<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
/X/ THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED NOVEMBER 4, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 79925-6584
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (915) 593-4444
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
8.5% CONVERTIBLE SUBORDINATED DEBENTURE
DUE FEBRUARY 1, 2004
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 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 .
----- -----
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S- K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
As of January 13, 1995 there were outstanding
10,117,534 shares of the registrant's common stock, no par value, which is the
only class of common or voting stock of the registrant. As of that date, the
aggregate market value of the shares of common stock held by non-affiliates of
the registrant (based on the closing price for the common stock on the New York
Stock Exchange on January 13, 1995) was $80,216,763.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENT ARE INCORPORATED BY REFERENCE INTO THE
INDICATED PART OR PARTS OF THIS REPORT:
ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR ENDED NOVEMBER 4, 1994
- PARTS I AND II (ATTACHED AS EXHIBIT 13 HERETO).
PROXY STATEMENT DATED JANUARY 31, 1995 - PART III.
THE EXHIBIT INDEX IS ON PAGE 16 OF FORM 10-K
<PAGE> 2
ITEM 1. BUSINESS
GENERAL
The Company, founded in 1920, is a leading manufacturer and marketer
of apparel for men and boys. The Company was incorporated in Texas in 1947 as
Farah Manufacturing Company, Inc. The name of the Company was changed to Farah
Incorporated in 1987.
The Company is organized as three distinct operating divisions: Farah
U.S.A., Farah International and Value Slacks. Farah U.S.A. (79% of
consolidated revenue for fiscal 1994) manufactures and sells a variety of
casual and dress apparel to retailers throughout the United States. Farah
International (15% of consolidated revenue for fiscal 1994) manufactures and
sells apparel in several countries in Europe, Australia and Asia. Farah
International's primary markets are the United Kingdom, Australia and New
Zealand. Value Slacks (6% of consolidated revenue for fiscal 1994) operates
retail stores which sell apparel manufactured by the Company for these
stores, close-outs and seconds from Farah U.S.A., and a limited amount of
merchandise purchased from third parties. As of November 4, 1994, Value Slacks
had 33 retail stores, 26 in the United States and 7 in Puerto Rico.
PRODUCTS
The Company manufactures high quality, medium priced apparel for men
and boys. The Company's products include casual slacks, dress slacks, suit
separates (matching pants and sportcoats which may be mixed and matched to
accommodate retail customer size preferences), sportcoats and shorts. The
Company's products are sold under four primary labels: Savane(R), Farah
Clothing Company(R), Farah(R) and John Henry(R). In addition the Company
manufactures and sells private label products for certain customers.
The Company's apparel products are manufactured with an array of
fabrics that emphasize comfort, fit and performance. The Company is known for
its use of "performance fabrics" that maintain a fresh, neat appearance. The
Company's product lines primarily use 100% cotton fiber and blended fabrics
(cotton/polyester or wool/polyester). Most of the Company's Savane products
are offered with PROCESS 2000(R). PROCESS 2000 is the Company's trademark,
first introduced by the Company in late fiscal 1989, which is used to describe
the wrinkle resistant features of the Savane garments. PROCESS 2000 fabrics
are soft, wrinkle and shrink resistant and behave like "permanent press." The
Company has also recently introduced products under the Farah/Farah Clothing
Company and John Henry labels using wrinkle resistant technologies.
Additional information with respect to the Company's significant
labels is as follows:
Savane -- This label is used primarily for casual slacks and shorts
that are made from 100% cotton fabrics and are treated with PROCESS 2000. The
Savane product line is targeted to the growing men's casual wear segment. The
Savane product line is sold primarily to better department stores. The Company
has positioned the Savane product as a high quality garment using better
fabrics and finer workmanship. In addition to men's slacks, the Company offers
slacks for boys and shorts under the Savane label.
Farah/Farah Clothing Company -- These labels are used primarily for
dress slacks and suit separates made from blended fibers. The Company has
introduced a line of casual slacks with these labels which are made from 100%
cotton. Some casual slacks with these labels are fabricated using a wrinkle
resistant technology. Farah/Farah Clothing Company are the Company's primary
dress labels sold to department stores and national chains.
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John Henry -- This label is used for higher fashion dress slacks and
suit separates produced from blended fabrics. The John Henry line is sold to
better department stores and certain of the products use a wrinkle resistant
technology.
FARAH U.S.A.
General. Farah U.S.A. produces and sells a variety of casual and
dress clothing lines to retailers throughout the United States. Substantially
all of Farah U.S.A.'s apparel is produced at Farah U.S.A. factories in Mexico
or Costa Rica or by third party contractors. Farah U.S.A.'s products are
directed to the men's and boy's segments of the apparel industry, with
approximately 75% of branded sales in fiscal 1994 in the men's segment. Farah
U.S.A. also offers its products to the young men's segment of the apparel
industry, but this area has not traditionally been an area of high volume
because of the fashion orientation in this segment of the industry. The Savane
casual products have recently gained acceptance among retailers in the boy's
segment of the apparel industry. In fiscal 1992, Farah U.S.A. established a
private label division to manufacture and sell private label products for
certain customers.
