictions on transfer. Accordingly, the liquidity of the market for such Old
Notes could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material federal income tax
consequences expected to result to holders whose Old Notes are exchanged for
Exchange Notes in the Exchange Offer. The following discussion is based upon
current provisions of the Internal Revenue Code of 1986, as amended, applicable
Treasury regulations, judicial authority and administrative rulings and
practice. There can be no assurance that the Internal Revenue Service (the
"IRS") will not take a contrary view, and no ruling from the IRS has been or
will be sought with respect to the Exchange Offer. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations, and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. EACH HOLDER OF OLD
NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES
OF EXCHANGING OLD NOTES FOR EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not be considered a taxable exchange for United States federal income tax
purposes because the Exchange Notes will not be considered to differ materially
in kind or extent from the Old Notes. Exchange Notes received by a holder of Old
Notes will be treated as a continuation of the Old Notes. Accordingly, there
will not be any United States federal income tax consequences to holders
exchanging Old Notes for Exchange Notes in the Exchange Offer.
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PLAN OF DISTRIBUTION
Except as provided herein, this prospectus may not be used for an offer to
resell, a resale or other transfer of Exchange Notes. Based on existing
interpretations of the Securities Act by the staff of the Commission set forth
in several "no-action" letters to third parties and unrelated to the Company and
the Exchange Offer, the Company believes that the Exchange Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by the holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without further compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders have no arrangement or understanding with any person to participate
in the distribution (within the meaning of the Securities Act) of such Exchange
Notes. Any holder who is an affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) will not be able to rely on the interpretation by the staff of the
Commission set forth in the above-mentioned "no action" letters, (ii) will not
be able to tender its Old Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer transaction unless such sale or transfer is
made pursuant to an exemption from such requirements.
A Participating Broker-Dealer holding Old Notes may participate in the
Exchange Offer provided that it acquired the Old Notes for its own account as a
result of market-making or other trading activities. In connection with any
resales of Exchange Notes, any Participating Broker-Dealer who receives Exchange
Notes for Old Notes pursuant to the Exchange Offer may be an "underwriter"
(within the meaning of the Securities Act) and must deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of the
Exchange Notes. The Commission has taken the position that Participating Broker-
Dealers may fulfill their prospectus delivery requirements with respect to the
Exchange Notes (other than a resale of an unsold allotment from the original
sale of the Old Notes) with this Prospectus, as it may be amended or
supplemented from time to time. Under the Registration Rights Agreement, the
Company is required to allow Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements, to use this
Prospectus, as it may be amended or supplemented from time to time, in
connection with the resale of such Exchange Notes for a period of 180 days. Each
Participating Broker-Dealer wishing to accept the Exchange Offer must represent
to the Company that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of Exchange Notes.
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive a like principal amount of Old Notes. The
form and terms of the Exchange Notes will be identical in all material respects
to the form and terms of the Old Notes, except as described herein.
Exchange Notes received by broker-dealers for their own account pursuant to
the Exchange Offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, or at prices related to such
prevailing market prices or at negotiated prices. Any such resale may be made
directly to purchasers or to or through broker-dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any person that participates in the
distribution of such Exchange Notes may be deemed an "underwriter" (within the
meaning of the Securities Act) and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such broker-dealers may
be deemed to be underwriting compensation under the Securities Act. The Letter
of Transmittal states that any acknowledgment by a Participating Broker-Dealer
that it will deliver a prospectus in connection with any resale of Exchange
Notes, and any such delivery of a prospectus, shall not be deemed an admission
by such Participating Broker-Dealer that it is an underwriter.
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For a period of 180 days after the Expiration Date, the Company will send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any Participating Broker-Dealer that requests such documents in
such Participating Broker-Dealer's Letter of Transmittal. By acceptance of the
Exchange Offer, each broker-dealer that receives Exchange Notes for Old Notes
pursuant thereto agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in this Prospectus untrue in
any material respect or which requires the making of any changes in this
Prospectus in order to make the statements herein not materially misleading
(which notice the Company has agreed to deliver to such broker-dealer), such
broker-dealer will suspend the use of this Prospectus until the Company has
amended or supplemented this Prospectus to correct such misstatement or omission
and has furnished copies of the amended or supplemented Prospectus to such
broker-dealer.
The Company has agreed, pursuant to the Registration Rights Agreement, to
pay all expenses incident to the Company's performance of and compliance with
the Exchange Offer and the Registration Rights Agreement (other than agency fees
and commissions, underwriting discounts and commissions and the fees and
disbursements of counsel and other advisors and experts retained by the
holders). In addition, the Company has agreed to indemnify the holders of the
Exchange Notes against certain liabilities, including liabilities under the
Securities Act.
The Exchange Notes are a new issuance of securities for which there is
currently no trading market. The Exchange Notes will not be listed on any
securities exchange. The Company has been advised by the Initial Purchaser that
it intends to make a market in the Exchange Notes; however, the Initial
Purchaser is not obligated to do so, and any such market making activities may
be discontinued at any time without notice. Accordingly, there can be no
assurance that an active trading market for the Exchange Notes will develop or
as to the liquidity of any such market. In addition, if the Exchange Notes are
traded after their initial issuance, they may trade at a discount from their
initial offering price, depending upon prevailing interest rates, the market for
similar securities, the performance of the Company and other factors.
LEGAL MATTERS
The legality of the Exchange Notes offered hereby will be passed upon for
the Company by Alston & Bird LLP, Atlanta, Georgia. As to matters of Texas law,
Alston & Bird LLP has relied upon the opinion of Haynes and Boone, LLP, Dallas,
Texas. As to matters of Florida law, Alston & Bird LLP has relied upon the
opinion of Mechanik Nuccio Smith & Williams, P.A., Tampa, Florida.
EXPERTS
The Consolidated Financial Statements of Tropical Sportswear Int'l
Corporation at September 27, 1997 and September 28, 1996 and for each of the
three years in the period ended September 27, 1997 included elsewhere in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The Consolidated Financial Statements of Farah at November 2, 1997 and
November 3, 1996 and for each of the two years in the period ended November 2,
1997 included elsewhere in this Prospectus have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report thereon appearing elsewhere herein.
The Consolidated Financial Statements of Farah for the year ended November
3, 1995 included elsewhere in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
TROPICAL SPORTSWEAR INT'L CORPORATION
Unaudited Interim Condensed Consolidated Financial
Statements:
Condensed Consolidated Balance Sheets as of July 4, 1998 and
September 27, 1997........................................ F-2
Condensed Consolidated Statements of Income for the Thirteen
Weeks and Forty Weeks Ended July 4, 1998 and for the
Thirteen Weeks and Thirty-Nine Weeks Ended June 28,
1997...................................................... F-3
Condensed Consolidated Statements of Cash Flows for the
Forty Weeks Ended July 4, 1998 and for the Thirty-Nine
Weeks Ended June 28, 1997................................. F-4
Notes to Condensed Consolidated Financial Statements........ F-5
Audited Consolidated Financial Statements:
Report of Independent Certified Public Accountants.......... F-10
Consolidated Balance Sheets as of September 27, 1997 and
September 28, 1996........................................ F-11
Consolidated Statements of Income for the Years Ended
September 27, 1997, September 28, 1996 and September 30,
1995...................................................... F-12
Consolidated Statements of Shareholders' Equity for the
Years Ended September 30, 1995, September 28, 1996 and
September 27, 1997........................................ F-13
Consolidated Statements of Cash Flows for the Years Ended
September 27, 1997, September 28, 1996, and September 30,
1995...................................................... F-14
Notes to Consolidated Financial Statements.................. F-15
FARAH INCORPORATED AND SUBSIDIARIES
Unaudited Interim Condensed Consolidated Financial
Statements:
Condensed Consolidated Statements of Operations and Retained
Earnings for the Quarters and Six Months Ended May 3, 1998
and May 4, 1997........................................... F-25
Condensed Consolidated Balance Sheets as of May 3, 1998 and
November 2, 1997.......................................... F-26
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended May 3, 1998 and May 4, 1997.................. F-27
Notes to Condensed Consolidated Financial Statements........ F-28
Audited Consolidated Financial Statements:
Report of Independent Accountants........................... F-39
Report of Independent Accountants........................... F-40
Consolidated Statements of Operations for the Years Ended
November 2, 1997, November 3, 1996 and November 3, 1995... F-41
Consolidated Balance Sheets as of November 2, 1997 and
November 3, 1996.......................................... F-42
Consolidated Statements of Shareholders' Equity for the
Years Ended November 2, 1997, November 3, 1996 and
November 3, 1995.......................................... F-43
Consolidated Statements of Cash Flows for the Years Ended
November 2, 1997, November 3, 1996 and November 3, 1995... F-44
Notes to Consolidated Financial Statements.................. F-45
</TABLE>
F-1
<PAGE> 119
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 4,
1998 SEPTEMBER 27,
(UNAUDITED) 1997
----------- -------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 4,851 $ 116
Accounts receivable....................................... 71,234 24,981
Inventories............................................... 86,049 21,351
Deferred income taxes..................................... 9,865 1,495
Prepaid expenses.......................................... 12,558 812
-------- -------
Total current assets.............................. 184,557 48,755
Property and equipment, net................................. 59,262 20,283
Deferred income taxes....................................... 1,137 --
Intangible assets, including trademarks and goodwill........ 42,380 393
Other assets................................................ 10,834 227
-------- -------
Total assets...................................... $298,170 $69,658
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 33,568 $12,828
Accrued expenses.......................................... 24,184 2,322
Accrued incentive compensation............................ 1,505 1,934
Income taxes payable...................................... 1,261 102
Current portion of long-term debt and capital leases...... 3,714 1,335
Due to Farah shareholders................................. 4,873 --
-------- -------
Total current liabilities......................... 69,105 18,521
Senior subordinated debt.................................... 100,000 --
Long-term debt and noncurrent portion of capital leases..... 79,656 24,055
Deferred income taxes....................................... 431 431
Other noncurrent liabilities................................ 1,256 --
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 38,630 shares
issued and outstanding at September 27, 1997........... -- 3,863
Common stock $.01 par value; 50,000,000 shares
authorized; 7,600,000 and 6,000,000 shares issued
and outstanding at July 4, 1998 and September 27,
1997, respectively..................................... 76 60
Additional paid-in capital................................ 17,270 --
Retained earnings......................................... 30,376 22,728
-------- -------
Total shareholders' equity........................ 47,722 26,651
-------- -------
Total liabilities and shareholders' equity........ $298,170 $69,658
======== =======
</TABLE>
See accompanying notes.
