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 February 4, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND 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 jurisdication of (I.R.S. Employer
incorporation or oganization) Identification No.)
8889 Gateway West, El Paso, Texas 79925
(Adress 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 March 11, 1994 there were outstanding 8,202,736 shares of the
registrant's common stock, no par value, which is the only class of
common or voting stock of the registrant.
Page 1
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Quarter Ended February 4, 1994 and February 5, 1993
(Unaudited)
1994 1993
(Thousands of dollars
except per share data)
Net sales $51,270 35,316
Cost of sales 35,886 24,676
Gross profit 15,384 10,640
Selling, general and administrative expenses 12,888 9,805
Operating income 2,496 835
Other income (expense):
Interest expense (687) (402)
Interest income 180 185
Foreign currency transaction gains (losses) 75 (20)
Other, net 3 3
(429) (234)
Income before provision for income taxes 2,067 601
Provision (benefit) for income taxes 56 (3)
Net income 2,011 604
Retained earnings:
Beginning 3,696 3,564
Ending $5,707 4,168
Net income per share $0.25 0.08
Weighted average shares of common stock
and common stock equivalents outstanding 8,204,472 7,318,463
Page 2
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 4, 1994 AND NOVEMBER 5, 1993
(Unaudited)
February 4, November 5,
1994 1993
(Thousands of dollars)
ASSETS
Current assets:
Cash $2,336 2,007
Trade receivables, net 27,311 32,458
Inventories:
Raw materials 12,409 10,628
Work in process 19,330 15,706
Finished goods 31,837 27,838
63,576 54,172
Other current assets 6,705 5,482
Total current assets 99,928 94,119
Note receivable 6,199 6,267
Property, plant and equipment, net 14,980 14,426
Other non-current assets 3,941 4,079
$125,048 118,891
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $31,605 25,680
Current installments of long-term debt 640 4,509
Trade payables 20,225 20,324
Other current liabilities 10,318 10,833
Total current liabilities 62,788 61,346
Long-term debt, excluding current installments 2,885 1,179
Other non-current liabilities 3,598 3,627
Deferred gain on sale of building 8,806 9,314
Shareholders' equity:
Common stock, no par value, authorized
20,000,000 shares; issued 8,179,504
in 1994 and 8,007,900 in 1993 45,516 44,369
Cumulative foreign currency
translation adjustment (2,093) (2,481)
Minimum pension liability adjustment (2,050) (2,050)
Retained earnings 5,707 3,696
47,080 43,534
Less: Treasury stock, 36,275 shares in
1994 and 1993 109 109
Total shareholders' equity 46,971 43,425
$125,048 118,891
Page 3
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended February 4, 1994 and February 5, 1993
(Unaudited)
1994 1993
(thousands of dollars)
Cash flows from (used in) operating activities:
Net income $2,011 604
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 874 552
Amortization of deferred gain on
building sale (508) (508)
Decrease (increase) in:
Trade receivables 5,147 5,277
Inventories (9,404) (1,396)
Other current assets (1,223) (295)
Decrease in:
Trade payables (99) (3,718)
Other current liabilities (515) (2,231)
Net cash used in
operating activities (3,717) (1,715)
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment (1,287) (1,276)
Net cash used in investing
activities (1,287) (1,276)
Cash flows from (used in) financing activities:
Net change in revolving credit facility 5,981 3,475
Proceeds from issuance of debt 1,897 202
Repayment of long-term debt (4,117) (316)
Receipts from exercise of stock options 1,055 -
Other 129 36
Net cash from financing
activities 4,945 3,397
Foreign currency translation adjustment 388 (490)
Net increase (decrease) in cash flow 329 (84)
Cash, beginning of year 2,007 1,634
Cash, end of quarter $2,336 1,550
Supplemental cash flow disclosures:
Interest paid 763 464
Income taxes paid 272 867
Page 4
<PAGE>
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 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. The Company's business generally fluctuates with the activities
of the retail apparel trade industry with its first quarter
historically the lowest in sales volume and income. The remaining
three quarters are expected to be comparable in terms of
sales and profitability, with the fourth quarter being somewhat
higher than the second and third. There can be no assurance
that the sales and profitability pattern discussed above will occur
in 1994 and results for interim periods are not necessarily
indicative of results that may be expected for the fiscal
year as a whole.
4. Change in Accounting Principles - Accounting for Income Taxes
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition of
deferred tax assets, net of applicable reserves, related to net
operating loss carryforwards and certain temporary differences.
The Company adopted SFAS 109 effective November 6, 1993 resulting
in a deferred tax asset at November 6, 1993, of $8,580,000,
less a valuation allowance of the same amount, as follows:
Deferred tax assets:
U.S. Federal NOL carryforwards $1,352,000
Foreign NOL carryforwards 1,045,000
Deferred gain not recognized for book 3,167,000
Unrecognized capital loss 459,000
Foreign tax credit carryforwards 1,710,000
Other accrued expenses and reserves 1,840,000
Other deferred tax assets 273,000
Total deferred tax assets 9,846,000
<PAGE>
Deferred Tax Liabilities:
Tax over book depreciation
and amortization 862,000
Other deferred tax liabilities 404,000
Total deferred tax liabilities 1,266,000
Net deferred tax asset 8,580,000
Valuation allowance (8,580,000)
Net deferred tax asset, net of valuation allowance $ -
Page 5
<PAGE>
Pursuant to the requirements of SFAS 109, a valuation allowance
must be provided when it is more likely than not that the deferred tax
asset will not be realized. The Company has provided a valuation
allowance against the entire November 6, 1993 net deferred tax asset.
In subsequent periods, the Company may reduce the valuation allowance,
provided that utilization of the deferred tax asset is more likely than
not as defined by SFAS 109.
At November 6, 1993 the Company's U.S. subsidiary had approximately
$3,977,000 of tax net operating loss carryforwards available to offset
future taxable income. Approximately $3,515,000 of this carryforward
expires in 2007 and $462,000 in 2008. The Company's United
Kingdom and Ireland subsidiaries had approximately $3,078,000 and
$296,000 respectively of net operating loss carryforwards available to
offset future taxable income in those countries. Carryforwards in these
countries are available until used, for an indefinite future period. In
addition, there were foreign tax credit carryforwards at November 6, 1993
available to offset limited classes of future taxable income of
approximately $1,710,000, which expire beginning in 1994, with
all expiring by 1996.
Page 6
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
Sales for the first quarter of fiscal 1994 increased by $15,954,000
(45.2%) over the first quarter of fiscal 1993. Sales were
up at all divisions, with the largest increase at Farah U.S.A.
where sales increased by 60%. Sales increased by 2% at Farah
International and by 9% at Value Slacks.
Farah U.S.A. sales for the first quarter of fiscal 1994 were $41,310,000
compared to $25,806,000 in the first quarter of fiscal 1993. Unit
volume increased by 55% while the average unit selling price
increased by 3%. The Company continues to experience considerable
growth in sales of Savane products, with a 196% increase in Savane
sales over the first quarter of fiscal 1993. As a percent of sales,
Savane represented 55% of Farah U.S.A. sales in the first quarter of
fiscal 1994 compared to 30% during the same period in fiscal 1993.
Sales of private label products also increased by 225% in the first
quarter of fiscal 1994. The first quarter of fiscal 1993 represented
the first full quarter of private label sales. Private label sales
were 9% of total Farah U.S.A. sales in the first quarter of fiscal
1994 compared to 4% in the first quarter of fiscal 1993.
Farah International sales were $5,655,000 for the first quarter of
fiscal 1994 compared to $5,554,000 in the first quarter of fiscal 1993.
Unit volume was up 2% while the average unit selling price was comparable
in both periods. Sales were comparable in the first quarter of fiscal
1994 to 1993 in Farah Manufacturing (U.K.) Limited ("Farah U.K.") and
Farah Australia Pty, Ltd. ("Farah Australia") while Farah (New Zealand)
Limited ("Farah New Zealand") reported a 32% increase in unit sales for
the period. Farah New Zealand, which began operations in 1990, is
continuing to increase its customer base, contributing to its overall
sales increase.
Value Slacks sales were $4,305,000 in the first quarter of fiscal 1994
compared to $3,956,000 in the first quarter of fiscal 1993. Sales in
Puerto Rico decreased 12% while sales in the U.S. increased 30%.