The following table shows the sales (in thousands) of Farah U.S.A.
products by label for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------
1994 1993 1992 1991
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Savane $ 114,395 $ 60,387 $ 17,230 $ 5,526
Farah/Farah Clothing Company 47,239 52,949 64,239 68,383
John Henry 14,381 14,739 18,300 18,590
Private label and other 15,391 8,692 2,212 1,994
------------ ---------- ----------- ----------
Total Farah U.S.A. $ 191,406 $ 136,767 $ 101,981 $ 94,493
============ ========== =========== ==========
</TABLE>
Manufacturing, Sourcing and Distribution. The men's apparel industry
in the United States has two primary selling seasons. The Spring selling
season extends from December to April, and the Fall selling season extends from
May to November. Farah U.S.A.'s operations follow this seasonal pattern. The
various steps in the manufacturing cycle are timed so that Farah U.S.A. begins
to manufacture products for a given season two to three months before the
retail season officially begins.
Farah U.S.A. purchases its fabric and trim requirements, such as
pocketing, linings, belts, buttons, zippers and thread, from several domestic
and foreign sources. No single supplier of raw materials is critical to Farah
U.S.A.'s long-term production needs. Although the Company believes that
alternative sources of supply exist in the event Farah U.S.A. needs to seek
additional or replacement suppliers, short-term disruptions could occur in the
event certain suppliers cease to serve as sources of supply. The order lead
time for fabrics is approximately two to six months. Payment terms are
generally 60 days. All fabrics are delivered to one of the Company's
facilities in El Paso, Texas. Quality control procedures are in place to test
for flaws, coloring, stretch, shrinkage and other characteristics.
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Farah U.S.A. utilizes one of the Company's facilities in El Paso to
store and cut fabrics. Cut fabrics are then inspected, batched and packed for
shipment to one of Farah U.S.A.'s offshore manufacturing plants or to third
party contractors. Farah U.S.A. uses company-owned factories in Mexico and
Costa Rica or third party contractors to sew and finish substantially all of
its products. In fiscal 1994 approximately 58% of Farah U.S.A.'s total
production was manufactured in its own factories, with the balance manufactured
by independent contractors. Farah U.S.A. performs most sewing and finishing
offshore in order to keep production costs low; however, the finishing of
garments sewn by third party contractors is conducted either in its El Paso
facility or one of its offshore facilities. The offshore plants pack the
finished garments and ship them back to El Paso for distribution to Farah
U.S.A. customers.
Orders from retailers are filled from inventory at the Company's
facility in El Paso. Shipments to retailers are sent directly to certain of
the retailers' stores or to independent distribution centers. Certain
retailers pick up their goods at the El Paso facility.
Marketing and Sales. Retailers are requiring increased quality of
service from their suppliers and greater flexibility in managing their
inventories as the retailers frequently change orders based upon updated
consumer demand patterns. Many of Farah U.S.A.'s major customers participate
in an inventory replenishment program referred to as "Quick Response." "Quick
Response" has evolved in the apparel industry to assist retailers in minimizing
their inventories by requiring the apparel manufacturers to maintain enough
finished goods inventory on hand to meet the retailer's demand on short notice.
Most "Quick Response" orders are shipped within 72 hours of receipt of the
order from the retailer. The Company has implemented an electronic data
interchange ("EDI") system with selected large retailers in order to respond to
their demands to provide better service and facilitate the "Quick Response"
program. EDI systems allow retailers to electronically transmit orders for
certain items on a frequent basis, typically weekly. Some retailers also
transmit detailed sales data from their store locations. The Company uses the
sales data to anticipate demand from the retailers, update sales forecasts and
plan and monitor production and inventory levels.
The Company also has developed a computer system which was first
implemented in fiscal 1990 as part of a company-wide program to increase
quality and customer service. The system runs on laptop computers that the
Farah U.S.A. sales force carries with them as they contact retailers. This
system maintains timely, accurate data on style numbers, prices and size charts
(size charts describe the distribution of sizes that a retailer typically
sells). The system also provides up-to-date, easily accessible data on
inventories, customer orders and production backlogs. With the system, the
sales force can execute orders more efficiently and assist the retailer in
attaining higher margins by reducing inventory imbalances.
Farah U.S.A. has five regional corporate account executives who are
directly responsible for certain major retail accounts. Farah U.S.A. employs
a field sales force of approximately 37 salespersons who each report to one of
the corporate account executives and are responsible for the primary
relationship with smaller retailers.