F-2
<PAGE> 120
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THIRTY-NINE
THIRTEEN THIRTEEN FORTY WEEKS
WEEKS ENDED WEEKS ENDED WEEKS ENDED ENDED
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales...................................... $69,823 $44,249 $152,290 $115,608
Cost of goods sold............................. 51,874 33,737 114,570 88,327
------- ------- -------- --------
Gross profit................................. 17,949 10,512 37,720 27,281
Selling, general and administrative expenses... 10,776 5,272 22,136 14,859
------- ------- -------- --------
Operating income............................. 7,173 5,240 15,584 12,422
Other expense:
Interest..................................... 1,435 819 2,238 2,263
Bridge loan funding fee...................... 500 -- 500 --
Other, net................................... 288 199 667 474
------- ------- -------- --------
2,223 1,018 3,405 2,737
------- ------- -------- --------
Income before income taxes..................... 4,950 4,222 12,179 9,685
Provision for income taxes..................... 1,860 1,547 4,531 3,518
------- ------- -------- --------
Net income................................... $ 3,090 $ 2,675 $ 7,648 $ 6,167
======= ======= ======== ========
Net income per common share
Basic..................................... $ 0.41 $ 0.45 $ 1.02 $ 1.03
======= ======= ======== ========
Diluted................................... $ 0.40 $ 0.44 $ 1.02 $ 1.03
======= ======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 121
TROPICAL SPORTSWEAR INT'L CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FORTY THIRTY-NINE
WEEKS ENDED WEEKS ENDED
JULY 4, JUNE 28,
1998 1997
----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 7,648 $ 6,167
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization............................. 2,314 1,541
Other, net................................................ (583) 533
Changes in operating assets and liabilities:
Accounts receivable.................................... (12,818) (8,428)
Inventories............................................ (678) 3,736
Accounts payable....................................... (1,327) (3,780)
Accrued incentive compensation......................... (429) (513)
Other, net............................................. (4,942) 1,570
--------- -------
Net cash used by operating activities............. (10,815) 826
INVESTING ACTIVITIES
Capital expenditures........................................ (3,766) (4,407)
Acquisition of Farah, Inc., net of cash acquired............ (84,179) --
Other, net.................................................. 121 9
--------- -------
Net cash used by investing activities............. (87,824) (4,398)
FINANCING ACTIVITIES
Proceeds of long-term debt.................................. 100,108 4,246
Proceeds from sale of common stock.......................... 17,286 --
Retirement of preferred stock............................... (3,863) --
Principal payments of long-term debt........................ (56,094) (2,860)
Net change in capital leases................................ (378) (341)
Net change in long-term revolving credit line borrowings.... 51,442 2,768
Payment of debt issuance costs.............................. (5,127) --
--------- -------
Net cash provided by financing activities......... 103,374 3,813
--------- -------
Net increase in cash........................................ 4,735 241
Cash at beginning of period................................. 116 261
--------- -------
Cash at end of period....................................... $ 4,851 $ 502
========= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 122
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 4, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Tropical Sportswear Int'l Corporation (the "Company") include the accounts of
Tropical Sportswear Int'l Corporation and its subsidiaries, including Savane
International Corp. (formerly known as Farah Incorporated and referred to herein
as "Savane") which was acquired on June 9, 1998. These financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. The unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and related notes included in the Company's Annual Report
on Form 10-K for the year ended September 27, 1997. In the opinion of
management, the unaudited condensed consolidated financial statements contain
all necessary adjustments (which include only normal, recurring adjustments) for
a fair presentation for the interim periods presented. Operating results for the
forty weeks ended July 4, 1998 are not necessarily indicative of results that
may be expected for the entire fiscal year ending October 3, 1998.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented to conform to the Statement 128
requirements.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 4, SEPTEMBER 27,
1998 1997
-------- -------------
<S> <C> <C>
Raw materials............................................... $ 12,379 $ 2,255
Work in process............................................. 18,977 5,617
Finished goods.............................................. 54,693 13,479
-------- -------
$ 86,049 $21,351
======== =======
</TABLE>
3. DEBT AND CAPITAL LEASES
Long-term debt and capital leases consists of the following:
<TABLE>
<CAPTION>
JULY 4, SEPTEMBER 27,
1998 1997
-------- -------------
<S> <C> <C>
Revolving credit line....................................... $ 63,578 $12,135
Equipment loan facility..................................... -- 2,354
Real estate loan............................................ 9,583 9,754
Senior Subordinated Notes................................... 100,000 --
Capital leases.............................................. 8,151 1,147
Other....................................................... 2,058 --
-------- -------
183,370 25,390
Less current maturities..................................... 3,714 1,335
-------- -------
$179,656 $24,055
======== =======
</TABLE>
F-5
<PAGE> 123
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 10, 1998, the Company closed on a new senior credit facility (the
Facility) which provides for borrowings of up to $110 million, subject to
certain borrowing base limitations. The Facility was obtained in conjunction
with the Company's acquisition of Savane (See Note 6) and was used to refinance
indebtedness then outstanding under the Company's previous senior credit
facility, to refinance indebtedness of Savane, to pay fees incurred in
connection with the acquisition of Savane and with the Facility, and for general
corporate purposes. Borrowings under the Facility bear variable rates of
interest (9.2% at July 4, 1998) and are secured by substantially all of the
Company's domestic assets. The Facility matures in June 2003. Debt issue costs
of $1,358 were incurred to date in connection with the Facility and are included
in other assets. These costs will be amortized to expense over the life of the
Facility using the effective interest method. As of July 4, 1998, an additional
$27,851 was available for borrowings under the Facility.
On June 10, 1998, the Company closed on a $100 million interim financing
facility (the Bridge Facility). The net proceeds from the Bridge Facility were
used to acquire Savane and pay related fees and expenses. The Bridge Facility
was repaid on June 24, 1998 as described below. A funding fee of $500 was
incurred and amortized to expense over the 14 day life of the loan.
On June 24, 1998, the Company closed on the sale of $100 million of Senior
Subordinated Notes (The Notes) through a private placement. Under the terms of
the indenture agreement underlying the Notes, the Company will pay semi-annual
interest at the rate of 11% for ten years, at which time the entire principal
amount is due. The net proceeds from the Notes were used to repay a portion of
the borrowings outstanding under the Bridge Facility. Debt issue costs of $3,769
were incurred to date and are included in other assets. These costs will be
amortized to expense over the life of the Notes using the effective interest
method.
4. SHAREHOLDERS' EQUITY
The Company completed an initial public offering (the "Offering") on
October 28, 1997. The Company sold 1,600,000 shares of its Common Stock at
$12.00 per share and received net proceeds of $17,286 after deducting
underwriters' discounts and offering expenses. Proceeds from the Offering were
used to retire existing Preferred Stock, reduce amounts outstanding under the
Company's revolving credit facility and for other working capital purposes.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN FORTY THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
JULY 4, JUNE 28, JULY 4, JUNE 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Net income.......................... $3,090 $2,675 $7,648 $6,167
====== ====== ====== ======
Denominator for basic earnings per
share:
Weighted average shares of common
stock outstanding................ 7,600 6,000 7,465 6,000
Effect of dilutive stock options
using the treasury stock
method........................... 135 15 52 15
------ ------ ------ ------
Denominator for diluted earnings per
share............................... 7,735 6,015 7,517 6,015
====== ====== ====== ======
Earnings per share -- basic........... $ 0.41 $ 0.45 $ 1.02 $ 1.03
====== ====== ====== ======
Earnings per share -- diluted......... $ 0.40 $ 0.44 $ 1.02 $ 1.03
====== ====== ====== ======
</TABLE>
F-6
<PAGE> 124
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACQUISITION OF SAVANE INTERNATIONAL
On June 10, 1998, the Company closed on the acquisition of Savane. Total
purchase price, including amounts paid for common stock acquired, amounts paid
for the value of outstanding stock options, and fees and expenses amounted to
$98,514. Of the total purchase price, $4,873 remains unpaid and represents
amounts due to Savane shareholders who did not submit their shares during the
tender process. The $4,873 will be paid as these shareholders submit their
common stock through a forced merger process.