U.S. store sales represented 59% of total Value Slacks sales in the first
quarter of fiscal 1994 compared to 50% in the first quarter of fiscal
1993. There were 11 Puerto Rican stores in operation in the first
quarter of fiscal 1994 compared to 15 stores in the first quarter of
fiscal 1993. The number of U.S. stores increased to 21 stores in the
first quarter of fiscal 1994 from 14 in the first quarter of fiscal
1993. The Company plans to increase the number of U.S. stores in the
remainder of fiscal 1994 and close certain Puerto Rican stores.
<PAGE>
Gross profit increased by $4,744,000 (44.6%) in the first quarter of
fiscal 1994 compared to the first quarter of fiscal 1993. As a percent
of sales, consolidated gross profit was comparable at approximately 30%
in both periods.
At Farah U.S.A. gross profit as a percent of sales was comparable
in both quarters. The gross profit at Farah U.S.A. in the first quarter
of fiscal 1994 was favorably impacted by higher production volumes
which decreased per unit production cost and, to a lesser extent,
by the impact of lower duties as a result of the North American Free
Trade Agreement ("NAFTA") which became effective January 1, 1994. These
favorable impacts were offset by the recognition of certain contractor
-related production costs. At Farah International the gross profit
percentage increased from 35% in the first quarter of fiscal 1993 to 38%
in the first quarter of fiscal 1994. Production in the Company's Irish
factories was up approximately 11% resulting in higher efficiency
levels and an overall decrease in cost per unit produced. Gross profit
as a percent of sales also increased at Value Slacks from 39% in
fiscal 1993 to 45% in fiscal 1994. This increase is mainly due to an
increase in U.S. store sales, which carry a higher gross profit
percentage. Value Slacks has also been able to achieve a higher markup
due to increased sales of higher margin casual and Savane product.
Page 7
<PAGE>
Selling, general and administrative expenses ("SG&A") as a percent of
sales decreased from 28% in fiscal 1993 to 25% in fiscal 1994. At Farah
U.S.A. SG&A decreased from 25% in the first quarter of fiscal 1993 to
22% in the first quarter of fiscal 1994. 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 remained comparable in fiscal
1993 and 1994. At Value Slacks SG&A as a percent of sales increased
from 37% in the first quarter of fiscal 1993 to 44% in the first
quarter of fiscal 1994. This increase in SG&A was related to fixed
selling costs, including rent, payrolls and advertising, that were
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 income (expense), net increased by $195,000 in the first quarter
of fiscal 1994 compared to the first quarter of fiscal 1993. Interest
expense was up $285,000 due to increased usage of the Company's credit
facility to finance higher inventory levels. This increase was partially
offset by foreign currency transaction gains of $75,000 in fiscal 1994
compared to foreign currency transaction losses of $20,000 in fiscal 1993.
Income tax expense (benefit) fluctuated as a result of a change in the
mix of the income (loss) among the countries in which the Company
conducts its business and the effect of operating loss carryforwards.
See Note 4 of Notes to 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 limited
by formulas derived from accounts receivable, inventory and fixed assets.
As of February 4, 1994, usage under the facility was $32,669,000 and
available credit was $6,897,000.
Effective February 1, 1994 the company exchanged $1,673,000 of its
5% convertible subordinated debentures for 8.5% convertible subordinated
debentures due February 1, 2004. The 8.5% debentures are convertible
into the company's common stock at $15.2375 per share. The
remaining 5% convertible subordinated debentures totalling $2,252,000
were paid on February 1, 1994.
Capital expenditures through February 4, 1994 approximated $1,287,000
and were primarily for manufacturing equipment and information systems.
Page 8
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 10.50 Amendment No. 11 dated January 21, 1994 to Accounts
Financing Agreement dated August 2, 1990 between
Congress Financial Corporation (Southwest) and Farah
U.S.A., Inc.
Exhibit 10.51 Indenture dated as of February 1, 1994, between Farah
Incorporated and Texas Commerce Bank, N.A. (filed as
Item 9(c)(1) to Schedule 13E-4 dated December 3, 1993,
incorporated herein by reference.)
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: March 18, 1994
/s/ James C. Swaim
James C. Swaim
Executive Vice President
Chief Financial Officer
Page 9
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-Q INDEX TO EXHIBITS
FEBRUARY 4, 1994
Page
Description Number
Exhibit 10.50 Amendment No. 11 dated
January 21, 1994 to
Accounts Financing
Agreement dated August
2, 1990 between Congress
Financial Corporation
(Southwest) and Farah
U.S.A., Inc.
Exhibit 11 Statement regarding
computation of net income
per share.
Page 10
<PAGE>
EXHIBIT 10.50
AMENDMENT NO. 11 TO FINANCING AGREEMENTS
January 21, 1994
Congress Financial Corporation
(Southwest)
1201 Main Street
Dallas, Texas 75250
Gentlemen:
Congress Financial Corporation (Southwest)
("Lender"), Farah U.S.A., Inc. ("Farah USA") and
Value Clothing Company, Inc. ("Value Clothing") have
entered into financing arrangements pursuant to the
Accounts Financing Agreement [Security Agreement],
dated as of August 2, 1990, between Lender and Farah
USA and various supplements thereto, as amended
pursuant to Amendment No. 1 to Financing Agreements,
dated November 5, 1990, Amendment No. 2 to Financing
Agreements, dated February 11, 1991, Amendment No.
3 to Financing Agreements, dated January 29, 1992,
Amendment No. 4 to Financing Agreements dated June
25, 1992, Amendment No. 5 to Financing Agreements,
dated August 31, 1992, Amendment No. 6 to Financing
Agreements, dated September 4, 1992, Amendment No.
7 to Financing Agreements, dated September 16, 1992,
Amendment No. 8 to Financing Agreements, dated as of
May 7, 1993, Amendment No. 9 to Financing
Agreements, dated July 16, 1993, Amendment No. 10
to Financing Agreements, dated November 3, 1993, and
as amended pursuant to the letter agreement dated as
of October 28, 1992 (collectively, as so amended and
as amended hereby, the "Accounts Agreement", and
together with all supplements thereto, including,
but not limited to, the Covenant Supplement to
Accounts Financing Agreement [Security Agreement]
dated as of August 2, 1990 (the "Covenant
Supplement"), and all other agreements, documents
and instruments at any time executed and/or
delivered in connection with any of the foregoing or
related thereto, as the same now exist or may
hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced,
collectively, the "Financing Agreements"), which
Financing Agreements include, inter alia, the
guarantees of all obligations of Farah USA and Value
Clothing to Lender by each of Farah Incorporated,
Farah International, Inc., Farah Sales Corp., Farah
Manufacturing Company, Inc., Farah Manufacturing
<PAGE>
Company of New Mexico, Inc., Farah Clothing Company,
Inc., FTX, Inc., Radco Sportswear, Inc., Value
Slacks, Inc., Farah Manufacturing Services, Inc.,
Farah Licensing Company and Corporacion Farah Costa
Rica S.A. (individually and collectively
"Guarantors").
Farah USA, Value Clothing, Guarantors and
Farah Manufacturing (U.K.) Limited have requested
that Lender enter into financing arrangements with
Farah Manufacturing (U.K.) Limited and certain
amendments to the financing agreements and Lender is
willing to enter into such financing arrangements
with Farah Manufacturing (U.K.) Limited and agree to
such amendments subject to the terms and conditions
set forth herein. By this Agreement, Lender, Farah
USA, Value Clothing, Guarantors and Farah
Manufacturing (U.K.) Limited desire and intend to
set forth the terms of such financing arrangements
and evidence such amendments.
In consideration of the foregoing and the
respective agreements and covenants contained
herein, the parties hereto agree as follows:
1. Definitions.
(a) Amendments to Definitions.
(i) All references to the term
"Borrowers" in the Financing Agreements shall be
deemed and each such reference is hereby amended to
mean, individually and collectively, jointly and
severally, Farah USA, Value Clothing and Farah UK
(as hereinafter defined) and their respective
successors and assigns.
(ii) All references to the term
"Financing Agreements" in the Financing Agreement
shall be deemed and each such reference i hereby
amended to include, in addition and not in
limitation, this Amendment and the Farah UK
Agreements.
(iii) All references to the term
"Maximum Credit" in the Financing Agreements shall
be deemed and each such reference is hereby amended
to mean, as of any time, the amount equal to
$40,000,000 as reduced, automatically and without
further action by any party hereto, by an amount
equal to the aggregate amount of the loans
outstanding as of such time made by Lender to Farah
UK pursuant to the terms hereof.
