<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarter Ended May 6, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-5400
FARAH INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1061146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8889 Gateway West, El Paso, Texas 79925
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (915) 593-4444
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X . No ____.
As of June 13, 1994 there were 10,009,263 outstanding shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
Quarter and Six Months Ended May 6, 1994 and May 7, 1993
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------- -----------------
May 6, May 7, May 6, May 7,
1994 1993 1994 1993
---- ---- ---- ----
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
NET SALES $66,170 41,748 117,440 77,064
Cost of sales 46,702 29,731 82,588 54,407
--------- --------- --------- ---------
Gross profit 19,468 12,017 34,852 22,657
Selling, general and administrative expenses 15,129 10,223 28,017 20,028
--------- --------- --------- ---------
Operating income 4,339 1,794 6,835 2,629
Other income (expense):
Interest expense (855) (466) (1,542) (868)
Interest income 179 183 359 368
Foreign currency transaction gains (losses) 37 (94) 112 (114)
Other, net 76 (27) 79 (24)
--------- --------- --------- ---------
(563) (404) (992) (638)
Income before provision for income taxes 3,776 1,390 5,843 1,991
Provision (benefit) for income taxes:
Current 1,071 101 1,127 98
Deferred (825) -- (825) --
--------- --------- --------- ---------
246 101 302 98
NET INCOME 3,530 1,289 5,541 1,893
Retained earnings:
Beginning 5,707 4,168 3,696 3,564
--------- --------- --------- ---------
Ending $9,237 5,457 9,237 5,457
========= ========= ========= =========
NET INCOME PER SHARE $0.41 0.17 0.66 0.25
========= ========= ========= =========
Weighted average shares of common stock
and common stock equivalents
outstanding 8,704,973 7,742,098 8,453,298 7,530,281
========= ========= ========= =========
</TABLE>
2
<PAGE> 3
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 6, 1994 AND NOVEMBER 5, 1993
(Unaudited)
<TABLE>
<CAPTION>
May 6, November 5,
1994 1993
---------- -----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash $1,489 2,007
Trade receivables, net 36,540 32,458
Inventories:
Raw materials 10,161 10,628
Work in process 18,605 15,706
Finished goods 36,728 27,838
-------- -------
65,494 54,172
Other current assets 6,908 5,482
-------- -------
Total current assets 110,431 94,119
Note receivable 6,129 6,267
Property, plant and equipment, net 15,271 14,426
Other non-current assets 4,586 4,079
-------- -------
$136,417 118,891
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $10,878 25,680
Current installments of long-term debt 629 4,509
Trade payables 17,852 20,324
Other current liabilities 13,386 10,833
-------- -------
Total current liabilities 42,745 61,346
Long-term debt, excluding current installments 2,954 1,179
Other non-current liabilities 3,427 3,627
Deferred gain on sale of building 8,298 9,314
Shareholders' equity:
Common stock, no par value,
authorized 20,000,000 shares; issued
10,045,538 in 1994 and 8,007,900 in 1993 46,017 44,369
Additional paid-in capital 27,851 --
Cumulative foreign currency
translation adjustment (1,953) (2,481)
Minimum pension liability adjustment (2,050) (2,050)
Retained earnings 9,237 3,696
-------- -------
79,102 43,534
Less: Treasury stock, 36,275 shares
in 1994 and 1993, at cost 109 109
-------- -------
Total shareholders' equity 78,993 43,425
-------- -------
$136,417 118,891
======== =======
</TABLE>
3
<PAGE> 4
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended May 6, 1994 and May 7, 1993
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
--------- -------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $5,541 1,893
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,866 1,144
Amotization of deferred gain on building sale (1,016) (1,016)
Deferred income taxes (825) --
(Increase) decrease:
Trade receivables (4,082) 2,019
Inventories (11,322) (7,649)
Other current assets (1,162) (1,157)
Increase (decrease) in:
Trade payables (2,472) (1,451)
Income taxes payable 168 (768)
Other current liabilities 2,386 (410)
------- ------
Net cash used in operating activities (10,918) (7,395)
------- ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,481) (3,273)
------- ------
Net cash used in investing activities (2,481) (3,273)
------- ------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net change in revolving credit facilities (15,362) 4,952
Proceeds from issuance of debt 2,713 369
Repayment of long-term debt (4,258) (406)
Receipts from sales of treasury and common stock 29,499 5,881
Other (239) 253
------- ------
Net cash from financing activities 12,353 11,049
------- ------
Foreign currency translation adjustment 528 128
------- ------
NET INCREASE (DECREASE) IN CASH FLOW (518) 509
CASH, BEGINNING OF YEAR 2,007 1,634
------- ------
CASH, END OF QUARTER $1,489 2,143
======= ======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
INTEREST PAID $1,582 1,013
INCOME TAXES PAID 319 873
</TABLE>
4
<PAGE> 5
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO 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. The Company 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 the Company's 1993 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.