The acquisition has been accounted for using the purchase method of
accounting. The preliminary fair value of identifiable net assets acquired is
$56,518. Additional appraisals are being obtained and further analysis is
currently being performed which could cause the $56,518 to be adjusted. The
preliminary excess of $41,996 will be allocated to the value of the Savane(R)
and Farah(R) trademarks with the remainder, if any, being allocated to goodwill.
The value of the trademarks and goodwill will be amortized over their estimated
useful lives of 30 years.
The Notes are jointly and severally guaranteed by Tropical's domestic
subsidiaries. The wholly-owned foreign subsidiaries are not guarantors with
respect to the Notes and do not have any credit arrangements senior to the Notes
except for their local overdraft facility and capital lease obligations.
The unaudited pro forma results presented below include the effects of the
acquisition as if it had been consummated at the beginning of the year prior to
acquisition. The unaudited pro forma financial information below is not
necessarily indicative of either future results of operations or results that
might have been achieved had the acquisitions been consummated at the beginning
of the year prior to acquisition.
<TABLE>
<CAPTION>
FORTY WEEKS THIRTY-NINE
ENDED WEEKS ENDED
JULY 4, JUNE 28,
1998 1997
----------- -----------
<S> <C> <C>
Net sales................................................... $335,598 $324,374
Net income (loss)........................................... (3,666) 1,198
Earnings (loss) per share................................... (0.49) 0.20
</TABLE>
7. SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS
The following is the supplemental combining condensed balance sheet as of
July 4, 1998 and the supplemental combining condensed statement of operations
for the thirteen week periods ended July 4, 1998 and June 28, 1997 and the forty
and thirty-nine weeks ended July 4, 1998 and June 28, 1997, respectively, and
the statement of cash flows for the forty and thirty-nine weeks ended July 4,
1998 and June 28, 1997, respectively. The only intercompany eliminations are the
normal intercompany sales, borrowings and investments in wholly-owned
subsidiaries. Separate complete financial statements of the guarantor
subsidiaries are not presented because management has determined that they are
not material to investors.
BALANCE SHEET
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................................... $ 440 $ 1,143 $ 3,268 $ -- $ 4,851
Accounts receivable, net................ 37,343 27,979 6,318 (406) 71,234
Inventories............................. 23,963 50,159 11,927 -- 86,049
Other current assets.................... 61,369 19,813 740 (59,499) 22,423
-------- -------- ------- --------- ------------
Total current assets............. 123,115 99,094 22,253 (59,905) 184,557
Property, plant and equipment, net........ 21,641 28,463 9,158 -- 59,262
Investment in subsidiaries and other
assets.................................. 121,905 98,016 (6,824) (158,746) 54,351
-------- -------- ------- --------- ------------
Total assets..................... $266,661 $225,573 $24,587 $(218,651) $ 298,170
======== ======== ======= ========= ============
</TABLE>
F-7
<PAGE> 125
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital leases........................ $ 652 $ 2,751 $ 311 $ -- $ 3,714
Accounts payable and accrued
liabilities........................... 25,656 30,746 9,418 (429) 65,391
-------- -------- ------- --------- ------------
Total current liabilities........ 26,308 33,497 9,729 (429) 69,105
Long-term debt and noncurrent portion of
capital leases.......................... 173,254 9,831 2,919 (6,348) 179,656
Other noncurrent liabilities.............. 19,377 60,627 106 (78,423) 1,687
Stockholders' equity...................... 47,722 121,618 11,833 (133,451) 47,722
-------- -------- ------- --------- ------------
Total liabilities and
stockholders' equity.......... $266,661 $225,573 $24,587 $(218,651) $ 298,170
======== ======== ======= ========= ============
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED JULY 4, 1998
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 51,108 $16,577 $3,077 $ (939) $ 69,823
Gross profit.............................. 13,235 4,096 618 -- 17,949
Operating income (loss)................... 6,980 301 (108) -- 7,173
Interest, income taxes and other, net..... 3,247 944 (50) (58) 4,083
Net income (loss)......................... 3,733 (643) (58) 58 3,090
</TABLE>
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED JUNE 28, 1997
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 44,270 $ 90 $ -- $ (111) $ 44,249
Gross profit.............................. 10,586 37 -- (111) 10,512
Operating income (loss)................... 5,228 12 -- -- 5,240
Interest, income taxes and other, net..... 2,560 5 -- -- 2,565
Net income (loss)......................... 2,668 7 -- -- 2,675
</TABLE>
<TABLE>
<CAPTION>
FORTY WEEKS ENDED JULY 4, 1998
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................................. $133,416 $16,860 $3,077 $(1,063) $152,290
Gross profit.............................. 32,937 4,166 617 -- 37,720
Operating income (loss)................... 15,385 308 (109) -- 15,584
Interest, income taxes and other, net..... 7,552 493 (51) (58) 7,936
Net income (loss)......................... 7,833 (185) (58) 58 7,648
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED JUNE 28, 1997
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales................................. $155,504 $ 228 $ -- $ (124) $115,608
Gross profit.............................. 27,328 77 -- (124) 27,281
Operating income (loss)................... 12,419 3 -- -- 12,422
Interest, income taxes and other, net..... 6,253 2 -- -- 6,255
Net income (loss)......................... 6,166 1 -- -- 6,167
</TABLE>
F-8
<PAGE> 126
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FORTY WEEKS ENDED JULY 4, 1998
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash used by operating activities... $ (1,098) $(8,818) $ (957) $ 58 $(10,815)
Net cash used by investing activities... (97,018) 5,673 3,372 149 (87,824)
Net cash provided by financing
activities............................ 98,446 4,282 853 (207) 103,374
Net increase in cash.................... 330 1,137 3,268 -- 4,735
Cash, beginning of period............... 110 6 -- -- 116
Cash, end of period..................... 440 1,143 3,268 -- 4,851
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED JUNE 28, 1997
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities............................ $ 871 $ (45) $ -- $ -- $ 826
Net cash used by investing activities... (4,396) (2) -- -- (4,398)
Net cash provided by financing
activities............................ 3,813 -- -- -- 3,813
Net increase in cash.................... 288 (47) -- -- 241
Cash, beginning of period............... 209 52 -- -- 261
Cash, end of period..................... 497 5 -- -- 502
</TABLE>
F-9
<PAGE> 127
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tropical Sportswear Int'l Corporation
We have audited the accompanying consolidated balance sheets of Tropical
Sportswear Int'l Corporation as of September 27, 1997 and September 28, 1996,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended September 27, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tropical Sportswear Int'l Corporation at September 27, 1997 and September 28,
1996, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended September 27, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
November 5, 1997, except for Note 15,
as to which the date is May 1, 1998
F-10
<PAGE> 128
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 116 $ 261
Accounts receivable....................................... 24,981 20,197
Inventories............................................... 21,351 23,282
Deferred income taxes..................................... 1,495 1,816
Prepaid income taxes...................................... -- 269
Prepaid expenses.......................................... 812 163
------- -------
Total current assets.............................. 48,755 45,988
Property and equipment...................................... 25,245 20,145
Less accumulated depreciation and amortization.............. 4,962 3,475
------- -------
20,283 16,670
Other assets................................................ 227 350
Excess of cost over fair value of net assets of
acquired subsidiary less accumulated amortization
of $82 at September 27, 1997 and $68 at
September 28, 1996........................................ 393 407
------- -------
Total assets...................................... $69,658 $63,415
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $12,828 $13,949
Accrued expenses.......................................... 2,322 1,581
Accrued incentive compensation............................ 1,934 2,365
Income taxes payable...................................... 102 --
Current installments of long-term debt.................... 801 2,155
Current installments of obligations under capital
leases................................................. 534 455
------- -------
Total current liabilities......................... 18,521 20,505
Long-term debt.............................................. 23,442 23,676
Obligations under capital leases............................ 613 486
Deferred income taxes....................................... 431 366
Commitments and contingencies
Shareholders' equity:
Preferred stock, $100 par value; 10,000,000 shares
authorized; 38,630 shares issued and outstanding....... 3,863 3,863
Common stock, $.01 par value; 50,000,000 shares
authorized; 6,000,000 shares issued and outstanding.... 60 60
Retained earnings......................................... 22,728 14,459
------- -------
Total shareholders' equity........................ 26,651 18,382
------- -------
Total liabilities and shareholders' equity........ $69,658 $63,415
======= =======
</TABLE>
See accompanying notes.