<PAGE>
(iv) All references to the term
"Obligations" in the Financing Agreements shall be
deemed and each such reference is hereby amended to
include, in addition and not in limitation, any and
all loans, indebtedness, liabilities and obligations
of any kind owing by Farah UK to Lender, however
evidenced, whether as principal, guarantor or
otherwise, whether arising under the Accounts
Agreement, this Amendment, or otherwise, whether now
existing or hereafter arising, whether direct or
indirect, absolute or contingent, joint or several,
due or not due, primary or secondary, liquidated or
unliquidated, secured or unsecured, original,
renewed or extended, and whether arising directly or
acquired from others (including, without limitation,
participations or interests of Lender in obligations
of Farah UK to others) and including, without
limitation, Lender's charges, commissions, interest,
expenses, costs and attorneys' fees chargeable to
Farah UK in connection with all of the foregoing.
(b) Additional Definitions. As used
herein, the following terms shall have the
respective meanings given to them below and the
Accounts Agreement (including all supplements
thereto) shall be deemed and is hereby amended to
include, in addition and not in limitation, each of
the following definitions -
(i) "Current Assets" shall mean the
aggregate net book value of all assets of any Person
and its subsidiaries, on a consolidated basis,
calculating the book value of inventory for this
purpose on a first-in-first-out basis, which would,
in accordance with GAAP, be classified as current
assets.
(ii) "Current Liabilities" shall
mean all Indebtedness of any Person and its
subsidiaries, on a consolidated basis, which would
in accordance with GAAP be classified as current
liabilities; and in any event including Indebtedness
payable on demand or within one (1) year from the
date of determination without any option of the
obligor to extend or renew beyond such year, all
accruals for federal or other taxes based on or
measured by income and payable within such year, and
including the current portion of long term debt
required to be paid within one (1) year.
(iii) "Eligible Farah UK Accounts"
shall mean Farah UK Accounts in the ordinary course
of business arising out of Farah UK's sale of goods
or rendition of services, which are and at all times
<PAGE>
shall continue to be acceptable to Lender in all
respects. Standards of eligibility may be fixed and
revised from time to time solely by Lender in its
exclusive reasonable judgment. In determining
eligibility, Lender may, but need not, rely on
aging~, reports and schedules of Farah UK Accounts
furnished to Lender by Farah USA or Farah UK, but
reliance by Lender thereon from time to time shall
not be deemed to limit Lender's right to revise
standards of eligibility at any time as to both
present and future Farah UK Accounts. In general,
a Farah UK Account shall not be deemed eligible
unless: (A) the Farah UK Account Debtor on such
Farah UK Account is and at all times continues to be
reasonably acceptable to Lender, (B) such Farah UK
Account complies in all respects with the
representations, covenants and warranties set forth
herein and in the other Financing Agreements (as if
such Farah UK Account was an Eligible Account of
Farah USA under the terms of the Financing
Agreements, including, but not limited to, Sections
6.5 and 6.6 of the Accounts Agreement) and (C) no
more than sixty (60) days have elapsed since the due
date of such Farah UK Account but in no event more
than one hundred twenty (120) days from the invoice
date thereof.
(iv) "Eligible Farah UK Inventory"
shall mean Inventory of Farah UK consisting of
finished goods acceptable to Lender in all respects.
General criteria for Eligible Farah UK Inventory may
be established and revised from time to time by
Lender in its exclusive reasonable judgment. In
determining such acceptability Lender may, but need
not, rely on reports and schedules of Inventory
furnished to Lender by either Farah UK or Farah USA
on behalf of Farah UK, but reliance thereon by
Lender from time to time shall not be deemed to
limit its right to revise standards of eligibility
at any time. In general, except in Lender's sole
discretion, Eligible Farah UK Inventory shall not
include (A) raw materials, (B) work-in-process (C)
spare parts, (D) packaging and shipping materials,
(E) supplies used or consumed in the business of
Farah UK, (F) Inventory subject to a security
interest or lien in favor of any third party or
subject to a retention of title by any third party,
(G) Inventory which is not subject to the first
priority perfected security interest of Lender, (H)
Inventory at premises which are not owned and
operated by Farah UK, provided, that, any Inventory
of Farah UK which would otherwise be deemed Eligible
Farah UK Inventory at locations which are not owned
and operated by Farah UK may nevertheless be
<PAGE>
considered Eligible Farah UK Inventory if Lender
shall have received an agreement in writing, in form
and substance satisfactory to Lender, from the
holder of such Inventory or the owner and/or
operator of such location, as the case may be,
pursuant to which such holder, owner and/or
operator, if required by Lender acknowledges the
first priority lien on such Inventory of Lender,
agrees to waive any and all claims such holder,
owner and/or operator may, at any time, have against
such Inventory, and permits Lender access to and the
right to remain on the premises so as to exercise
Lender's rights and remedies and otherwise deal with
the Inventory of Farah UK, (I) bill and hold goods,
(J) defective goods, (K) obsolete, slow moving
and/or discontinued goods, (L) "seconds" and (M)
Inventory purchased on consignment.
(v) "Farah Licensing" shall mean Farah
Licensing Company, a Delaware corporation, and its
successors and assigns.
(vi) "Farah UK" shall mean Farah
Manufacturing (U.K.) Limited, a private limited
company incorporated in England, and its successors
and assigns.
(vii) "Farah UK Account Debtor" shall
mean each debtor or obligor in any way obligated on
or in connection with any Farah UK Accounts.
4
(viii) "Farah UK
Accounts" shall mean all of Farah UK's present and
future accounts, contract rights, general
intangibles, chattel paper, documents and
instruments, as such terms are defined in the UCC,
including, without limitation, all obligations for
the payment of money arising out of Farah UK's sale,
lease or other disposition of goods or other
property or rendition of services.
(ix) "Farah UK Agreements" shall mean
individually and collectively, the Debenture, dated
of even date herewith, between Lender and Farah UK
and all agreements, documents and instruments at any
time executed and/or delivered by Farah UK to Lender
in connection herewith or therewith, as the same now
exist or may hereafter be further amended, modified,
supplemented, extended, renewed, restated or
replaced.
(x) "Farah UK Collateral" shall mean
<PAGE>
all assets and properties of Farah UK at any time
subject to a mortgage, charge, assignment, pledge,
lien, right of set-off, encumbrance or other
security interest (whether fixed or floating) in
favor of Lender and including, without limitation,
all assets and properties of Farah UK subject to a
charge in favor of Lender pursuant to the Farah UK
Agreements.
(xi) "Farah UK Events of Default"
shall have the meaning set forth in Section 7 of
this Amendment.
(xii) "Governmental Agency" shall mean
the government of any country, or any province or
state thereof or a local municipality or other
political subdivision thereof or any body,
department, authority, agency, public corporation or
instrumentality of any of the foregoing.
(xiii) "Net Amount of Eligible Farah UK
Accounts" shall mean the gross amount of Eligible
Farah UK Accounts less sales, excise or similar
taxes and less returns, discounts, claims, credits
and allowances of any nature at any time issued,
owing, granted, outstanding, available or claimed.
(xiv) "Pounds Sterling" shall mean
legal tender according to the laws of England.
(xv) "U.S. Dollars" shall mean legal
tender according to the laws of the United States of
America.
(xvi) "U.S. Dollar Equivalent" shall
mean the number of U.S. Dollars which Lender can
purchase with the amount of the available currency,
including, without limitation, Pounds Sterling, at
any time or from time to time in order to perform
any provision of this Amendment or the other
Financing Agreements, provided that such
determination shall be at the buying rate of
exchange available to Lender on such date, at such
time, at any branch in New York, New York or of any
bank, chartered, incorporated or qualified to do
banking business under the laws of the United States
of America, the State of New York or as may be
selected by Lender, in its discretion.
(c) Interpretation. All capitalized terms
used herein shall have the meaning assigned thereto
in the other Financing Agreements, unless otherwise
defined herein.
<PAGE>
2. Farah UK Loans.
(a) Lender shall, in its discretion, make
loans to Farah UK from time to time, at the request
of Farah UK or Farah USA on behalf of Farah UK, of
up to:
(i) seventy-five (75%) percent of
the U.S. Dollar Equivalent of the Net Amount of
Eligible Farah UK Accounts (or such greater or
lesser percentage thereof as Lender may determine
from time to time); plus
(ii) thirty-five (35%) percent of
the Value (based on the U.S. Dollar Equivalent) of
Eligible Farah UK Inventory (or such greater or
lesser percentage thereof as Lender may determine
from time to time).