3. In the second quarter of 1994 the Company completed the offering of
2,990,000 shares of its common stock at a price of $16.375 per share.
Of the total shares offered, 1,790,000 shares were sold by the Company
with the remaining 1,200,000 shares sold by Marciano Investments, Inc.
Net proceeds from the sale by the Company were approximately
$27,200,000. Substantially all of the proceeds from the equity sale
were allocated to Additional Paid-in Capital.
4. The income tax provision for the six months ended May 6, 1994, in
accordance with the interim financial reporting guidelines of
generally accepted accounting principles, has been provided based upon
the Company's 1994 estimated annual effective tax rate. The estimated
annual rate is lower than the statutory tax rate of 34% due to the
recognition of previously unrecognized deferred tax benefits resulting
largely from the use of tax net operating loss carryforwards. In
addition, due to the Company's positive earnings trend, the valuation
allowance related to deferred tax assets recognized in accordance with
Statement of Financial Standards No. 109 was reduced resulting in a
deferred tax benefit of $825,000.
The current liability for income taxes was reduced by $656,000 with a
corresponding increase to Additional Paid-in Capital, at May 6, 1994
for the tax deduction resulting from the exercise of employee stock
options.
5
<PAGE> 6
FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Sales for the second quarter and first six months of fiscal 1994
increased by $24,422,000 (58.5%) and $40,376,000 (52.4%), respectively, over
the same periods of 1993. Sales were up at all divisions, with the largest
increase at Farah U.S.A.
Farah U.S.A. sales for the second quarter of 1994 were $52,969,000
compared to $31,600,000 for the second quarter of 1993, a 68% increase. For
the first six months sales were $94,279,000, compared to $57,406,000 in 1993, a
64% increase. The average price per unit was up by 3% in both the second
quarter and first six months, while unit sales increased by 62% for the quarter
and 59% for the first six months. The primary reason for the increase in sales
was due to the success of Savane products. Savane products are primarily no
wrinkles casual slacks. Sales of Savane products accounted for 58% and 57% of
second quarter and year-to-date sales, respectively, up from 39% and 35% in
the same periods in 1993. Sales of Farah and Farah Clothing Company branded
products experienced a 2% increase for the quarter, but were down approximately
9% for the six month period. Casual, no wrinkles products were added to these
lines which increased sales in the second quarter. Farah and Farah Clothing
Company products were 23% of second quarter sales in 1994 and 37% in 1993, and
22% of sales for the first six months of 1994 compared to 39% in 1993.
Farah International sales in the second quarter were $10,022,000
compared to $7,831,000 in 1993. For the first six months sales were
$15,677,000 compared to $13,385,000 in 1993. In the second quarter unit sales
increased 20% and the average price per unit increased 7%. In the first six
months unit sales were up 13% compared to 1993 and the average price per unit
increased 4%. In the second quarter of 1994 United Kingdom sales, which
represented 68% of total Farah International sales, were up 36% over the same
period in 1993. United Kingdom sales increased by 19% for the first six
months of 1994. Sales increases in the United Kingdom were experienced in both
slacks and shirts. These increases were attributable to greater acceptance of
a wider, more stylish product base, combined with the introduction of no
wrinkles products in the second quarter.