F-11
<PAGE> 129
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales............................................... $151,692 $117,355 $110,064
Cost of goods sold...................................... 115,637 91,132 87,858
-------- -------- --------
Gross profit............................................ 36,055 26,223 22,206
Selling, general and administrative expenses............ 19,443 15,189 15,060
-------- -------- --------
Operating income........................................ 16,612 11,034 7,146
Other expense:
Interest.............................................. 2,899 2,498 3,160
Factoring............................................. 505 373 708
Other, net............................................ 32 247 293
-------- -------- --------
3,436 3,118 4,161
-------- -------- --------
Income before income taxes.............................. 13,176 7,916 2,985
Provision for income taxes.............................. 4,907 2,745 825
-------- -------- --------
Net income.............................................. $ 8,269 $ 5,171 $ 2,160
======== ======== ========
Net income per common share, basic and diluted.......... $ 1.37 $ 0.86 $ 0.36
======== ======== ========
</TABLE>
See accompanying notes.
F-12
<PAGE> 130
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- --------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------ ------ ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994..................... 39 $3,863 6,000 $60 $ 7,128 $11,051
Net income................................... -- -- -- -- 2,160 2,160
-- ------ ----- --- ------- -------
Balance at September 30, 1995.................. 39 3,863 6,000 60 9,288 13,211
Net income................................... -- -- -- -- 5,171 5,171
-- ------ ----- --- ------- -------
Balance at September 28, 1996.................. 39 3,863 6,000 60 14,459 18,382
Net income................................... -- -- -- -- 8,269 8,269
-- ------ ----- --- ------- -------
Balance at September 27, 1997.................. 39 $3,863 6,000 $60 $22,728 $26,651
== ====== ===== === ======= =======
</TABLE>
See accompanying notes.
F-13
<PAGE> 131
TROPICAL SPORTSWEAR INT'L CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 8,269 $ 5,171 $ 2,160
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
(Gain) loss on disposal of property and equipment..... (6) 152 215
Depreciation and amortization......................... 2,121 1,431 1,226
Provision for doubtful accounts....................... 331 -- --
Deferred income taxes................................. 386 (204) 327
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable................................ (5,115) 704 (3,396)
Inventories........................................ 1,931 (848) 1,060
Prepaid income taxes............................... 269 898 (1,167)
Prepaid expenses and other assets.................. (526) (119) 94
Increase (decrease) in liabilities:
Accounts payable................................... (1,121) 3,863 (4,476)
Accrued expenses................................... 741 (73) 689
Accrued incentive compensation..................... (431) 1,576 (758)
Income taxes payable............................... 102 -- (732)
------- -------- -------
Net cash provided (used) by operating activities........ 6,951 12,551 (4,758)
INVESTING ACTIVITIES
Capital expenditures.................................... (5,162) (10,119) (1,467)
Proceeds from sale of property and equipment............ 78 234 39
------- -------- -------
Net cash used by investing activities................... (5,084) (9,885) (1,428)
FINANCING ACTIVITIES
Proceeds of long-term debt.............................. 4,676 7,330 803
Principal payments of long-term debt.................... (3,253) (1,628) (1,750)
Principal payments of capital leases.................... (424) (500) (540)
Net proceeds from (repayment of) long-term revolving
credit line borrowings................................ (3,011) (7,675) 7,333
------- -------- -------
Net cash provided (used) by financing activities........ (2,012) (2,473) 5,846
------- -------- -------
Net increase (decrease) in cash......................... (145) 193 (340)
Cash at beginning of year............................... 261 68 408
------- -------- -------
Cash at end of year..................................... $ 116 $ 261 $ 68
======= ======== =======
</TABLE>
See accompanying notes.
F-14
<PAGE> 132
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED SEPTEMBER 27, 1997
(IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Tropical
Sportswear Int'l Corporation (the Company) and its wholly-owned subsidiary,
Apparel Network Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
The Company's principal line of business is the marketing, design,
manufacture and distribution of men's casual pants and shorts. The principal
markets for the Company include major retailers within the United States. The
Company subcontracts the assembly of substantially all of its products with
independent manufacturers in the Dominican Republic and Mexico and, at any point
in time, a majority of the Company's work-in-process inventory is located in
those countries.
ACCOUNTING PERIOD
The Company operates on a 52/53 week annual accounting period ending on the
Saturday nearest September 30th. Each of the years ended September 27, 1997,
September 28, 1996, and September 30, 1995 contains 52 weeks.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (Statement 128).
The overall objective of Statement 128 is to simplify the calculation of
earnings per share (EPS) and achieve comparability with the recently issued
International Accounting Standard No. 33, Earnings Per Share. Statement 128 is
effective for both interim and annual financial statements for periods ending
after December 15, 1997. The new standard has been applied in the accompanying
financial statements with no material impact on the Company's EPS for the
periods presented herein.
Basic and diluted earnings per share has been calculated based on the
weighted average number of shares outstanding for all periods presented (6,000
shares); the number of shares used in the diluted calculation does not
materially differ from the amount used in the basic calculation.
REVENUE RECOGNITION
Based on its terms of F.O.B. shipping point, the Company records sales upon
the shipment of finished product to the customer.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. The Company records provisions for
markdowns and losses on excess and slow-moving inventory to the extent the cost
of inventory exceeds estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company primarily uses
straight-line depreciation methods over periods that approximate the assets'
estimated useful lives.
F-15
<PAGE> 133
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF ACQUIRED SUBSIDIARY
The excess of cost over fair value of net assets of the acquired subsidiary
is amortized on the straight-line basis over a period of 40 years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from the estimates.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable,
accounts payable, long-term debt and obligations under capital leases. The
carrying amounts of these financial instruments approximate their fair values.
STATEMENT OF CASH FLOWS
Supplemental cash flow information:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid for:
Interest...................................... $2,937 $2,439 $3,160
Income taxes.................................. 4,150 2,051 2,373
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations of $630 and $349 were incurred when the Company
entered into leases for new equipment in the years ended September 27, 1997 and
September 30, 1995 respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS 121). This standard requires impairment losses to
be recorded on long-lived assets used in operations when impairment indicators
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company adopted the
provisions of SFAS 121 during fiscal 1996 with no impact on the financial
statements.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Receivable from factor...................................... $24,631 $19,627
Receivable from trade accounts.............................. 997 1,094
Reserve for returns and allowances and bad debts............ (647) (524)
------- -------
$24,981 $20,197
======= =======
</TABLE>
F-16
<PAGE> 134
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 1, 1995, the Company entered into a factoring agreement whereby
substantially all of the Company's trade receivables are assigned on an ongoing
basis, without recourse, except for credit losses on the first .15% of amounts
factored. The factoring agreement is with a national company which, in
management's opinion, is highly creditworthy. The purchase price of each
receivable is the net face amount, less a factoring discount of .30%. Prior to
October 1, 1995, the Company factored its trade receivables without recourse and
under this agreement, the purchase price of each receivable was the net face
amount less a factoring discount of .65%.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Raw materials............................................... $ 2,255 $ 2,399
Work in process............................................. 5,617 5,946
Finished goods.............................................. 13,479 14,937
------- -------
$21,351 $23,282
======= =======
</TABLE>
The Company has made provisions for inventory loss of approximately $2,200,
$2,200 and $1,780 at September 27, 1997, September 28, 1996 and September 30,
1995, respectively, to reflect a write down of excess and slow-moving inventory
to net realizable value.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28, LIFE
1997 1996 (YEARS)
------------- ------------- -------
<S> <C> <C> <C>
Land................................................ $ 3,976 $ 3,976 --
Land improvements................................... 1,581 6 15
Buildings and improvements.......................... 9,317 6,243 39.5
Machinery and equipment............................. 10,313 7,824 3-7
Leasehold improvements.............................. 58 64 15-39.5
Construction in progress............................ -- 2,032 --
------- -------
$25,245 $20,145
======= =======
</TABLE>
During the years ended September 27, 1997 and September 28, 1996, the
Company capitalized $72 and $71 of interest expense, respectively.
F-17
<PAGE> 135
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Note payable to former owners............................... $ -- $ 1,827
Revolving credit line....................................... 12,135 15,147
Equipment loan facility..................................... 2,354 1,557
Term note................................................... -- 1,000
Construction and term loan.................................. 9,754 6,292
Other notes payable......................................... -- 8
------- -------
24,243 25,831
Less current maturities..................................... 801 2,155
------- -------
$23,442 $23,676
======= =======
</TABLE>
The note payable to former owners (the Acquisition Note) was issued on July
8, 1994 in conjunction with the settlement of the final purchase price to be
paid for the Company. The Acquisition Note bears no interest and is, therefore,
recorded at its net present value using a discount rate of 9%. The outstanding
face value amounted to $2,000 as of September 28, 1996. The Acquisition Note was
repaid on January 31, 1997.
On September 28, 1994, the Company entered into a secured revolving credit
and term loan agreement (the Credit Agreement). The Credit Agreement, as
amended, consists of a $40,000 revolving credit line ($5,500 of which can be
utilized for letters of credit), a $3,000 term note and a $5,000 equipment loan
facility. The Credit Agreement expires on October 31, 1998, at which time any
outstanding balances become due. Borrowings under the revolving credit line are
limited to the lesser of $40,000 or qualifying accounts receivable and eligible
inventory. Available borrowings under the revolving credit line were
approximately $17,056 and $7,233 at September 27, 1997 and September 28, 1996,
respectively. The revolving credit line bears interest at a variable rate of
prime or LIBOR plus an applicable margin (8.70% and 8.75% at September 27, 1997
and September 28, 1996, respectively).