In addition, Farah U.S.A. employs merchandise coordinators who visit
retail store accounts and provide services, such as training and education of
in-store sales personnel about the Savane products; straightening slacks and
ensuring that displays are neat and orderly; responding to customer questions
and comments; and ensuring that the stores are satisfied with their level of
service. These individuals report to members of the sales force.
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Advertising. Farah U.S.A.'s advertising program is comprised of
national media advertising and participation in cooperative advertising
programs with retailers. In fiscal 1993 and 1994, Farah U.S.A. ran national
television advertising campaigns for the Savane product line. These
advertisements ran on major networks and cable television. In cooperative
advertising programs, the Company and individual retailers combine their
efforts and share the costs of local television, radio and newspaper
advertisements and in-store advertising and promotional events featuring the
Company's branded products. Farah U.S.A. has used in-store marketing
techniques, such as providing retailers with attractive tables for the display
of Savane pants.
Competition. The apparel industry is highly competitive due to its
fashion orientation, its mix of large and small producers, the flow of imported
merchandise and a wide variety of retailing methods. The principal elements of
competition in the apparel industry include style, quality, price, comfort,
brand loyalty, customer service and advertising. Competition has been
exacerbated by the recent consolidations and closing of major department store
groups. The men's slacks segment of the men's apparel industry is
characterized by a large number of participants. The Company believes its
largest competitors in the United States are Levi Strauss & Co. and Haggar
Corp.
The men's casual wear market for slacks began to experience
significant growth in the mid-1980's with the introduction from Levi's of its
Dockers(R) casual products. Levi's has recently introduced a Dockers labeled
wrinkle resistant product and has devoted substantial financial resources to
develop and market this new product.
FARAH INTERNATIONAL
Farah International sells apparel in several countries in Europe,
Australia and Asia. The primary markets for Farah International are the United
Kingdom, Australia and New Zealand. Farah International produces most of its
products in two locations, and third party contractors produce the remainder.
Wholly-owned plants in Ireland supply the United Kingdom market, and two
factories in Fiji operated by a 50% joint venture supply the markets in
Australia and New Zealand. Approximately 85% of 1994 production was sourced
from the Company-owned manufacturing facilities. The Company products are sold
internationally primarily under the Farah and Savane labels.
The United Kingdom is Farah International's principal market and in
fiscal 1994 accounted for approximately 64% of its sales. Distribution
channels in the United Kingdom are significantly different from those in the
United States in that retailers carry more private label brands than branded
products. Farah International's primary distribution channels in the United
Kingdom are large retail outlets and independent menswear stores.
Farah International products primarily include dress and casual
slacks, and shirts and sweaters manufactured by third parties. Farah
International's products are designed for the specific styles and tastes of the
markets in which they are sold and differ from Farah U.S.A. apparel. During
fiscal 1994 the majority of Farah International's products were made from
polyester fabrics or blended fabrics with a high polyester content, as opposed
to natural fibers which are more popular in the United States.
Farah Australia and Farah New Zealand accounted for approximately 33%
of Farah International's sales in fiscal 1994. Farah New Zealand was opened in
fiscal 1990 under the same management as Farah Australia.
For information regarding the sales, operating profits and assets of
the Company in each of the geographic segments in which the Company operates,
see Note 10 of Notes to Consolidated Financial Statements.
4
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VALUE SLACKS
Value Slacks stores offer Farah U.S.A.'s seconds, irregulars and
excess merchandise, combined with some merchandise manufactured specifically
for Value Slacks. Value Slacks began with one outlet store in downtown El Paso
in 1968 and has added locations as the Company's production has grown. Value
Slacks operated 33 retail outlet stores as of November 4, 1994, 26 of which
were located in the United States and 7 in Puerto Rico. The stores are
generally 2,000 to 5,000 square feet and are located in suburban outlet malls
or strip centers.
As the factory outlet store concept has gained acceptance in the
United States, Value Slacks has de-emphasized operations in Puerto Rico and
expanded in the United States. During fiscal 1992 through fiscal 1994, the
Company closed an aggregate of nine stores in Puerto Rico and opened an
aggregate of twelve stores in the United States.
CUSTOMERS
The Company's primary customers are department stores. The Company's
ten largest customers accounted for approximately 54% of the Company's
consolidated revenues during fiscal 1994. In fiscal 1994, no one customer
accounted for more than 10% of consolidated revenues.
TECHNOLOGY AND TRADEMARKS
The Company and several of its competitors use wrinkle resistant
technologies in the manufacturing of men's slacks. Management believes there
are two primary types of wrinkle resistant technologies which are used in the
manufacturing process. In the post-cured process, fabrics are treated by the
mills with a wrinkle resistant finish. The fabrics are sewn into garments,
pressed and then cured in ovens. The other method is the wet process which
involves the application of the wrinkle resistant finish after the sewing
process. Sewn garments are placed in washers or submerged in tanks that
contain wrinkle resistant resins. The garments are then dried, pressed and
cured in ovens. Both technologies, together with other technologies, are
available to the Company's competitors.