(b) All loans shall be charged to a loan
account in the name of Farah UK on Lender's books.
Lender shall render to Farah USA, as agent for Farah
UK, each month a statement of its loan account which
shall be considered correct and deemed accepted by,
and binding upon, Farah UK as an account stated,
except to the extent that Lender receives a written
notice of any specific exceptions by Farah UK
thereto within thirty (30) days after the date of
such statement.
(c) At Lender's option, all principal,
interest, fees, commissions, costs, expenses or
other charges payable by Farah UK to Lender and any
and all loans and advances by Lender to Farah UK may
be charged directly to the account of Farah UK
maintained by Lender.
(d) All loans by Lender to Farah UK shall
be payable at the offices of Lender specified above
or at such other place as Lender may hereafter
designate from time to time and at Lender's option
and upon the request of Lender, Farah UK shall
execute and deliver to Lender one or more promissory
notes in form and substance satisfactory to Lender
to further evidence such loans.
(e) Interest shall be payable by
Farah UK to Lender on the last day of each month
upon the closing daily balances in its account for
each day during such month at a rate equal to the
Annual Rate. The Annual Rate shall increase or
decrease by an amount equal to each increase or
decrease, respectively, in the Index Rate, effective
on the first day of the month after any change in
<PAGE>
the Index Rate based on the Index Rate in effect on
the last day of the month in which any such change
occurs. The Annual Rate in effect hereunder on the
date hereof, expressed in terms of simple interest
is 8 1/4 percent per annum. Interest shall be
calculated on the basis of a three hundred sixty
(360) day year and shall be included in each monthly
statement of the loan account of Farah UK. Lender
shall have the right, at its option, to charge all
interest to the loan account of Farah UK on the
first day of each month, and such interest shall be
deemed to be paid by the first amounts subsequently
credited thereto.
(f) No agreements, conditions, provisions
or stipulations contained in this Amendment or in
any of the other Financing Agreements or the
occurrence of an Event of Default or the exercise
by Lender of the right to accelerate the payment of
the maturity of principal and interest, or to
exercise any option whatsoever contained in this
Amendment or in any of the other Financing
Agreements or the arising of any contingency
whatsoever shall entitle Lender to collect, in any
event, interest exceeding the Maximum Legal Rate,
and in no event shall Farah UK be obligated to pay
interest exceeding such Maximum Legal Rate, and all
agreements, conditions or stipulations, if any,
which may in any event or contingency whatsoever
operate to bind, obligate or compel Farah UK to pay
a rate of interest exceeding such Maximum Legal Rate
shall be without binding force or effect at law or
in equity, to the extent only of the excess of
interest over such maximum interest allowed by law.
In the event any interest is charged in excess of
the Maximum Legal Rate (herein referred to as the
"Excess"), Farah UK and Lender acknowledge and
stipulate that any such charge shall be the result
of an accidental and bona fide error, and such
Excess shall be, first, applied to reduce the
principal of any Obligations due, and, second,
returned to Farah UK, it being the intention of the
parties hereto not to enter at any time into an
usurious or otherwise illegal relationship. The
parties hereto recognize that with fluctuations in
the Index Rate such an unintentional result could
inadvertently occur. By the execution of this
Amendment, Farah UK covenants that (i) the credit or
return of any Excess shall constitute the acceptance
by Farah UK of any such Excess, and (ii) Farah UK
shall not seek or pursue any other remedy, legal or
equitable, against Lender based, in whole or in
part, upon the charging or receiving of any interest
in excess of the Maximum Legal Rate. For the
<PAGE>
purpose of determining whether or not any Excess has
been contracted for, charged or received by Lender,
all interest at any time contracted for, charged or
received by Lender in connection with the
Obligations of Farah UK shall be amortized,
prorated, allocated and spread in equal parts during
the entire term of the financing arrangements of
Lender with Farah UK.
(g) If the applicable state or federal law
is amended in the future to allow a greater rate of
interest to be charged to Farah UK under this
Amendment than is presently allowed by applicable
state or federal law, then the limitation of
interest hereunder and under the Accounts Agreement
shall be increased to the maximum rate of interest
allowed by applicable state or federal law as
amended, which increase shall be effective hereunder
on the effective date of such amendment, and all
interest charges owing to Lender by reason thereof
shall be payable upon demand.
(h) Until the authority of Farah UK to do
so is curtailed or terminated at any time by Lender,
Farah UK shall, at its expense and on behalf of
Lender, collect, as the property of Lender and in
trust for Lender, all proceeds from the Farah UK
Accounts and the sale of the Inventory of Farah UK,
in whatever form, including, without limitation, all
cash, checks, drafts or other instruments and all
other proceeds of Collateral. At such time
hereafter as Lender may request, Farah UK shall not
commingle such collections with Farah UK's own
funds. Upon Lender's request, Farah UK shall on the
day received deposit all such proceeds into deposit
accounts subject to the provisions set forth below
for the collection and transfer of sales proceeds.
At such time as proceeds of Collateral of Farah UK
are deposited into deposit accounts subject to the
provisions set forth below, such proceeds when
received by Lender at such place as Lender may
designate from time to time shall be credited to the
loan account of Farah UK after adding two (2)
business days for remittances by federal funds wire
transfers and five (5) business days for collection,
clearance and transfer of all other remittances, in
each instance conditional upon final payment to
Lender.
(i) At such time as Lender may request,
Farah UK shall, in a manner satisfactory to Lender
from time to time, enter into deposit account
arrangements such that all proceeds of the sale of
the inventory of Farah UK of every form, or amounts
<PAGE>
payable upon letters of credit, bankers' acceptances
and other proceeds of such Collateral shall be
deposited into a blocked account under Lender's
control or deposited into one of the deposit
accounts that is approved by Lender with respect to
which irrevocable instructions from Farah UK have
been accepted by the depository bank to transfer all
collected funds to a blocked account under the
control of Lender. In connection therewith, Farah
UK shall execute such instructions, blocked account
and other agreements as Lender, in its discretion,
shall specify.
3. Farah UK Representations, Warranties
and Covenants. Farah UK hereby represents, warrants
and covenants to Lender the following (which shall
survive the execution and delivery of this
Amendment), the truth and accuracy of which, or
compliance with, being a continuing condition of the
making of loans by Lender to Farah UK hereunder:
(a) Farah UK shall at all times preserve,
renew and keep in full force and effect its
existence as a corporation and the rights and
franchises with respect thereto and continue to
engage in business of the same type as it is engaged
as of the date hereof. Farah UK shall give Lender
thirty (30) days prior written notice of any
proposed change in its corporate name which notice
shall set forth the new name.
(b) The books and records and chief
executive office of Farah UK are maintained at
Crittall Road, Witham, Essex CM8 3DJ England. Farah
UK shall not change such location without Lender's
prior written consent and prior to making any such
change, Farah UK agrees to execute any additional
documents or notices which Lender may require. The
only locations of any assets of Farah UK are those
addresses listed on Exhibit A hereto and made a part
hereof. Exhibit A sets forth the owner and/or
operator of the premises at such addresses for all
locations which Farah UK does not own and operate
and all mortgages, if any, with respect to the
premises. Farah UK shall not remove any Farah UK
Collateral from such locations, without Lender's
prior written consent, except for sales of Farah UK
Inventory in the ordinary course of business of
Farah UK.
(c) Farah UK shall maintain its shipping
forms, invoices and other related documents in a
form satisfactory to Lender and shall maintain its
books, records and accounts in accordance with
<PAGE>
applicable accounting principles consistently
applied. Farah agrees to furnish Lender monthly
with accounts receivable aging, inventory reports
(if requested by Lender) and interim financial
statements (including balance sheets, statements of
income and surplus account and cash flow
statements), and to furnish Lender, at any time or
from time to time with such other information
regarding its business affairs and financial
condition as Lender may reasonably request,
including, without limitation, balance sheets,
statements of profit and loss, financial statements,
cash flow and other projections, earnings forecasts,
schedules, aging and reports. Farah UK hereby
irrevocably authorizes and directs all accountants,
auditors or other third parties to deliver to
Lender, at Farah UK's expense, copies of its
financial statements, papers related thereto, and
other accounting records of any nature in their
possession and to disclose to Lender any information
they may have regarding its business affairs and
financial conditions. All such statements and
information will fairly present Farah UK's financial
condition as of the dates and the results of Farah
UK's operations for the periods, for which the same
are furnished. Any documents, schedules or other
papers delivered to Lender may be destroyed or
otherwise disposed of by Lender one (1) year after
the same are delivered to Lender, unless Farah UK
makes written request therefor and pays all expenses
attendant to their return, in which event Lender
shall return same when Lender's actual or
anticipated need therefor has ceased.