The equipment loan facility is payable in monthly installments of $31 and
bears interest at a variable rate of prime or LIBOR plus an applicable margin
(8.46% and 8.41% at September 27, 1997 and September 28, 1996, respectively).
Available borrowings under the equipment loan facility were approximately $1,990
and $3,400 at September 27, 1997 and September 28, 1996, respectively.
The term note is payable in monthly installments of $83 and bears interest
at prime plus an applicable margin (10.25% and 11.0% at September 27, 1997 and
September 28, 1996, respectively). No additional borrowings are available under
the term note.
On May 7, 1996, the Company entered into a construction and term loan
agreement (the Loan Agreement). The Loan Agreement consists of a $9,600
construction loan, which is secured by a mortgage. The construction loan was
utilized to purchase the Company's previously leased operating facility and to
finance the construction of a new adjacent cutting facility. Interest is payable
monthly at prime plus an applicable margin (8.75% at September 28, 1996). On
July 18, 1997, the construction loan was converted to a $9,800 term loan which
will mature on May 7, 2006. Principal and interest at 8.88% are due monthly
based on a 19-year amortization.
F-18
<PAGE> 136
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's debt agreements contain certain covenants, the most
restrictive of which are as follows: (i) maintenance of consolidated net worth
at specified levels, (ii) achievement of specified adjusted net earnings from
operations, (iii) maintenance of debt service coverage ratio at specified
levels, (iv) limitations on annual capital expenditures, (v) limitations on
liens, and (vi) prohibition of the payment of dividends. The Company is in
compliance with all such covenants. The Credit Agreement is secured by
substantially all of the assets of the Company.
The scheduled maturities of long-term debt as of September 27, 1997 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ----------- -------
<S> <C>
1998........................................................ $ 801
1999........................................................ 14,105
2000........................................................ 236
2001........................................................ 261
2002........................................................ 286
Thereafter.................................................. 8,554
</TABLE>
6. LEASES
The Company leases administrative facilities and certain equipment under
non-cancelable leases. Future minimum lease payments under operating leases and
the present value of future minimum capital lease payments as of September 27,
1997 are:
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
- ----------- --------- -------
<S> <C> <C>
1998........................................................ $ 308 $ 601
1999........................................................ 239 375
2000........................................................ 231 132
2001........................................................ 192 132
2002........................................................ 144 66
Thereafter.................................................. 207 --
------ ------
Total minimum lease payments...................... $1,321 1,306
======
Less amount representing interest........................... 159
------
Present value of minimum capital lease payments............. 1,147
Less current installments................................... 534
------
$ 613
======
</TABLE>
The following summarizes the Company's assets under capital leases:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Machinery and equipment..................................... $2,893 $2,253
Accumulated amortization.................................... 1,588 1,242
</TABLE>
Amortization of assets under capital leases has been included in
depreciation.
Total rental expense for operating leases for the years ended September 27,
1997, September 28, 1996, and September 30, 1995 was approximately $465, $859,
and $982, respectively.
F-19
<PAGE> 137
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CLOSURE OF INTERNATIONAL SUBSIDIARY
In September 1995, a decision was made to close the Company's international
subsidiary, Confecciones Siglo, S.A., and, at September 30, 1995, the Company
had accrued $500 for costs associated with the closing. These costs included
employee severance, relocation of certain equipment and estimated losses on
disposals of property and equipment. During fiscal 1996, the assets of the
subsidiary were liquidated.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal....................................... $4,143 $2,713 $375
State......................................... 378 236 123
------ ------ ----
4,521 2,949 498
Deferred expense (benefit):
Federal....................................... 365 (188) 309
State......................................... 21 (16) 18
------ ------ ----
386 (204) 327
------ ------ ----
$4,907 $2,745 $825
====== ====== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
A reconciliation of the difference between the effective income tax rate
and the statutory federal tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income tax expense at federal statutory rate
(34.0%)....................................... $4,480 $2,691 $1,015
State income taxes, net of federal benefit...... 348 144 90
Losses of international subsidiary.............. -- (162) (312)
Amortization of goodwill........................ 4 48 4
Other items..................................... 75 24 28
------ ------ ------
$4,907 $2,745 $ 825
====== ====== ======
</TABLE>
In fiscal 1996 and 1995, as a result of closing the Company's international
subsidiary, the Company recorded tax benefits for losses of the international
subsidiary which were previously not deductible for income tax purposes.
F-20
<PAGE> 138
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Inventory related......................................... $ 962 $1,060
Accounts receivable related............................... 233 185
Various accrued expenses.................................. 351 599
Deferred tax liabilities:
Depreciation.............................................. (431) (366)
Other items............................................... (51) (28)
------ ------
Net deferred tax asset...................................... $1,064 $1,450
====== ======
Classified as follows:
Current asset............................................. $1,495 $1,816
Non-current liability..................................... (431) (366)
------ ------
$1,064 $1,450
====== ======
</TABLE>
9. SIGNIFICANT CUSTOMERS
In fiscal 1997, three customers accounted for approximately 29%, 19% and
11% of sales. In fiscal 1996, three customers accounted for approximately 26%,
17% and 14% of sales. In fiscal 1995, four customers accounted for approximately
18%, 15%, 15% and 14% of sales.
10. COMMITMENTS AND CONTINGENCIES
As of September 27, 1997 and September 28, 1996, the Company had
approximately $1,004 and $4,704, respectively, of outstanding letters of credit
with various expiration dates through January 1998.
On March 21, 1997, Levi Strauss & Co. brought suit against the Company in
U.S. District Court for the Northern District of California. The complaint
alleges, among other things, that the Company's Flyers(TM) trademark and certain
trade dress used in the labeling and packaging of the Company's Flyers(TM) and
Bay to Bay(R) products infringe upon certain of plaintiff's proprietary
trademark and trade dress rights in violation of the federal Lanham Act and
California law. The complaint seeks injunctive relief, as well as treble damages
and attorneys' fees. The Company has also received notice that the plaintiff
intends to seek to amend its complaint to allege that certain trade dress used
in the labeling and packaging of the Company's licensed Bill Blass(R) brand
dress slack also infringes upon certain of the plaintiff's proprietary trade
dress rights. Although the outcome of the litigation cannot be determined at
this time and the Company would consider reasonable settlement opportunities,
the Company currently intends to vigorously defend against such allegations.
Nevertheless, in an attempt to limit the Company's liability, if any, with
respect to such alleged infringement, the Company has unilaterally altered the
trademark and trade dress which are currently the subject of this litigation.
On July 3, 1997, Out-of-Mexico Apparel, Ltd. brought suit against the
Company in California Superior Court for, among other things, breach of
contract, breach of an implied covenant of good faith and fair dealing, and
violation of the California Unfair Business Practices Act. The complaint alleges
that the Company entered into contracts for the manufacture of apparel with
certain manufacturers in contravention of a customer non-disclosure and
non-circumvention agreement between Out-of-Mexico Apparel, Ltd. and the Company.
The complaint seeks compensatory damages and prejudgment interest, punitive
damages and the costs of suit. Although the outcome of the litigation cannot be
determined at this time, the Company intends to vigorously defend against such
allegations.
F-21
<PAGE> 139
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has not recorded any amounts related to the above two matters.
The Company is not involved in any other legal proceedings which the Company
believes could reasonably be expected to have a material adverse effect on the
Company's business, financial position or results of operations.
11. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) profit sharing plan under which all
employees are eligible to participate. Employee contributions are voluntary and
subject to Internal Revenue Service limitations. The Company matches, based on
annually determined factors, employee contributions provided the employee
completes 1,000 hours of service annually and is employed as of December 31 of
each plan year. For the years ended September 27, 1997, September 28, 1996, and
September 30, 1995, the Company charged to expense $114, $112, and $86,
respectively, related to this plan.
12. STOCK OPTION PLANS
The Board of Directors has adopted two stock option plans, which became
effective on October 28, 1997. The Employee Stock Option Plan (the Employee
Plan) and the Non-Employee Director Stock Option Plan (the Director Plan)
reserve 700,000 shares of common stock for future issuance under the plans. The
per share exercise price of each stock option granted under the plans will be
equal to the quoted fair market value of the stock on the date of grant. Under
the Employee Plan, on October 28, 1997, the effective date of the initial public
offering, the Board granted options to purchase 300,000 shares of common stock
of the Company to key employees. Under the Director Plan, on October 28, 1997,
the Board also granted options to purchase 60,000 shares of common stock of the
Company to non-employee directors.
In December 1996 and January 1997, The Board of Directors granted to key
members of management, non-qualified options to purchase 60,000 shares of common
stock of the Company at an exercise price of $10.50 per share, its estimated
fair value at the date of grant.
All options granted have 10 year terms and vest and become fully
exercisable at the end of three years of continued employment.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123 (Statement 123), "Accounting for Stock Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for Fiscal 1997: risk-free interest rate of 5.7%; a dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .31; and a weighted-average expected life of the option of 5 years.