Value Slacks sales were $3,179,000 in the second quarter of 1994
compared to $2,317,000 in 1993. For the first six months sales were $7,484,000
compared to $6,273,000 in the prior year. Sales in the U.S. stores increased
by 60% in the second quarter of 1994 compared to 1993, while sales in Puerto
Rican stores decreased 5%. There were 9 Puerto Rican stores operating in the
second quarter of 1994 compared to 12 in 1993. Four new stores were opened in
the U.S. in the second quarter, while one store was closed, bringing total U.S.
stores to 24, compared to 16 in 1993.
Gross profit increased by $7,451,000 (62.0%) in the second quarter of
1994 compared to 1993 and increased by $12,195,000 (53.8%) for the first six
months. In the second quarter gross profit as a percent of sales was up at
Farah U.S.A. and Value Slacks, and decreased at Farah International.
At Farah U.S.A., gross profit as a percent of sales increased from 26%
to 27% in the second quarter and was comparable for the first six months at 27%
in both 1994 and 1993. Improved margins were mainly attributable to higher
production levels resulting in lower per unit costs, and lower duties in Mexico
as a result of the North American Free Trade Agreement "NAFTA". These
improvements were partially offset by higher U.S. based labor costs. At Farah
International, gross profit as a percent of sales decreased from 36% in the
second quarter of 1993 to 35% in the second quarter of 1994. Margins were
comparable in the first six months at 36% in both periods. Gross profit in
the second quarter of 1993
6
<PAGE> 7
was favorably impacted by a grant received from the Industrial Development
Administration in Ireland to help provide training in the manufacturing
facilities. Gross profit as a percent of sales increased at Value Slacks from
43% in the second quarter of 1993 to 49% in 1994. For the first six months the
gross profit percent increased from 41% to 47%. This increase is mainly due to
an increase in U.S. store sales, which carry a higher gross profit percent.
Selling, general and administrative expenses ("SG&A") as a percent of
sales decreased from 25% in the second quarter of 1993 to 23% in the second
quarter of 1994. For the six month period SG&A as a percent of sales decreased
from 26% in 1993 to 24% in 1994. At Farah U.S.A., SG&A decreased from 21% in
the second quarter of 1993 to 20% in 1994 and from 22% in 1993 to 21% in 1994
for the first six months. This decrease was mainly attributable to a revised
sales compensation structure, lower shipping charges due to a new freight
policy and fixed costs that did not increase in relation to increased sales
levels. At Farah International, SG&A as a percent of sales decreased in the
second quarter from 30% in 1993 to 28% in 1994. For the first six months SG&A
decreased from 32% in 1993 to 31% in 1994. This decrease was mainly
attributable to lower professional fees, and other fixed costs that did not
increase in relation to increased sales. At Value Slacks, SG&A as a percent of
sales decreased for the quarter from 61% in 1993 to 56% in 1994 and increased
for the first six months from 46% in 1993 to 49% in 1994. The decrease for the
quarter was mainly attributable to fixed costs that did not increase in
relation to the increased sales levels, partially offset by certain costs
associated with the closure of two stores in Puerto Rico. The increase in the
first six months resulted from fixed selling costs incurred in the first
quarter in stores in the eastern United States where sales suffered due to
severe weather conditions, limiting the number of operating days during the
month of January.
Other expense, net, increased by $159,000 in the second quarter of
1994 compared to 1993. In the first six months the expense increased by
$354,000. Interest expense was up $389,000 for the quarter and $674,000 for
the first six months due to increased usage of the Company's credit facility to
finance higher inventories and receivables. This increase was partially offset
by foreign currency transaction gains of $37,000 for the quarter and $112,000
for the first six months compared to foreign currency transaction losses of
$94,000 and $114,000 in the same periods of 1993.