(d) Farah UK shall keep and maintain, at
its own cost and expense, satisfactory and complete
books and records of all Farah UK Accounts, all
payments received or credits granted thereon and all
other dealings therewith. At any time on or after
the occurrence of an Event of Default, at such times
as Lender may request, Farah UK shall deliver to
Lender all original documents evidencing the sale
and delivery of goods or the performance of services
which created any Accounts, including but not
limited to all original contracts, orders, invoices,
bills of lading, warehouse receipts, delivery
tickets and shipping receipts. At any such time as
Lender may request, Farah UK shall deliver to Lender
schedules describing the Accounts and/or written
confirmatory assignments to Lender of each Account,
in form and substance satisfactory to Lender and
duly executed by Farah UK, together with such other
information as Lender may request. Lender will
return to Farah UK, at Farah UK's expense, any
<PAGE>
original documents evidencing the sale and delivery
of goods which created any Accounts delivered to
Lender pursuant to this Section 3(d) and in Lender's
possession when Lender's actual or anticipated need
therefor has ceased. In no event shall the making
or the failure to make or the content of any
schedule or assignment or Farah UK's failure to
comply with the provisions hereof be deemed or
construed as a waiver, limitation or modification of
Lender's security interest therein, lien upon and
assignment of the Farah UK Collateral or Farah UK's
representations, warranties or covenants under this
Amendment or any of the other Financing Agreements.
(e) Farah UK shall immediately upon
obtaining knowledge thereof report to Lender all
reclaimed, repossessed or returned goods (other than
returns in the ordinary course of business of Farah
UK which shall only be reported to Lender with such
frequency and in such manner as Lender may
reasonably require). At Lender's request, any goods
reclaimed or repossessed by or returned to Farah UK
will be set aside, marked with Lender's name and
held by Farah UK for the account of Lender.
(f) Farah UK shall duly pay and discharge
all taxes, assessments, contributions and
governmental charges upon or against Farah UK or its
properties or assets prior to the date on
-- 10 --
which penalties attach thereto. Farah UK will be
liable for any tax or penalty imposed upon any
transaction under this Amendment or any of the other
Financing Agreements or giving rise to the Farah UK
Accounts or any other assets of Farah UK or which
Lender may be required to withhold or pay for any
reason and Farah UK agrees to indemnify and hold
Lender harmless with respect thereto, and to repay
to Lender on demand the amount thereof, and until
paid by Farah UK such amount shall be added to and
deemed part of the Obligations.
(g) Except as otherwise disclosed to
Lender in writing, there is no present investigation
by any Governmental Agency pending or threatened
against Farah UK and there is no action, suit,
proceeding or claim pending or threatened against
Farah UK or its assets or goodwill, or affecting any
transactions contemplated by this Amendment or the
other Financing Agreements, or any instruments or
<PAGE>
documents delivered in connection herewith or
therewith before any court, arbitrator or
Governmental Agency which if adversely determined
with respect to Farah UK would result in any
material adverse change in Farah UK's business,
properties, assets, goodwill, or condition,
financial or otherwise.
(h) Farah UK does not have any
Subsidiaries as of the date hereof except as set
forth on Exhibit B hereto. Farah International,
Inc., a Texas corporation, is the direct and
beneficial owner and holder of 9,999 shares of the
issued and outstanding shares of capital stock of
Farah UK and Farah USA is the direct and beneficial
owner and holder of 1 share of the issued and
outstanding shares of capital stock of Farah UK,
which 10,000 shares constitute all of the issued and
outstanding shares of capital stock of Farah UK.
Farah UK will not form or acquire any Subsidiary
without the prior written consent of Lender.
(i) Farah UK will not, and will not permit
any subsidiary to, create, incur, assume or permit
to exist, contingently or otherwise, any
Indebtedness, except:
(i) Indebtedness to Lender;
(ii) Indebtedness consisting of
unsecured current liabilities incurred in the
ordinary course of its business which are not past
due;
(iii) unsecured Indebtedness of Farah
UK to Farah Exports (Ireland) in the amount of
British Pounds Sterling 3,887,791.64 outstanding as
of December 19, 1993 and incurred by Farah UK in the
ordinary course of business of Farah UK pursuant to
the purchase of Inventory by Farah UK from Farah Exports
(Ireland), which Indebtedness is, in all respects, subject
and subordinate in right of PaYment to the right of
Lender to receive the prior
-- 11 --
indefeasible payment in full of all of the
Obligations; provided, that: (A) Farah UK shall not,
directly or indirectly, make any payments in respect
of such Indebtedness, including, but not limited to,
any prepayments or other non-mandatory payments or
any payments pursuant to the purported acceleration
<PAGE>
thereof except, that, Farah UK may make payments
from time to time to Farah Exports (Ireland) in
respect of such indebtedness outstanding as of the
date hereof, Provided, that, each of the following
conditions is satisfied: (1) as of the date of each
such payment and after giving effect thereto, no
Event of Default shall exist or have occurred and
(2) the aggregate amount of all such payments in any
fiscal year of Farah UK shall not exceed $500,000,
and (B) Farah UK shall not, directly or indirectly,
(1) amend, modify, alter or change the terms of such
Indebtedness or (2) redeem, retire, defease,
purchase or otherwise acquire such Indebtedness, or
set aside or otherwise deposit or invest any sums
for such purpose;
(iv) Indebtedness incurred in the
ordinary course of its business secured only by
liens permitted under Sections 3(j)(ii) and
3(j)(iii) hereof;
(v) Indebtedness owing to any one
person existing on the date hereof in an amount of
less than $10,000 (or the foreign currency
equivalent thereof as determined by Lender) and any
other Indebtedness existing on the date hereof equal
to or in excess of such amount which is described on
Exhibit C hereto, provided, that: (A) Farah UK and
its subsidiaries may only make regularly scheduled
payments of principal and interest in respect of
such Indebtedness as set forth on Exhibit C, (B)
Farah UK will not, directly or indirectly, (1) make
any prepayments or other non-mandatory payments in
respect of any such Indebtedness or (2) redeem,
retire, defease, purchase or otherwise acquire such
Indebtedness,or set aside or otherwise deposit or
invest any sums for such purpose or (3) amend,
modify, alter or change the terms of the
arrangements relating thereto or any agreement or
instrument evidencing such Indebtedness, and (C)
Farah UK and its subsidiaries will furnish to Lender
all notices, demands or other materials concerning
such Indebtedness, promptly after receipt thereof or
concurrently with the sending thereof, as the case
may be.
(j) Farah UK will not, and will not permit
any subsidiary to create or suffer to exist any
mortgage, pledge, security interest, lien,
encumbrance, defect in title or restriction upon the
use of its real or personal properties, whether now
owned or hereafter acquired, except:
<PAGE>
Lender;
(i) the liens or security interests in favor of
- 12 -
(ii) tax, mechanics or other like
statutory liens arising in the ordinary course of
Farah UK's business to the extent (A) such liens
secure Indebtedness which is not overdue or (B)
until foreclosure or similar proceedings shall have
been commenced, such liens secure Indebtedness
relating to claims or liabilities which are being
contested in good faith by appropriate proceedings
available to Farah UK prior to the commencement of
foreclosure or other similar proceedings and are
adequately escrowed for or reserved against in
Lender's judgment;
(iii) purchase money mortgages or
other purchase money liens or security interests
upon any specific fixed assets hereafter acquired,
or mortgages, liens or security interests existing
on any such future fixed assets at the time of
acquisition thereof (including, without limitation,
capitalized or finance leases) or in connection with
the refinancing of the existing capitalized leases
with respect to specific assets, provided, that, (A)
no such purchase money or other mortgages, liens or
security interests (or capitalized or finance lease,
as the case may be) with respect to specific future
fixed assets or as refinanced shall extend to or
cover any other property, other than the specific
fixed assets so acquired, or acquired or refinanced
subject to such mortgage, lien or security interest
(or lease) and the proceeds thereof, (B) such
mortgage, lien or security interest secures the
obligation to pay the purchase price of such
specific fixed assets only (or the obligations under
the capitalized or finance lease), and (C) the
principal amount secured thereby shall not exceed
one hundred (100%) percent of the cost of the fixed
assets so acquired; and
(iv) the existing liens,
encumbrances or security interests described on
Exhibit D hereto.