F-22
<PAGE> 140
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for fiscal 1997 is (in thousands except for earnings per
share information):
<TABLE>
<S> <C>
Pro forma net income........................................ $8,230
Pro forma earnings per share (basic and diluted)............ $ 1.37
</TABLE>
A summary of the Company's stock option activity, and related information
for the year ended September 27, 1997 follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
(000) EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding -- beginning of year............................ -- n/a
Granted................................................... 60 $10.50
Exercised................................................. -- n/a
Canceled/expired............................................ -- n/a
-----
Outstanding -- end of year.................................. 60 $10.50
=====
Exercisable at end of year................................ -- n/a
Weighted-average fair value of options granted during the
year................................................... $3.95
</TABLE>
The exercise price for options outstanding as of September 27, 1997 was
$10.50. The weighted-average remaining contractual life of those options is 9
years.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended September 27, 1997 and September 28, 1996:
<TABLE>
<CAPTION>
NET INCOME
NET GROSS NET (LOSS) PER
SALES PROFIT INCOME COMMON SHARE
------- ------- ------ ------------
<S> <C> <C> <C> <C>
Fiscal year ended September 27, 1997
First Quarter................................ $30,727 $ 6,745 $ 919 $ 0.15
Second Quarter............................... 40,632 10,024 2,573 0.43
Third Quarter................................ 44,249 10,512 2,675 0.45
Fourth Quarter............................... 36,084 8,774 2,102 0.35
Fiscal year ended September 28, 1996
First Quarter................................ $20,396 $ 3,141 $ (481) $(0.08)
Second Quarter............................... 32,389 7,491 1,792 0.30
Third Quarter................................ 33,808 7,994 2,216 0.37
Fourth Quarter............................... 30,762 7,597 1,644 0.27
</TABLE>
F-23
<PAGE> 141
TROPICAL SPORTSWEAR INT'L CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS
An initial public offering (the Offering) of the Company's common stock was
completed on October 28, 1997 in which the company raised approximately $17,300
(net of offering costs). In connection with the Offering, the Board formed a new
corporation, Tropical Sportswear Int'l Corporation (the Company). Outstanding
common and preferred stock of the predecessor company, Apparel International
Group, Inc. (AIG), was exchanged for an equal amount of common and preferred
stock of the Company. Immediately preceding the closing of the Offering, the
subsidiaries of AIG, Tropical Acquisition Corporation and Tropical Sportswear
International Corporation, were merged into the Company.
The preferred stock of AIG had a par value of $100 per share. These shares
were exchanged for a special class of preferred stock which has a $.01 par value
and a $100 per share liquidation preference. These shares were redeemed upon the
closing of the Offering.
Effective October 23, 1997, the Board of Directors approved a change in the
Company's capital stock to authorize 50,000,000 shares of $.01 par value common
stock and 10,000,000 shares of $.01 par value preferred stock. At this time, the
Board also authorized a 6,000-for-1 stock split for holders of its common stock.
The accompanying consolidated financial statements have been restated to reflect
this change in capitalization.
15. RECENT DEVELOPMENT -- MERGER AGREEMENT AND SUPPLEMENTAL CONDENSED FINANCIAL
INFORMATION
Pursuant to a definitive merger agreement dated May 1, 1998, the Company
formed Foxfire Acquisition Corp. to acquire all of the issued and outstanding
stock of Farah Incorporated. The acquisition will be financed through senior
subordinated notes of the Company (the "Notes"). The Notes will be jointly and
severally guaranteed by the Company's two wholly-owned subsidiaries and Farah
Incorporated's domestic subsidiaries.
The Company's wholly-owned subsidiary, Tropical Sportswear Company, Inc.,
formed on September 25, 1997, is a finance subsidiary with all of its assets and
operations resulting from transactions with its parent. Apparel Network
Corporation is a retail subsidiary. Financial information for Apparel Network
Corporation as of September 27, 1997 and September 28, 1996 and for the three
years in the period ended September 27, 1997 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------- -------------
<S> <C> <C>
Current assets.............................................. $ 92 $ 98
Non-current assets.......................................... 21 122
Current liabilities......................................... 153 178
Non-current liabilities..................................... -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales....................................... $324 $192 $ 2
Gross profit.................................... 118 24 --
Income before income taxes...................... 28 (79) (14)
Net income...................................... 17 (48) (9)
</TABLE>
Separate financial statements of the guarantors are not presented because
management has determined they will not be material to investors.
F-24
<PAGE> 142
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
QUARTERS AND SIX MONTHS ENDED MAY 3, 1998 AND MAY 4, 1997
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
MAY 3, 1998 MAY 4, 1997 MAY 3, 1998 MAY 4, 1997
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(THOUSANDS OF DOLLARS EXCEPT (THOUSANDS OF DOLLARS EXCEPT
SHARE AND PER SHARE DATA) SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................. $66,130 $70,771 $125,174 $132,709
Cost of sales............................. 50,364 50,883 93,504 95,113
------- ------- -------- --------
Gross profit.............................. 15,766 19,888 31,670 37,596
Selling, general and administrative
expenses................................ (16,261) (16,881) (30,336) (32,882)
Termination of foreign operations......... 1,395 -- (2,585) (2,462)
Relocation expenses....................... (1,904) -- (2,696) --
Production conversion expenses............ -- (577) -- (849)
------- ------- -------- --------
Operating income (loss)................. (1,004) 2,430 (3,947) 1,403
Other income (expense):
Interest expense........................ (1,319) (921) (2,518) (1,628)
Interest income......................... 37 205 67 396
Foreign currency transaction gains...... 208 13 364 124
Other, net.............................. 47 82 (36) 124
------- ------- -------- --------
Income (loss) before income taxes......... (2,031) 1,809 (6,070) 419
Income tax benefit........................ (696) (1,402) (1,665) (837)
------- ------- -------- --------
Net income (loss)............... (1,335) 3,211 (4,405) 1,256
Retained earnings:
Beginning............................... 5,516 6,361 8,586 8,316
------- ------- -------- --------
Ending.................................. $ 4,181 $ 9,572 $ 4,181 $ 9,572
======= ======= ======== ========
Net income (loss) per
share -- basic and diluted.... $ (0.13) $ 0.31 $ (0.43) $ 0.12
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-25
<PAGE> 143
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 3, 1998 AND NOVEMBER 2, 1997
<TABLE>
<CAPTION>
MAY 3, NOVEMBER 2,
1998 1997
------------ -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 3,121 $ 2,332
Trade receivables, net.................................... 35,804 43,053
Inventories:
Raw materials.......................................... 14,398 12,339
Work in process........................................ 17,369 18,457
Finished goods......................................... 42,752 43,996
-------- --------
Total inventories................................. 74,519 74,792
Other current assets...................................... 10,109 10,851
-------- --------
Total current assets.............................. 123,553 131,028
Property, plant and equipment, net.......................... 34,790 36,033
Other non-current assets.................................... 13,438 8,531
-------- --------
$171,781 $175,592
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 39,944 $ 35,572
Current installments of long-term debt.................... 5,438 5,301
Trade payables............................................ 20,828 20,600
Other current liabilities................................. 12,110 13,492
-------- --------
Total current liabilities......................... 78,320 74,965
Long-term debt, excluding current installments.............. 13,900 13,771
Other non-current liabilities............................... 1,381 2,957
Deferred gain on sale of building........................... 169 1,185
Shareholders' equity:
Common stock no par value, $.01 stated value, 20,000,000
shares authorized; issued 10,322,632 in 1998 and
10,315,264 in 1997..................................... 46,026 46,026
Additional paid-in capital................................ 30,804 30,627
Cumulative foreign currency translation adjustment........ (2,891) (2,416)
Retained earnings......................................... 4,181 8,586
-------- --------
78,120 82,823
Less: Treasury stock 36,275 shares in 1998 and 1997, at
cost...................................................... 109 109
-------- --------
Total shareholders' equity........................ 78,011 82,714
-------- --------
$171,781 $175,592
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-26
<PAGE> 144
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 3, 1998 AND MAY 4, 1997
<TABLE>
<CAPTION>
MAY 3, 1998 MAY 4, 1997
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss)........................................... $(4,405) $ 1,256
Adjustments to reconcile net income (loss) to net cash from
(used in) operating activities:
Depreciation and amortization............................. 3,294 2,531
Amortization of deferred gain on building sale............ (1,016) (1,016)
Amortization of deferred gain on subsidiary sale.......... -- (1,322)
Writedown of property, plant and equipment................ 2,856 1,345
Gain on sale of assets.................................... (18) (19)
Deferred income taxes..................................... (1,807) (1,107)
Decrease (increase) in:
Trade receivables......................................... 7,249 3,028
Inventories............................................... 273 (6,942)
Other current assets...................................... 150 (594)
Increase (decrease) in:
Trade payables............................................ 228 1,663
Other current liabilities................................. (1,382) (839)
------- -------
Net cash from (used in) operating activities...... 5,422 (2,016)
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (3,699) (5,761)
Proceeds from sales of property, plant and equipment........ 79 19
------- -------
Net cash used in investing activities............. (3,620) (5,742)
------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net increase in short-term debt............................. 4,372 8,402
Repayment of long-term debt................................. (2,979) (853)
Proceeds from sale of common stock.......................... -- 529
Other....................................................... (2,369) (802)
------- -------
Net cash from (used in) financing activities...... (976) 7,276
------- -------
Effect of exchange rate changes on cash..................... (37) (28)
------- -------
Net increase (decrease) in cash........................... 789 (510)
Cash, beginning of period................................. 2,332 3,777
------- -------
Cash, end of period....................................... $ 3,121 $ 3,267
======= =======
Supplemental cash flow disclosures:
Interest paid............................................. 2,499 1,459
Income taxes paid......................................... 159 275
Assets acquired through direct financing loans or capital
leases................................................. 3,245 2,609
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-27
<PAGE> 145
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. On May 1, 1998, Farah signed a definitive merger agreement with Tropical
Sportswear Int'l Corporation ("Tropical") pursuant to which Tropical offered to
acquire 100% of the outstanding shares of Farah common stock in a tender offer.