The Company uses both methods of wrinkle resistant technologies. The
Company uses its wet process on 100% cotton Savane products. The Company uses
the post-cured method primarily on Farah/Farah Clothing Company labeled
products.
The post-cured method limits a manufacturer to the fabrics and
finishes which are offered by the mills. Because the Company is not dependent
on the limited number of wrinkle resistant fabrics currently offered by the
mills, the Company believes it manufactures its wrinkle resistant Savane
products in a wider range of colors, fabrics and finishes. The Company also
believes that the wet processed garments retain their wrinkle resistant
features longer than garments treated with the post-cured process.
The Company owns many U.S. and foreign trademark registrations,
including Savane, PROCESS 2000, Farah and Farah Clothing Company, and has
several other trademark applications pending in the United States and foreign
countries. The John Henry trademark is licensed from Zodiac International
Trading Corporation, an affiliate of Salant Corporation. The John Henry
license is renewable by the Company through 2038.
5
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BACKLOG
A Substantial portion of the Company's sales is based on "Quick
Response" orders. See "Business -- Farah U.S.A. -- Marketing and Sales."
Accordingly, the Company does not consider customers orders to be backlog or
necessarily indicative of future sales.
SEASONALITY
The Company's products are primarily marketed for the Spring and Fall
retail selling seasons each year, with interim lines introduced periodically to
complement the two primary selling seasons. Sales volume for the first quarter
is generally the lowest of the year while the fourth quarter is the highest.
Farah U.S.A. closes some of its factories in the first quarter for
approximately two weeks at Christmas time. However, with the Company's
introduction of more year-round basic products, the seasonality has been
diminished somewhat.
REGULATION
Substantially all of the Company's total production is manufactured
abroad, either in its foreign factories or through arrangements with
independent foreign contractors. As a result, the Company's operations may be
adversely affected by political instability resulting in the disruption of
trade from foreign countries in which the Company's facilities or contractors
are located, the imposition of additional regulations relating to imports or
duties, taxes and other charges on imports, any significant fluctuation of the
value of the dollar against foreign currencies and restrictions on the transfer
of funds. In addition, the Company's import operations are subject to
constraints imposed by bilateral textile agreements between the United States
and certain foreign countries. These agreements impose quotas on the amount
and type of goods which can be imported into the United States from these
countries. However, the Company closely monitors import quotas and can, in
most cases, shift production to contractors located in other countries with
available quotas or to domestic factories. The Company's apparel products that
are imported from its factories in Mexico and Costa Rica are eligible for
certain duty-advantaged programs historically known as "807 Programs."
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EMPLOYEES
As of November 4, 1994, the Company had approximately 6,000 employees.
As of that date, Farah U.S.A., Farah International and Value Slacks had
approximately 5,250, 500 and 200 employees, respectively. Of these employees,
approximately 400 were either salaried or paid based on sales commissions
earned and the remainder were paid on an hourly basis or on the basis of
production. Approximately 200 of Farah U.S.A.'s United States employees are
members of the Amalgamated Clothing and Textile Union and approximately 1,650
of its employees are members of various unions in Mexico. The collective
bargaining agreement with the Company's United States employees expires in
February 1995. The collective bargaining agreements for the Company's
employees in Mexico expire in December 1995 and January 1996. The Company
considers its relations with its employees to be good.
ENVIRONMENTAL REGULATIONS
Current environmental regulations have not had and, in the opinion of
the Company, assuming the continuation of present conditions, will not have any
material effect on the business, capital expenditures, earnings or competitive
position of the Company.
FINANCIAL INSTRUMENT DERIVATIVES.
The Company does not utilize financial instrument derivatives.
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ITEM 2. PROPERTIES
The Company's principal executive offices and United States
distribution facility are located in El Paso, Texas. The Company considers
both its domestic and international facilities to be suitable, adequate and
with sufficient productive capacity for current operations.
The following table reflects the general location, use and approximate
size of the Company's significant real properties currently in use or under
construction:
<TABLE>
<CAPTION>
Approximate Owned/
Location Use Square Footage Leased (1)
-------- --- -------------- ------------
<S> <C> <C> <C>
El Paso, Texas Garment manufacturing plant 116,000 Owned (2)
Chihuahua, Mexico Garment manufacturing plant 54,000 Owned
San Jose, Costa Rica Two garment manufacturing plants 168,000 Owned
Cartoga, Costa Rica Garment manufacturing plant 52,000 Owned
Galway & Kiltimagh, Ireland Two garment manufacturing plants 59,000 Owned
El Paso, Texas Garment manufacturing plant, 1,033,000 Leased (3)
warehouse and office facility
El Paso, Texas Garment manufacturing plant 201,000 Leased
Piedras Negras, Mexico Five garment manufacturing plants 183,000 Leased
Ballyhaunis, Ireland Garment manufacturing plant 24,000 Leased
Sydney, Australia Office/Warehouse 15,000 Leased
Suva, Fiji Two manufacturing plants 35,000 Leased (4)
garment manufacturing
Witham, United Kingdom Office/Warehouse 57,000 Leased
Auckland, New Zealand Office/Warehouse 6,000 Leased
Retail locations in the United
States and Puerto Rico 33 Retail stores 118,000 Leased
</TABLE>
(1) See Note 8 of Notes to Consolidated Financial Statements for a
discussion of lease terms.