(k) Farah UK will not, and will not permit
any subsidiary to, directly or indirectly, make any
loans or advance money or property to any Person, or
invest in (by capital contribution, dividend or
otherwise) or purchase or repurchase the stock or
Indebtedness or all or a substantial part of the
<PAGE>
assets or property of any Person, or guarantee,
assume, endorse, or otherwise become responsible for
(directly or indirectly) the indebtedness,
performance, obligations or dividends or any Person
or agree to do any of the foregoing, except:
(i) guarantees in favor of Lender;
(ii) loans by Farah UK or any of its
subsidiaries to any of the other Borrowers or Farah
Incorporated, after written notice to Lender;
(iii) the endorsement of instruments
for collection or deposit in the ordinary course of
business;
- 13 -
(iv) investments by Farah UK in the
stock of any existing Subsidiary as of the date
hereof;
(v) after written notice thereof to
Lender, investments in the following instruments,
which shall be pledged and delivered to Lender upon
Lender's request, (A) marketable obligations issued
or guaranteed by the United States of America or an
instrumentality or agency thereof, maturing not more
than one (1) year after the date of acquisition
thereof, (B) certificates of deposit or other
obligations maturing not more than one (1) year
after the date of acquisition thereof issued by any
bank or trust company organized under the laws of
and located in the United States of America or any
State thereof or any bank, trust company, building
society or other financial institution organized
under the laws of and located in England or Wales
and having capital, surplus and undivided profits of
at least $100,000,000 or the foreign currency
equivalent thereof as determined by Lender
(provided, that, upon Lender's request, Farah UK or
such subsidiary, as the case may be, shall execute
and deliver to Lender a pledge agreement or
memorandum of deposit with respect thereto, in form
and substance satisfactory to Lender) and (C) open
market commercial paper with a maturity date not in
excess of two hundred seventy (270) days from the
date of acquisition thereof which have the highest
credit rating by either Standard & Poor's
Corporation or Moody's Investors Service, Inc.
(1) Farah UK will not, and will not permit
<PAGE>
any subsidiary to, directly or indirectly, purchase,
acquire or lease any property or receive any
services from, or sell, transfer or lease any
property or services to any Affiliate of Farah UK
except on prices and terms no less favorable than
would have been obtained in an arm's length
transaction with a non-affiliated person.
(m) Farah UK will permit representatives
of Lender at any time to inspect its inventory,
equipment and other tangible Farah UK Collateral and
to have free access to and right of inspection of
any papers, instruments an records pertaining to any
of the Farah UK Collateral and make abstracts or
photocopies from Farah UK's books and records, at
the expense of Farah UK, pertaining to inventory,
accounts, contract rights, chattel paper,
instruments, documents and other collateral. The
foregoing rights shall be in addition to and shall
not limit Lender's rights and remedies with respect
to the Farah UK Collateral upon or at any time after
the occurrence of an event of default (as provided
hereunder).
(n) Upon Lender's request, on or after the
occurrence of an Event of Default at any time and
from time to time, but in no event prior to the
occurrence of an Event of Default more than
- 14 -
once in any twelve (12) consecutive month period,
Farah UK will, at its sole cost and expense, execute
and deliver to Lender written reports or appraisals
of the Farah UK Collateral consisting of inventory
and equipment listing all items and categories
thereof, describing the condition of same and
setting forth the value thereof (the lower if cost
or market value of the inventory and the lower of
net cost less depreciation, fair market value and/or
liquidation value of the equipment), in such form as
is satisfactory to Lender.
(o) Farah UK will (i) use, store and
maintain the Farah UK Collateral consisting of
inventory and equipment with all reasonable care and
caution, and (ii) use such Farah UK Collateral for
lawful purposes only and in conformity with
applicable laws, ordinances and regulations.
(p) At its option, Lender may discharge
taxes, liens or security interests or other
<PAGE>
encumbrances at any time levied or placed on the
Farah UK Collateral and may pay for the maintenance
and preservation of the Farah UK Collateral and
Farah UK agrees to reimburse Lender on demand,
together with interest therein at the rate specified
herein, for any payment made or expense incurred by
Lender in connection with the foregoing and any such
payment or expense shall constitute a part of the
Obligations.
4. Farah UK Inventory Loan Sublimits.
Notwithstanding anything to the contrary contained
herein or in any of the other Financing Agreements,
except in Lender's discretion, the aggregate unpaid
principal amount of the loans outstanding at any
time based on the Eligible Farah UK Inventory,
regardless of the amounts of such Eligible Farah UK
Inventory, shall not exceed $1,750,000.
5. Maximum Credit for Farah UK Loans.
(a) Except in Lender's discretion, the
aggregate unpaid principal amount of the loans or
other financial accommodations by Lender to Farah UK
shall not exceed U.S. $2,500,000.
(b) Section 2.3 of the Accounts Agreement
is hereby deleted in its entirety and the following
substituted therefor:
"Lender may, from time to time, permit the
outstanding amount of any components of the loans by
Lender to Borrowers and/or Credits, or the aggregate
amounts of such outstanding loans and Credits to
exceed the amounts available under the lending
formulas provided for herein or otherwise applicable
as to each of Borrowers, the lending sublimit set
forth in Section 4 of Amendment No. 10 to Financing
Agreements, or
- 15 -
Section 4 or 5 of Amendment No. 11 to Financing
Agreements or $40,000,000, as applicable; provided,
that, should Lender so permit in any one instance
such event shall not operate to limit, waive or
otherwise affect any rights of Lender on any future
occasions. In such event, and without limiting the
right of Lender to demand payment of the
Obligations, or any portion thereof, in accordance
with any other terms of the Accounts Agreement,
Amendment No. 10 to Financing Agreements, Amendment
<PAGE>
No. 11 to Financing Agreements or any of the other
Financing Agreements, Borrowers shall remain liable
therefor and Borrowers shall, upon demand by Lender,
which may be made at any time and from time to time,
repay to Lender the entire amount of any such
excess(es) or in accordance with such other terms as
Lender may agree to in writing at the time, except,
that, Farah UK shall not be required to repay any
such amounts arising as a result of loans by Lender
to the other Borrowers."
6. Farah UK Financial Covenants.
(a) Net Worth. Farah UK will, at all
times, maintain a Consolidated Tangible Net Worth of
not less than $750,000.
(b) Working Capital. Farah UK will, at
all times, maintain a ratio of Current Assets to
Current Liabilities of not less than 1.0:1.0.
7. Farah UK Events of Default. All
Obligations shall be, at Lender's option,
immediately due and payable without notice or demand
(notwithstanding any deferred or installment
payments allowed, if any, by any instrument
evidencing or relating to the Obligations) and any
provision of this Amendment or any of the other
Financing Agreements as to future loans and advances
by Lender to Borrowers shall, at Lender's option,
terminate forthwith, upon the occurrence of any one
or more of the following ("Farah UK Events of
Default"):
(a) Farah UK shall be in default in the
payment of any of the Obligations of Farah UK when
due, which default shall continue for three (3)
days; or
(b) Farah UK shall fail to observe or
perform any covenant or agreement contained herein
or in any of the other Financing Agreements other
than as described in subsection (a) above and such
failure shall continue for seven (7) business days,
provided, that, such seven (7) business day period
shall not apply in the case of: (i) any failure to
observe any such covenant or agreement which is not
capable of being cured at all or within such seven
(7) business day period or which has been
- 16 -
the subject of a prior failure within a six (6)
month period or (ii) an intentional breach by Farah
<PAGE>
UK or its management of any such covenant or
agreement; or
(c) any other guarantor, endorser or
person liable on the Obligations shall terminate or
breach any of the terms, covenants, conditions or
provisions of any guarantee, endorsement or other
agreement of such person with, or in favor of,
Lender; or
(d) any representation, warranty or
statement of fact when made to Lender at any time by
or on behalf of Farah UK is false or misleading in
any material respect; or
(e) Farah UK or any other guarantor,
endorser or person liable on the Obligations shall
become insolvent, generally unable to pay its debts
as they mature, call a meeting of creditors or have
a creditors' committee appointed, make a voluntary
arrangement, make a general assignment for the
benefit of creditors, suspend or discontinue doing
business for any reason, or shall commence or have
commenced against it any action or proceeding for
the winding up or dissolution or the appointment of
any trustee, manager, receiver, custodian,
administrator or administrative receiver or
liquidator of it or all or any part of its
properties or assets; or
(f) a judgment (including, without
limitation, any attachment, sequestration or
distress) is rendered against Farah UK or any other
guarantor, endorser or person liable on the
Obligations in excess of $50,000 or the foreign
currency equivalent thereof as determined by Lender
in any one case or in excess of $100,000 or the
foreign currency equivalent thereof as determined by
Lender in the aggregate and the same shall remain
undischarged for a period in excess of thirty (30)
days or execution shall at any time not be
effectively stayed; or
(g) Farah UK or any other guarantor,
endorser or person liable on the Obligations shall
commence any action or proceeding for relief under
the U.S. Bankruptcy Code or any reorganization,
arrangement, composition, readjustment, liquidation,
dissolution or similar relief under the U.S.