Income tax expense fluctuates as a result of a change in the mix of
the income (loss) in the countries in which the Company conducts its business.
In addition, the company has unrecognized deferred tax assets, including net
operating loss carryforwards, available in both the United States and United
Kingdom to offset income. See discussion of income taxes in Note 4 to the
consolidated financial statements.
Financial Condition
The company's credit facility provides up to $40,000,000 of credit
through November 3, 1995. Farah U.S.A., Farah U.K. and Value Slacks are
parties to this facility. Availability under the facility is determined by
formulas derived from accounts receivable, inventory and fixed assets. As of
May 6, 1994, usage under the facility was $11,304,000 and available credit was
$28,696,000. Usage under the facility was reduced in April 1994 as a result of
proceeds from the sale of common stock. In the second quarter of 1994 the
Company received approximately $27,200,000 from the sale of 1,790,000 shares of
its common stock at a price of $16.375.
Net cash used in operating activities was $10.9 million in the second
quarter of fiscal 1994. The primary use of cash in operations was to fund the
increase in inventories and receivables resulting from the increase in the
Company's sales. The Company believes that its borrowing availability from its
credit facility and cash from operations will be adequate for fiscal 1994
anticipated liquidity requirements.
Inventories increased by $11,322,000 at May 6, 1994 compared to November 5,
1993. The
7
<PAGE> 8
increase is primarily attributable to increased finished goods inventory levels
to meet higher sales at Farah U.S.A. and, to a lesser extent, an increase in
Farah U.S.A. finished goods inventories needed to satisfy customers' quick
response needs. Trade payables decreased by $2,472,000 compared to November 5,
1993 due to lower Farah U.S.A. raw material inventories. Short-term debt and
current maturities of long-term decreased by $18,682,000 from November 5, 1993
to May 6, 1994. The decrease was due to the receipt of proceeds from the sale
of common stock in the second quarter of 1994, partially offset by borrowings
to finance the higher inventories and receivables discussed above.
Capital expenditures through May 6, 1994 approximated $2,481,000 and
were primarily for manufacturing equipment and information systems. The
Company anticipates that capital expenditures will be higher in the second half
of the year as manufacturing facilities are expanded and other capital
expenditures are incurred to meet expected sales increases over 1993.
8
<PAGE> 9
Item 4. Submission of Matters to a Vote of Security Holders
(a) On March 8, 1994, the Annual Meeting of Shareholders of Farah
Incorporated was held.
(b) N/A
(c) Matters, other than procedural ones, voted upon were as
follows:
(1) Approval to add 350,000 shares to the 1991 stock
option plan.
<TABLE>
<CAPTION>
% of
Shares Outstanding
------- -----------
<S> <C> <C>
For 7,009,391 86.79
Against 561,661 6.95
Abstain 45,580 .56
Non Votes N/A 5.70
</TABLE>
9
<PAGE> 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 11 Statement regarding computation of net income per
share.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which the report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARAH INCORPORATED
Date: June 17, 1994 /s/ JAMES C. SWAIM
James C. Swaim
Executive Vice President
Chief Financial Officer
10
<PAGE> 11
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-Q INDEX TO EXHIBITS
MAY 6, 1994
<TABLE>
<CAPTION>
Number Description Page
------ ----------- ----
<S> <C> <C>
Exhibit 11 Statement regarding computation of net income per share. 12
</TABLE>
11
<PAGE> 1
Exhibit 11
FARAH INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
Income per share is based on weighted average shares of common stock and common
stock equivalents outstanding. Stock options are included as common stock
equivalents under the treasury stock method, where dilutive. Additional
dilution from the Company's convertible subordinated debentures, which are not
common stock equivalents, is not material.
12