(2) Underlying land is leased through February 2002.
(3) Originally owned by the Company and sold and leased back in 1988.
Initial lease term is ten years ending in 1998. In fiscal 1992,
approximately 45% of the Company's El Paso building was subleased to a
third party for a term approximating six and a half years.
(4) By a 50% joint venture.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in several legal actions. In the opinion
of the Company's management, based upon the advice of the respective attorneys
handling such cases, the aggregate of expected fees, expenses, possible
settlements and liability will not have a material adverse effect on the
financial performance of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required under this item is set forth under the
caption "Common Stock" on page 28 of the Company's Annual Report to
Shareholders for the fiscal year ended November 4, 1994 and is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required under this item is set forth under the
caption "Selected Financial Data" on page 36 of the Company's Annual Report to
Shareholders for the fiscal year ended November 4, 1994 and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required under this Item is set forth under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 29 to 35 of the Company's Annual Report to
Shareholders for the fiscal year ended November 4, 1994 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Farah Incorporated
and Subsidiaries included in the Company's Annual Report to Shareholders for
fiscal year ended November 4, 1994 on page 28 and 12 through 27 are
incorporated herein by reference:
Quarterly Data (Unaudited) - Supplementary Data for
fiscal years 1994 and 1993
Consolidated Statements of Operations - Years ended
November 4, 1994, November 5, 1993 and November 6, 1992
Consolidated Balance Sheets - November 4, 1994 and November 5,
1993
Consolidated Statements of Shareholders' Equity - Years ended
November 4, 1994, November 5, 1993 and November 6,
1992
Consolidated Statements of Cash Flows - Years ended
November 4, 1994, November 5, 1993 and November 6, 1992
Notes to Consolidated Financial Statements - November 4, 1994,
November 5, 1993 and November 6, 1992
Report of Independent Public Accountants
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is set forth under the
caption "Directors and Executive Officers" on pages 4 through 6, and
"Performance of the Common Stock" and "Stock Option and Compensation Committee
Report on Executive Compensation" on pages 12 through 14 of the Company's Proxy
Statement dated January 31, 1995 prepared in connection with its 1995 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is set forth under the
caption "Compensation of Executive Officers" on pages 7 through 10 of the
Company's Proxy Statement prepared in connection with its 1995 Annual Meeting
of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required under this item is set forth under the
caption "Ownership of Common Stock" on pages 2 and 3 of the Company's Proxy
Statement prepared in connection with its 1995 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is set forth under the captions
"Certain Matters Involving Directors and Shareholders" and "Compensation of
Directors" on pages 6 and 7 and 11 and 12, respectively, of the Company's Proxy
Statement prepared in connection with its 1995 Annual Meeting of Shareholders
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The consolidated financial statements and notes together with
the Report of Independent Public Accountants and Selected Financial Highlights
as included in the Company's Annual Report to Shareholders for fiscal year
ended November 4, 1994 filed with this Annual Report on Form 10-K are
incorporated herein by reference (only the financial statements listed below,
which are included in the Annual Report to Shareholders for the fiscal year
ended November 4, 1994, are filed herewith and the remainder of the Annual
Report to Shareholders for the fiscal year ended November 4, 1994 is furnished
to the Commission for its information):
Consolidated Statements of Operations - Years ended November 4, 1994,
November 5, 1993 and November 6, 1992
Consolidated Balance Sheets - November 4, 1994 and November 5, 1993
Consolidated Statements of Shareholders' Equity - Years ended
November 4, 1994, November 5, 1993 and November 6, 1992
Consolidated Statements of Cash Flows - Years ended
November 4, 1994, November 5, 1993 and November 6, 1992
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Quarterly Data (unaudited) - Supplementary Data for
fiscal years 1994 and 1993
Selected Financial Data for fiscal years ended 1990 to 1994
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<PAGE> 12
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period for which this report is filed.
(c) Exhibits.
3 ARTICLES OF INCORPORATION AND BYLAWS.
* 3.1 Restated Articles of Incorporation dated March 25, 1994 (filed
as Exhibit 3.1 to Form S-3 as of March 25, 1994).
* 3.2 Articles of Amendment to the Articles of Incorporation of
Farah Incorporated dated March 26, 1993 (filed as Exhibit 3.2
to Form S-3 on March 25, 1994).