Bankruptcy Code or any other present or future
statute, law or regulation or an application or
petition shall be made by Farah UK or any other
guarantor, endorser or person liable on the
Obligations or by any third person to an English
<PAGE>
Court for an Administration Order or any other order
under the United Kingdom Insolvency Act 1986 (as
amended or substituted from time to time) in respect
of Farah UK or its assets or Farah UK or any other
guarantor, endorser and person liable for the
Obligations shall take any corporate action to
authorize any of such actions or proceedings; or
- 17 -
(h) Farah UK or any other
guarantor, endorser or person liable on the
Obligations shall have commenced against it any
action or proceeding for relief under the U.S.
Bankruptcy Code or any reorganization, arrangement,
composition, readjustment, liquidation, dissolution
or similar relief under the U.S. Bankruptcy Code or
any other present or future statute, law or
regulation which is not dismissed within thirty (30)
days of its commencement, or Farah UK, any other
guarantor, endorser or person shall file any answer
admitting or not contesting the allegations of a
petition or application filed against it in any such
proceeding or by any act or omission indicates its
consent to, acquiescence in or approval of, any such
action or proceeding or if the relief requested is
granted sooner; or
(i) there shall be a material adverse
change in the business, assets or condition
(financial or otherwise) of Farah UK from the date
hereof; or
(j) there is any change in the majority
control or ownership of Farah UK; or
(k) at any time, Lender shall, in its
reasonable discretion, consider the Obligations
insecure or all or any part of the Collateral
unsafe, insecure or insufficient and Farah UK shall
not on Lender's demand furnish other Farah UK
Collateral or make payment on account, reasonable
satisfactory to Lender; or
(1) Farah UK or any other guarantor,
endorser or person liable on the Obligations shall
default in the payment of any amounts due on any
indebtedness owed by it or in the performance of any
of the other terms or covenants of any evidence of
such indebtedness or of any material mortgage,
security agreement, indenture, debenture, pledge or
other agreement relating thereto or securing such
<PAGE>
indebtedness or with respect to any material
contract, lease, license or other agreement with any
person other than Lender, which default continues
for more than the applicable cure period, if any,
with respect thereto; or
(m) the occurrence of an Event of Default
under any of the other Financing Agreements.
8. Early Termination Fee. Section 9.2 of the
Accounts Agreement is hereby deleted in its entirety
and the following substituted therefor:
"9.2 If Lender terminates this Agreement or the
other Financing Agreements upon the occurrence of an
Event of Default or, at the request of Borrowers
prior to the Renewal Date, or prior to any
subsequent anniversary of the Renewal Date, in view
of the
- 18 -
impracticality and extreme difficulty of
ascertaining actual damages and by mutual agreement
of the parties as to a reasonable calculation of
Lender's lost profits as a result thereof:
(a) Farah USA and Value Clothing hereby agree to
pay to Lender, upon the effective date of such
termination, an early termination fee in an amount
equal to: (i) two (2%) percent of $40,000,000 less
any amounts received by Lender on such date from
Farah UK pursuant to Section 9.2(b) below, if such
termination is effective on or prior to November 3,
1994 or (ii) one (1%) percent of $40,000,000 less
any amounts received by Lender on such date from
Farah UK pursuant to Section 9.2(b) below, if such
termination is effective after November 3, 1994, but
prior to the Renewal Date or if such termination is
effective after the Renewal Date on a date other
than an anniversary of the Renewal Date, and
(b) Farah UK hereby agrees to pay to Lender,
upon the effective date of such termination, an
early termination fee in an amount equal: (i) two
(2%) percent of $2,500,000, if such termination is
effective on or prior to November 3, 1994 or (ii)
one (1%) percent of $2,500,000, if such termination
is effective after November 3, 1994, but prior to
the Renewal Date or if such termination is effective
after the Renewal Date on a date other than an
anniversary of the Renewal Date.
Such early termination fees shall be presumed to be
<PAGE>
the amount of damages sustained by said early
termination and Borrowers agree that it is
reasonable under the circumstances currently
existing. The early termination fees provided for
in this Section 9.2 shall be deemed included in the
Obligations."
9. Covenants Applicable to U.K. For the
purposes of the application and interpretation of
the provisions of the Accounts Agreement, this
Amendment or the other Financing Agreements to the
operations of Farah UK in England and to any of the
Collateral which may at any time or from time to
time be located in England:
(a) all payments of principal, interest,
fees and other amounts to be made pursuant to the
Accounts Agreement, this Amendment or the other
Financing Agreements in respect of all or
any part of the Obligations shall be made free and
clear and without deduction for any and all present
and future taxes, withholdings, levies, duties, any
charges of any Governmental Agency and all
liabilities with respect thereto (except for any
taxes, duties or levies charged on the income of
Lender under the laws of the United States of
America), and without set-off, withholding or
deduction of any kind whatsoever and, if with regard
to any payment to be made by Farah UK to Lender
pursuant to the Accounts Agreement, this Amendment,
the other Financing Agreements or otherwise, any
deduction for any and all such present and future
taxes, withholding, levies, duties, charges of a
Governmental Agency or any liability with respect
thereto is required to be made by Farah UK, Farah UK
shall pay such additional amounts to Lender as may
be necessary in order that the net amount received
by Lender after such deduction shall equal such
payment which would have been received by Lender in
the absence of such deduction; and
-19-
(b) Farah UK shall make all payments in
respect of the Obligations in U.S. Dollars and any
payment on account of the Obligations made in a
currency other than U.S. Dollars, whether pursuant
to a judgment or order of a Court or a Governmental
Agency or otherwise, shall constitute a discharge of
the Obligations only to the extent of the U.S.
Dollar Equivalent which Lender is able to purchase
and if the number of U.S. Dollars which Lender is 80
<PAGE>
able to purchase is less than the number of U.S.
Dollars originally due to it, Farah UK shall
indemnify and save Lender harmless from and against
any loss or damage arising as a result of such
deficiency and this indemnity shall:
(i) constitute an obligation
separate and independent from the Obligations,
(ii) give rise to a separate and
independent cause of action,
(iii) apply irrespective of any
indulgence granted by Lender from time to time,
(iv) be secured by the assignments,
charges and security interests created in respect of
the Collateral by the Accounts Agreement, this
Amendment or the other Financing Agreements, and
(v) shall continue in full force and
effect notwithstanding any judgment or order for a
liquidated sum in respect of an amount due under the
Accounts Agreement, this Amendment or the other
Financing Agreements or any judgment or order or any
payment made under any judgment or order or the
- 20 -
termination or non-renewal of the Accounts
Agreement, this Amendment and the other Financing
Agreements.
10. General Representations, Warranties and
Covenants. In addition to the continuing
representations, warranties and covenants heretofore
or hereafter made by Borrowers and Guarantors to
Lender pursuant to the Financing Agreements, each of
Borrowers and Guarantors hereby represents, warrants
and covenants with and to Lender as follows (which
representations, warranties and covenants are
continuing and shall survive the execution and
delivery hereof and shall be incorporated into and
made a part of the Financing Agreements):
(a) No Event of Default exists on the date
of this Amendment (after giving effect to the
amendments to the Financing Agreements made by this
Amendment).
(b) This Amendment has been duly executed
and delivered by Borrowers and Guarantors and is in
full force and effect as of the date hereof, and the
agreements and obligations of Borrowers and
<PAGE>
Guarantors contained herein constitute legal, valid
and binding obligations of Borrowers and Guarantors
enforceable against Borrowers and Guarantors ln
accordance with their respective terms.