Pursuant to the agreement, Tropical paid $9.00 per share for each of the
approximately 10.3 million outstanding shares of Farah common stock. The
transaction was structured as a cash tender offer followed by a cash merger to
acquire any shares not previously tendered. As a result of the transaction,
Farah became a wholly owned subsidiary of Tropical.
4. 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 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 an estimated fair value of $2.1 million, after a
write-down for impairment, and are included in "Other non-current assets" on
Farah's May 3, 1998 Condensed Consolidated Balance Sheet. Farah is uncertain as
to the timing of the disposal of the Costa Rican assets held for sale. See
subsequent event discussion in footnote 9.
5. 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 $1,904,000 and
$2,696,000 for the quarter and six months ended May 3, 1998 respectively.
F-28
<PAGE> 146
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 was classified as "Termination of foreign operations" in the
Condensed Consolidated Statement of Operations and Retained Earnings for the six
months ended May 4, 1997. Farah recognized an additional loss of $2.6 million in
the fourth quarter of fiscal 1997 in connection with the sale of its entire
Irish operations. Losses related to the sale were to be paid pursuant to a
long-term supply contract with the purchaser. The contract required quality
production at stipulated levels. In the second quarter of 1998, the contract was
revised, lowering future required production levels. This revision resulted from
failure on the part of the supplier to produce under the terms of the contract.
As a result of this revision, the loss previously recognized in fiscal 1997, was
reduced by $1.4 million in the second quarter of fiscal 1998. This amount was
classified as "Termination of foreign operations" in the Condensed Consolidated
Statement of Operations and Retained Earnings.
7. 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 implemented SFAS 128 in its first
fiscal quarter of 1998. Prior periods have been restated to conform with the
presentation required by SFAS 128. The implementation of this standard did not
have a material impact of Farah's calculation of earnings per share for the
periods presented in 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.
Basic and diluted earnings per share has been calculated based on the
weighted average number of shares outstanding for all periods presented
(10,284,090 shares, 10,265,762 shares, 10,281,540 and 10,228,432 shares for the
quarters and six months ended May 3, 1998 and May 4, 1997, respectively); the
number of shares used in the diluted calculation does not materially differ from
the amount used in the basic calculation, therefore 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 1999.
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 1999 year-end disclosures.
F-29
<PAGE> 147
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
8. Subsequent to the merger discussed in Note 3, the Company closed the
remainder of Farah's sewing operations in San Jose, Costa Rica. All employees of
the corporation were severed effective July 9, 1998. The Company is currently
seeking a buyer for the facility that housed such operations. There can be no
assurance that any such disposition will be consummated.
9. Pursuant to the merger discussed in Note 3, Tropical acquired all of the
issued and outstanding capital stock of Farah Incorporated. The Acquisition was
financed through senior subordinated notes of Tropical (the "Notes"). The Notes
are 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. Among other things,
proceeds from the Notes were 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
May 3, 1998 and November 2, 1997, the supplemental combining condensed
statements of operations for the quarters and six months ended May 3, 1998 and
May 4, 1997 and the condensed combining statements of cash flows for the six
months ended May 3, 1998 and May 4, 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-30
<PAGE> 148
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MAY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ -------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales........................... $ -- $ 55,107 $15,847 $(4,824) $66,130
Cost of sales....................... -- 42,974 12,214 (4,824) 50,364
------- -------- ------- ------- -------
Gross profit...................... -- 12,133 3,633 -- 15,766
Selling, general and administrative
expenses.......................... -- (12,701) (3,560) -- (16,261)
Termination of foreign operations... -- 1,395 -- -- 1,395
Relocation expenses................. -- (1,904) -- -- (1,904)
------- -------- ------- ------- -------
Operating income (loss)........... -- (1,077) 73 -- (1,004)
Interest, net....................... (35) (1,193) (54) -- (1,282)
Other, net.......................... -- (30) 285 -- 255
Equity in losses from
subsidiaries...................... (1,300) -- -- 1,300 --
------- -------- ------- ------- -------
Income (loss) before income taxes... (1,335) (2,300) 304 1,300 (2,031)
Income tax provision (benefit)...... -- (749) 53 -- (696)
------- -------- ------- ------- -------
Net income (loss)......... $(1,335) $ (1,551) $ 251 $ 1,300 $(1,335)
======= ======== ======= ======= =======
</TABLE>
F-31
<PAGE> 149
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MAY 4, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ -- $58,690 $16,041 $(3,960) $70,771
Cost of sales........................ -- 43,309 11,534 (3,960) 50,883
------ ------- ------- ------- -------
Gross profit....................... -- 15,381 4,507 -- 19,888
Selling, general and administrative
expenses........................... -- (13,046) (3,835) -- (16,881)
Production conversion expenses....... -- (577) -- -- (577)
------ ------- ------- ------- -------
Operating income................... -- 1,758 672 -- 2,430
Interest, net........................ (35) (699) 18 -- (716)
Other, net........................... -- 30 65 -- 95
Equity in earnings from
subsidiaries....................... 3,246 -- -- (3,246) --
------ ------- ------- ------- -------
Income before income taxes........... 3,211 1,089 755 (3,246) 1,809
Income tax provision (benefit)....... -- (1,479) 77 -- (1,402)
------ ------- ------- ------- -------
Net income................. $3,211 $ 2,568 $ 678 $(3,246) $ 3,211
====== ======= ======= ======= =======
</TABLE>
F-32
<PAGE> 150
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ -- $104,327 $29,942 $(9,095) $125,174
Cost of sales........................ -- 79,619 22,980 (9,095) 93,504
------- -------- ------- ------- --------
Gross profit......................... -- 24,708 6,962 -- 31,670
Selling, general and administrative
expenses........................... -- (23,563) (6,773) -- (30,336)
Termination of foreign operations.... -- (256) (2,329) -- (2,585)
Relocation expenses.................. -- (2,696) -- -- (2,696)
------- -------- ------- ------- --------
Operating loss....................... -- (1,807) (2,140) -- (3,947)
Interest, net........................ (70) (2,283) (98) -- (2,451)
Other, net........................... -- (164) 492 -- 328
Equity in losses from subsidiaries... (4,335) -- -- 4,335 --
------- -------- ------- ------- --------
Loss before income taxes............. (4,405) (4,254) (1,746) 4,335 (6,070)
Income tax provision (benefit)....... -- (1,914) 249 -- (1,665)
------- -------- ------- ------- --------
Net loss................... $(4,405) $ (2,340) $(1,995) $ 4,335 $ (4,405)
======= ======== ======= ======= ========
</TABLE>
F-33
<PAGE> 151
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 4, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ -- $110,211 $29,536 $(7,038) $132,709
Cost of sales........................ -- 80,417 21,734 (7,038) 95,113
------ -------- ------- ------- --------
Gross profit......................... -- 29,794 7,802 -- 37,596
Selling, general and administrative
expenses........................... -- (25,543) (7,339) -- (32,882)
Termination of foreign operations.... -- -- (2,462) -- (2,462)
Production conversion expenses....... -- (849) -- -- (849)
------ -------- ------- ------- --------
Operating income (loss).............. -- 3,402 (1,999) -- 1,403
Interest, net........................ (70) (1,184) 22 -- (1,232)
Other, net........................... -- 111 137 -- 248
Equity in earnings from
subsidiaries....................... 1,326 -- -- (1,326) --
------ -------- ------- ------- --------
Income (loss) before income taxes.... 1,256 2,329 (1,840) (1,326) 419
Income tax provision (benefit)....... -- (1,057) 220 -- (837)
------ -------- ------- ------- --------
Net income (loss).......... $1,256 $ 3,386 $(2,060) $(1,326) $ 1,256
====== ======== ======= ======= ========
</TABLE>
F-34
<PAGE> 152
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ -------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash................................. $ -- $ 396 $ 2,725 $ -- $ 3,121
Accounts receivable, net............. -- 28,977 7,221 (394) 35,804
Inventories.......................... -- 62,362 12,157 -- 74,519
Other current assets................. -- 9,532 577 -- 10,109
------- -------- ------- -------- --------
Total current assets....... -- 101,267 22,680 (394) 123,553
------- -------- ------- -------- --------
Property, plant and equipment, net... -- 30,511 4,279 -- 34,790
Other assets, net.................... 79,674 (41,200) 956 (25,992) 13,438
------- -------- ------- -------- --------
Total assets............... $79,674 $ 90,578 $27,915 $(26,386) $171,781
======= ======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
installments of long-term
debt............................ $ -- $ 41,454 $ 3,928 $ -- $ 45,382
Trade payables and other current
liabilities..................... -- 26,253 7,079 (394) 32,938
------- -------- ------- -------- --------
Total current
liabilities.............. -- 67,707 11,007 (394) 78,320
------- -------- ------- -------- --------
Long-term debt and capital lease
obligations........................ 1,663 12,187 50 -- 13,900
Other noncurrent liabilities......... -- 4,706 217 (3,542) 1,381
Deferred gain on sale of building.... -- 169 -- -- 169
Shareholders' equity................. 78,011 5,809 16,641 (22,450) 78,011
------- -------- ------- -------- --------
Total liabilities and
shareholders' equity..... $79,674 $ 90,578 $27,915 $(26,386) $171,781
======= ======== ======= ======== ========
</TABLE>
F-35
<PAGE> 153