* 3.3 Bylaws of Farah Incorporated Amended and Restated as of
September 1, 1993 (filed as Exhibit 3.2 to Form 10-K as of
November 5, 1993).
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
* 4.1 Indenture, dated as of February 1, 1994 (filed as Exhibit 1 to
Form 8-A as of February 1, 1994).
Pursuant to subsection (b)(4)(iii) of Item 601 of Regulation
S-K, Registrant hereby agrees to furnish to the Commission
upon request copies of other instruments defining rights of
holders of long-term debt, none of which instruments
authorizes indebtedness in an amount in excess of 10% on
consolidated assets.
10 MATERIAL CONTRACTS.
* 10.1 Amended and Restated Employment Agreement dated June 30, 1994
(filed as Exhibit 10.51 to Form 10-Q dated August 5, 1994).
* 10.2 Amended and Restated Employment Agreement dated August 2, 1994
(filed as Exhibit 10.52 to Form 10-Q dated August 5, 1994).
10.3 Amended and Restated Employment Agreement dated August 25,
1994.
10.4 Amended and Restated Employment Agreement dated August 25,
1994.
* 10.5 Net Lease, dated as of May 16, 1988, between Farah U.S.A.,
Inc. and Far Pass Realty Associates, Ltd. (filed as Exhibit 5
to Form 8-K dated May 25, 1988).
* 10.6 Guarantee of Lease by Farah Incorporated (filed as Exhibit 6
to Form 8-K dated May 25, 1988).
* 10.7 Pledge Agreement by Farah U.S.A., Inc. to Far Pass Realty
Associates, Ltd. (filed as Exhibit 7 to Form 8-K dated May 25,
1988).
* 10.8 Amended and Restated Farah Manufacturing Company, Inc. 1986
Stock Option Plan, and Form of Stock Option Agreement (filed
as Exhibit 4 (a) to the Company's Registration Statement on
Form S-8, Registration No. 2-75949).
11
<PAGE> 13
* 10.9 Farah Manufacturing Company, Inc. Executive Stock Option Plan,
as amended, and form of Stock Option Agreement (filed as
Exhibit 10.29 to Form 10-K as of October 31, 1988).
* 10.10 Amended and Restated Farah Manufacturing Company, Inc. 1981
Stock Option Plan, and form of Stock Option Agreement (filed
as Exhibit 28.2 to the Company's Registration Statement on
Form S-8, Registration No. 33-11930).
* 10.11 Farah Incorporated 1988 Non-Employee Directors Stock Option
Plan and form of Stock Option Agreement (filed as Exhibit
10.31 to Form 10-K as of October 31, 1988).
* 10.12 Accounts Financing Agreement (Security Agreement), dated
August 2, 1990 between Farah U.S.A., Inc. ("Farah U.S.A.")
and Congress Financial Corporation (Southwest) ("Congress")
(filed as Exhibit 10.53 to Form 10-Q as of July 31, 1990).
* 10.13 Covenant Supplement to Accounts Financing Agreement (Security
Agreement) dated August 2, 1990, between Farah U.S.A. and
Congress (filed as Exhibit 10.54 to Form 10-Q as of July 31,
1990).
* 10.14 Inventory and Equipment Security Agreement Supplement to
Accounts Financing Agreement (Security Agreement) dated August
2, 1990, between Farah U.S.A. and Congress (filed as Exhibit
10.56 to Form 10-Q as of July 31, 1990).
* 10.15 Trade Financing Agreement Supplement to Accounts Financing
Agreement (Security Agreement) dated August 2, 1990, between
Farah U.S.A. and Congress (filed as Exhibit 10.57 to Form 10-Q
as of July 31, 1990).
* 10.16 Form of Pledge and Security Agreement, dated August 2, 1990
(filed as Exhibit 10.58 to Form 10-K as of October 31, 1990).
* 10.17 Collateral Assignment of License, dated August 2, 1990, by
Farah U.S.A. in favor of Congress (filed as Exhibit 10.60 to
Form 10-Q as of July 31, 1990).
* 10.18 Estoppel and Consent Agreement, dated August 2, 1990 by Farah
Incorporated ("Farah") (filed as Exhibit 10.61 to Form 10-Q as
of July 31, 1990).
* 10.19 Deed of Trust and Security Agreement, dated July 30, 1990, by
Farah U.S.A. and Farah in favor of Congress (filed as Exhibit
10.63 to Form 10-Q as of July 31, 1990).
* 10.20 Form of Guarantee and Waiver, dated August 2, 1990 (filed as
Exhibit 10.64 to Form 10-K as of October 31, 1990).
* 10.21 Collateral Assignment of Agreements, dated August 2, 1990, by
Farah in favor of Congress (filed as Exhibit 10.68 to Form
10-Q as of July 31, 1990).