11. Conditions Precedent. The effectiveness of
the other terms and conditions contained herein
shall be subject to the satisfaction of each of the
following:
(a) receipt by Lender of each of the
following, in form and substance satisfactory to
Lender and its counsel:
(i) All waivers, releases,
terminations and other documents as Lender may
request to evidence and effectuate the termination
of the existing financing arrangements of Farah-UK
with Standard Chartered Bank and the termination and
release by Standard Chartered Bank of any and all of
its interests pursuant to such financing
arrangements in and to any assets and properties of
Farah UK;
(ii) an absolute and unconditional
guarantee of payment of the Obligations of Farah UK
to Lender, each duly authorized, executed and
delivered by each of Farah USA, Value Clothing and
the Guarantors (other than Farah Licensing);
(iii) an absolute and unconditional
guarantee of payment of the Obligations of Borrowers
to Lender, a general security agreement granting to
Lender a first and only lien upon its assets and
related Uniform Commercial Code Financing
Statements, each duly authorized, executed and
delivered by Farah Licensing;
- 21 -
(iv) certified copies of directors'
resolutions of Farah UK, Farah USA, Value Clothing
and the Guarantors evidencing the authorization and
approval of this Amendment, the guarantees referred
to above and as to Farah UK, the new borrowing
arrangements to be provided by Lender to Farah UK
hereunder;
(v) originals of the Farah UK Agreements, duly
authorized, executed and delivered by Farah UK and
any other parties thereto;
(vi) appropriate lien search results
<PAGE>
for all jurisdictions in England in which assets of
Farah UK are located, which results are ln all
respects satisfactory to Lender;
(vii) evidence that Lender has valid
and perfected first priority security interests in
and liens upon all of the assets of Farah UK in
England;
(viii) an opinion letter of counsel to
Farah UK, Farah USA, Value Clothing and Guarantors
with respect to the matters provided for in this
Amendment (including an opinion letter of counsel
to Farah UK in England) and such related matters as
Lender may reasonably request;
(ix) all consents, waivers,
acknowledgements and other agreements from third
persons which Lender may deem necessary or desirable
in order to permit, protect and perfect the security
interests in and liens upon the assets of Farah UK
granted by Farah UK to Lender pursuant to the Farah
UK Agreements, including, without limitation,
waivers by lessors, owners or mortgagees,
processors, warehouses or consignees of any security
interests, liens or other claims by such person in
and to such collateral and agreements by such
persons permitting Lender access to the premises to
exercise its rights and remedies and otherwise deal
with the collateral;
(x) evidence that Farah UK has
established a blocked account or lockbox for the
collection of the Accounts of Farah UK and the
transfer of such collections to Lender, which shall
be with a bank and on terms acceptable to Lender;
(xi) evidence of insurance and loss
payee endorsements with respect to the assets of
Farah UK in favor of Lender, in form and substance
satisfactory to Lender, and certificates of
insurance policies and/or endorsements naming Lender
as loss payee, all at Farah UK's cost and expense;
(xii) such agreements from
participants as may be required to effectuate the
terms and provisions of this Amendment;
- 22 -
(xiii) an original of
<PAGE>
this Amendment, duly authorized, executed and
delivered by Farah UK, Farah USA, Value Clothing and
Guarantors;
(b) all representations and warranties
contained herein, in the Accounts Agreement and in
the other Financing Agreements shall be true and
correct in all respects;
(c) no Event of Default shall have occurred
and no event shall have occurred or condition be
exiting which, with notice or passage of time or
both, would constitute an Event of Default.
12. WAIVER OF JURY TRIAL. THE PARTIES HERETO
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR
PROCEEDING OF ANY KIND WITH RESPECT TO, IN
CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT,
THE OTHER FINANCING AGREEMENTS, THE OBLIGATIONS, THE
COLLATERAL OR ANY INSTRUMENT, DOCUMENT OR GUARANTY
DELIVERED PURSUANT HERETO OR TO ANY OF THE
FOREGOING, OR THE VALIDITY, PROTECTION,
INTERPRETATION, ADMINISTRATION, COLLECTION OR
ENFORCEMENT HEREOF OR THEREOF OR PURSUANT TO THE
OTHER FINANCING AGREEMENTS, OR ANY OTHER CLAIM OR
DISPUTE HOWSOEVER ARISING BETWEEN FARAH UK, FARAH
USA, VALUE CLOTHING AND GUARANTORS AND LENDER.
13. WAIVER OF COUNTERCLAIMS; JURISDICTION;
SERVICE OF PROCESS. EACH OF FARAH UK, FARAH USA,
VALUE CLOTHING AND GUARANTORS HEREBY WAIVES ALL
RIGHTS OF SETOFF AND RIGHTS TO IMPOSE COUNTERCLAIMS
IN THE EVENT OF ANY LITIGATION WITH RESPECT TO ANY
MATTER CONNECTED WITH THIS AGREEMENT, THE OTHER
FINANCING AGREEMENTS, THE OBLIGATIONS, THE
COLLATERAL, OR ANY TRANSACTION BETWEEN THE PARTIES
HERETO, AND IRREVOCABLY CONSENTS AND SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE SUPREME COURT OF
THE STATE OF NEW YORK IN NEW YORK CITY AND THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK AND THE DISTRICT COURT OF THE
STATE OF TEXAS AND THE UNITED STATES DISTRICT FOR
THE NORTHERN DISTRICT OF TEXAS AND THE COURTS OF ANY
STATE IN WHICH ANY OF THE COLLATERAL IS LOCATED AND
OF ANY FEDERAL COURT LOCATED IN SUCH STATES IN
CONNECTION WITH ANY ACTION, PROCEEDING OR CLAIM
ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE
OTHER FINANCING AGREEMENTS, THE OBLIGATIONS, THE
COLLATERAL OR ANY DOCUMENT, INSTRUMENT OR GUARANTY
DELIVERED PURSUANT HERETO OR TO ANY OF THE
FOREGOING. IN ANY SUCH LITIGATION, EACH OF FARAH
UK, FARAH USA, VALUE CLOTHING AND GUARANTORS WAIVES
PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER
PROCESS AND AGREES THAT THE SERVICE THEREOF MAY BE
<PAGE>
MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
REQUESTED AND BY TELECOPIER, DIRECTED TO IT AT ITS
CHIEF EXECUTIVE OFFICE SET FORTH IN THE ACCOUNTS
AGREEMENT OR THE OTHER FINANCING AGREEMENTS, OR
DESIGNATED IN WRITING PURSUANT TO THIS AGREEMENT,
OR IN ANY OTHER MANNER PERMITTED BY THE RULES OF
SAID COURTS. WITHIN THIRTY (30) DAYS AFTER SERVICE,
FARAH UK, FARAH USA, VALUE CLOTHING AND GUARANTORS
NAMED IN SUCH SUMMONS,
- 23 -
COMPLAINT OR OTHER PROCESS FAILING WHICH FARAH UK,
FARAH USA, VALUE CLOTHING AND GUARANTORS, AS THE
CASE MAY BE, SHALL BE DEEMED IN DEFAULT AND JUDGMENT
MAY BE ENTERED BY LENDER AGAINST SUCH BORROWERS OR
GUARANTORS FOR THE AMOUNT OF THE CLAIM AND OTHER
RELIEF REQUESTED THEREIN.
FARAH U.S.A., INC.
By: /s/ James C. Swaim
Title: Treasurer
FARAH MANUFACTURING (U.K.) LIMITED
By: /s/ Richard C. Allender
Title: Director
FTX, INC.
By: /s/ Thomas H. Ludwick
Title: Treasurer
ACKNOWLEDGED AND AGREED:
FARAH INCORPORATED
FARAH INTERNATIONAL, INC.
VALUE SLACKS, INC.
VALUE CLOTHING COMPANY, INC.
FARAH SALES CORP.
FARAH MANUFACTURING SERVICES, INC.
FARAH MANUFACTURING COMPANY, INC.
FARAH MANUFACTURING COMPANY
OF NEW MEXICO, INC.
FARAH CLOTHING COMPANY, INC.
RADCO SPORTSWEAR, INC.
CORPORACION FARAH-COSTA RICA S.A.
FARAH LICENSING COMPANY
By: /s/ James C. Swaim
<PAGE>
Title: Treasurer
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)
By: /s/ Ed Franco
Title: Vice President
- 24 -
<PAGE>
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 from the Company's convertible subordinated
debentures, which are not common stock equivalents, is not material.