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 2, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT 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 SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
installments of long-term
debt............................ $ -- $ 36,880 $ 3,993 $ -- $ 40,873
Trade payables and other current
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......... -- 6,159 385 (3,587) 2,957
Deferred gain on sale of building.... -- 1,185 -- -- 1,185
Shareholders' equity................. 82,714 8,068 19,194 (27,262) 82,714
------- -------- ------- -------- --------
Total liabilities and
shareholders' equity..... $84,377 $ 91,387 $31,192 $(31,364) $175,592
======= ======== ======= ======== ========
</TABLE>
F-36
<PAGE> 154
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 3, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net loss........................... $(4,405) $(2,340) $(1,995) $ 4,335 $(4,405)
Adjustments to reconcile net loss
to net cash from (used in)
operating activities:
Depreciation and amortization... -- 2,997 297 -- 3,294
Other adjustments............... -- (1,425) 1,440 -- 15
Changes in operating assets and
liabilities................... -- 4,565 1,953 -- 6,518
------- ------- ------- ------- -------
Net cash from (used) in
operating activities..... (4,405) 3,797 1,695 4,335 5,422
======= ======= ======= ======= =======
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property, plant and
equipment....................... -- (3,426) (273) -- (3,699)
Proceeds from disposition of
property, plant and equipment... -- 79 -- -- 79
------- ------- ------- ------- -------
Net cash used in investing
activities............... -- (3,347) (273) -- (3,620)
======= ======= ======= ======= =======
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net change in debt................. -- 1,498 (105) -- 1,393
Net change in equity............... (261) 81 (521) 440 (261)
Other.............................. 4,703 (2,169) 170 (4,812) (2,108)
------- ------- ------- ------- -------
Net cash from (used in)
financing activities..... 4,442 (590) (456) (4,372) (976)
------- ------- ------- ------- -------
Effect of exchange rate changes on
cash............................... (37) -- (37) 37 (37)
------- ------- ------- ------- -------
Net increase (decrease) in cash...... -- (140) 929 -- 789
Cash beginning of period............. -- 536 1,796 -- 2,332
------- ------- ------- ------- -------
Cash end of period................... $ -- $ 396 $ 2,725 $ -- $ 3,121
======= ======= ======= ======= =======
</TABLE>
F-37
<PAGE> 155
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 4, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT ONLY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income (loss).................. $1,256 $3,386 $(2,060) $(1,326) $1,256
Adjustments to reconcile net income
(loss) to net cash from (used
in) operating activities:
Depreciation and amortization... -- 2,163 368 -- 2,531
Other adjustments............... -- (3,447) 1,328 -- (2,119)
Changes in operating assets and
liabilities................... -- (2,973) (711) -- (3,684)
------ ------ ------- ------- ------
Net cash from (used in)
operating activities..... 1,256 (871) (1,075) (1,326) (2,016)
====== ====== ======= ======= ======
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Purchases of property, plant and
equipment....................... -- (5,302) (459) -- (5,761)
Proceeds from disposition of
property, plant and equipment... -- 2 17 -- 19
------ ------ ------- ------- ------
Net cash used in investing
activities............... -- (5,300) (442) -- (5,742)
====== ====== ======= ======= ======
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Net change in debt................. -- 6,437 1,112 -- 7,549
Net change in equity............... (325) 50 (1,072) 1,022 (325)
Other.............................. (903) (274) 953 276 52
------ ------ ------- ------- ------
Net cash from (used in)
financing activities..... (1,228) 6,213 993 1,298 7,276
------ ------ ------- ------- ------
Effect of exchange rate changes on
cash............................... (28) -- (28) 28 (28)
------ ------ ------- ------- ------
Net increase (decrease) in cash...... -- 42 (552) -- (510)
Cash beginning of period............. -- 542 3,235 -- 3,777
------ ------ ------- ------- ------
Cash end of period................... $ -- $ 584 $ 2,683 $ -- $3,267
====== ====== ======= ======= ======
</TABLE>
F-38
<PAGE> 156
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.
PricewaterhouseCoopers LLP
El Paso, Texas
December 17, 1997, except for
the information in Note 13 for
which the date is May 1, 1998.
F-39
<PAGE> 157
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-40
<PAGE> 158
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-41
<PAGE> 159
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-42
<PAGE> 160
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' 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-43
<PAGE> 161
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-44
<PAGE> 162
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-45
<PAGE> 163
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-46
<PAGE> 164
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.
F-47
<PAGE> 165
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 [TO] 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-48
<PAGE> 166
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. However, pro forma disclosures as if Farah adopted the cost
recognition provisions of SFAS 123 are presented below.
F-49
<PAGE> 167
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-50
<PAGE> 168
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-51
<PAGE> 169
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>
F-52
<PAGE> 170
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
F-53
<PAGE> 171
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-54
<PAGE> 172
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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-55
<PAGE> 173
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.
F-56
<PAGE> 174
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-57
<PAGE> 175
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<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.
F-58
<PAGE> 176
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-59
<PAGE> 177
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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").
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-60
<PAGE> 178
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NOVEMBER 2, 1997
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR 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>
NON-
PARENT GUARANTOR 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>
F-61
<PAGE> 179
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
-------- ------------ ------------ ------------ ------------
(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>
NOVEMBER 2, 1997
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR 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 SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
installments of long-term debt...... $ -- $ 36,880 $ 3,993 $ -- $ 40,873
Trade payables and other current
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
Shareholders' equity..................... 82,714 8,068 19,194 (27,262) 82,714
------- -------- ------- -------- --------
Total liabilities and
shareholders' equity......... $84,377 $ 91,387 $31,192 $(31,364) $175,592
======= ======== ======= ======== ========
</TABLE>
F-62
<PAGE> 180
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOVEMBER 3, 1996
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR 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
Trade payables and other current
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
Shareholders' 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-63
<PAGE> 181
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>
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-64
<PAGE> 182
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NOVEMBER 3, 1996
<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........................... $ 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-65
<PAGE> 183
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED NOVEMBER 3, 1995
<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)................... $(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-66
<PAGE> 184
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................ 1
Prospectus Summary................... 2
Risk Factors......................... 15
Use of Proceeds...................... 25
Capitalization....................... 27
The Transactions..................... 28
Unaudited Pro Forma Combined
Financial Data..................... 29
Selected Historical Financial
Information of TSI................. 32
Selected Historical Financial
Information of Farah............... 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 36
Business............................. 50
Management........................... 66
Principal Shareholders............... 72
Certain Transactions................. 73
Description of the Notes............. 74
Description of Other Indebtedness.... 102
The Exchange Offer................... 105
Certain Federal Income Tax
Considerations..................... 113
Plan of Distribution................. 114
Legal Matters........................ 115
Experts.............................. 115
Index to Financial Statements........ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
TROPICAL SPORTSWEAR INT'L
CORPORATION
OFFER TO EXCHANGE A NEW SERIES OF ITS
11% SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
FOR ANY AND ALL OUTSTANDING
11% SENIOR SUBORDINATED NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
The Exchange Agent for the Exchange
Offer is:
SUNTRUST BANK, ATLANTA
BY FACSIMILE:
SunTrust Bank, Atlanta
(404) 240-2030
Attention: Susan Knight
Confirm by Telephone:
(404) 240-1952
Attention: Susan Knight
BY OVERNIGHT COURIER:
SunTrust Bank, Atlanta
Corporate Trust Division
3495 Piedmont Road
Building 10, Suite 810
Atlanta, Georgia 30305
BY HAND OR REGISTERED OR CERTIFIED MAIL:
SunTrust Bank, Atlanta
c/o First Chicago Trust Company of New York
Corporate Trust, 8th Floor
14 Wall Street
New York, New York 10005
September 2, 1998
- ------------------------------------------------------
- ------------------------------------------------------