* 10.22 Collateral Assignment of Agreements, dated August 2, 1990, by
Farah Manufacturing Company of New Mexico, Inc. in favor of
Congress (filed as Exhibit 10.69 to Form 10-Q as of July 31,
1990).
* 10.23 Subordination Agreement, dated August 2, 1990, by Farah U.S.A.
and Farah (filed as Exhibit 10.70 to Form 10-Q as of July 31,
1990).
12
<PAGE> 14
* 10.24 Form of Pledge and Security Agreement, dated August 2, 1990
(filed as Exhibit 10.71 to Form 10-K as of October 31, 1990).
* 10.25 Trademark Collateral Assignment and Security Agreement, dated
August 2, 1990, by Farah in favor of Congress (filed as
Exhibit 10.75 to Form 10-Q as of July 31, 1990).
* 10.26 Patent Collateral Assignment and Security Agreement, dated
August 2, 1990, by Farah in favor of Congress (filed as
Exhibit 10.76 to Form 10-Q as of July 31, 1990).
* 10.27 General Security Agreement, dated August 2, 1990, by Farah in
favor of Congress (filed as Exhibit 10.77 to Form 10-Q as of
July 31, 1990).
* 10.28 Form of General Security Agreement, dated August 2, 1990
(filed as Exhibit 10.78 to Form 10-K as of October 31, 1990).
* 10.29 Amendment No. 1, dated November 5, 1990, to Financing
Agreements dated August 2, 1990 (filed as Exhibit 10.98 to
Form 10-K as of October 31, 1990).
* 10.30 Amendment No. 2 dated February 11, 1991, to Financing
Agreements dated August 2, 1990 (filed as Exhibit 10.103 to
Form 10-Q as of January 31, 1991).
* 10.31 Sublease between Farah U.S.A., Inc. and The Tonka Corporation,
dated January 6, 1992 (filed as Exhibit 10.107 to Form 10-K as
of October 31, 1991).
* 10.32 Farah Incorporated 1991 Stock Option and Restricted Stock Plan
dated October 15, 1991 (filed as Exhibit 10.108 to Form 10-K
as of October 31, 1991).
* 10.33 Amendment No. 3 dated January 29, 1992, to Financing
Agreements dated August 2, 1990 (filed as Exhibit 10.112 to
Form 10-Q as of February 7, 1992).
* 10.34 Amendment No. 4 dated June 25, 1992, to Accounts Financing
Agreement dated August 2, 1990 between Congress Financial
Corporation (Southwest) and Farah U.S.A., Inc. (filed as
Exhibit 10.118 to Form 10-Q as of August 7, 1992).
* 10.35 Amendment No. 5 dated August 31, 1992, to Accounts Financing
Agreement dated August 2, 1990 between Congress Financial
Corporation (Southwest) and Farah U.S.A., Inc. (filed as
Exhibit 10.119 to Form 10-Q as of August 7, 1992).
* 10.36 Amendment No. 6 dated September 4, 1992, to Accounts Financing
Agreement dated August 2, 1990 between Congress Financial
Corporation (Southwest) and Farah U.S.A., Inc. (filed as
Exhibit 10.120 to Form 10-Q as of August 7, 1992).
* 10.37 Amendment No. 7 dated September 16, 1992, to Accounts
Financing Agreement dated August 2, 1990 between Congress
Financial Corporation (Southwest) and Farah U.S.A., Inc.
(filed as Exhibit 10.121 to Form 10-Q as of August 7, 1992).
* 10.38 Stock Purchase Agreement dated August 4, 1992, between Farah
Incorporated and Marciano Investments, Inc. (filed as Exhibit
10.122 to Form 10-Q as of August 7, 1992).
* 10.39 Letter Agreement dated October 28, 1992, amending the Accounts
Financing Agreement dated August 2, 1990 between Farah U.S.A.,
Inc. and Congress Financial Corporation (Southwest), (filed as
Exhibit 10.125 to Form 10-K as of November 6, 1992).
13
<PAGE> 15
* 10.40 Amended and Restated Farah Savings and Retirement Plan, as of
January 1, 1991, (filed as Exhibit 10.125 to Form 10-K as of
November 6, 1992).
* 10.41 Amended and Restated Stock Purchase Agreement dated March 12,
1993 (amending and restating the stock purchase agreement
dated February 23, 1993) between Farah Incorporated, the
Georges Marciano Trust and the Paul Marciano Trust, (filed as
Exhibit 10.128 to Form 10-Q as of May 7, 1993).
* 10.42 Amendment No. 8 to Financing Agreements as of May 7, 1993
between Farah U.S.A., Inc. and Congress Financial Corporation
(Southwest), (filed as Exhibit 10.129 to Form 10-Q as of May
7, 1993).
* 10.43 Amendment No. 9 dated July 16, 1993 to Accounts Financing
Agreement dated August 2, 1990 between Congress Financial
Corporation (Southwest) and Farah U.S.A., Inc., (filed as
Exhibit 10.130 to Form 10- Q as of August 6, 1993).
* 10.44 Consulting Agreement dated June 15, 1993, (filed as Exhibit
10.131 to Form 10-Q as of August 6, 1993).
10.45 Deferred Compensation Agreement dated December 20, 1993.
10.46 Deferred Compensation Agreements dated December 16, 1994.
* 10.47 Amendment No. 10 dated November 5, 1993 to Accounts Financing
Agreement dated August 2, 1990 between Congress Financial
Corporation (Southwest) and Farah U.S.A., Inc. (filed as
Exhibit 10.49 to Form 10-K as of November 5, 1993).
* 10.48 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. (filed as
Exhibit 10.50 to Form 10-Q dated February 4, 1994).
* 10.49 Amendment No. 12 dated July 14, 1994 to Accounts Financing
dated August 2, 1990 between Congress Financial Corporation
(Southwest) and Farah U.S.A., Inc. (filed as Exhibit 10.53 to
Form 10-Q dated August 5, 1994).
10.50 Lease Agreement between Farah U.S.A., Inc. and Bank of America
National Trust & Savings Association dated December 8, 1994.
*Incorporated herein by reference.
13 ANNUAL REPORT TO SHAREHOLDERS FOR FISCAL YEAR 1994
21 SUBSIDIARIES OF FARAH INCORPORATED
23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
27 FINANCIAL DATA SCHEDULE
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
s/b/ James C. Swaim
James C. Swaim
Principal Financial Officer
Principal Accounting Officer
Dated: January 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on January 27, 1995.
<TABLE>
<S> <C>
s/b/ Richard C. Allender s/b/ Edward J. Monahan
Richard C. Allender Edward J. Monahan
Chief Executive Officer, Director Director
s/b/ Clark L. Bullock s/b/ Timothy B. Page
Clark L. Bullock Timothy B. Page
Director Director
s/b/ Christopher L. Carameros s/b/ Charles J. Smith
Christopher L. Carameros Charles J. Smith
Director Director
s/b/ Sylvan Landau s/b/ James C. Swaim
Sylvan Landau James C. Swaim
Director Director
s/b/ Michael R. Mitchell s/b/ Thomas G. Wyman
Michael R. Mitchell Thomas G. Wyman
Director Director
</TABLE>
15
<PAGE> 17
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-K INDEX TO ATTACHED EXHIBITS
(All Exhibits listed are on pages 17 through 135)
<TABLE>
<CAPTION>
Numbers
-------
<S> <C> <C>
Exhibit 10.3 Amended and Restated Employment Agreement 17
dated August 25, 1994.
Exhibit 10.4 Amended and Restated Employment Agreement 25
dated August 25, 1994.
Exhibit 10.45 Deferred Compensation Agreement dated 33
December 20, 1993.
Exhibit 10.46 Deferred Compensation Agreements dated 35
December 16, 1994.
Exhibit 10.50 Lease Agreement between Farah U.S.A., Inc. 39
and Bank of America National Trust & Savings
Association dated December 8, 1994.
Exhibit 13 Annual Report to Shareholders for Fiscal 101
Year 1994.
Exhibit 21 Subsidiaries of Farah Incorporated. 133
Exhibit 23 Consent of Independent Public Accountants. 134
Exhibit 27 Financial Data Schedule 135
</TABLE>
16
<PAGE> 1
EXHIBIT 10.3
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement entered into by and
between Farah Incorporated (the "Company") and James C. Swaim (the
"Executive").
In consideration of the following and mutual covenants and agreements
hereinafter set forth, the Company and the Executive do hereby agree as
follows:
1. EMPLOYMENT.
(a) The Company hereby employs the Executive and the Executive
hereby agrees to serve as an employee of the Company or one or more of its
subsidiaries on the terms and conditions set forth herein.
(b) The employment term shall commence on the date hereof and
shall end on March 1, 1996, unless mutually extended in writing by both
parties within ninety (90) days prior to the expiration of such term or unless
terminated under the provisions of Section 4 hereunder.
(c) The Executive shall serve as Executive Vice President, Chief
Financial Officer, and Treasurer of the Company or such other offices as the
Board of the Company or its subsidiaries (the "Boards") shall assign and shall
perform such duties and responsibilities as may from time to time be prescribed
by the Boards, provided that such other duties and responsibilities are
consistent with the Executive's position. The Executive shall perform and
discharge faithfully, diligently and to the best of his ability such duties and
responsibilities and shall devote all of his working time and efforts to the
business and affairs of the Company and its subsidiaries.
(d) In connection with his employment, the Executive shall be
based at the Company's El Paso office, or such other location as may be
agreeable to both the Company and the Executive.
2. COMPENSATION.
(a) The Company and/or its subsidiaries shall pay to the Executive
a minimum annual salary of $175,000, or such additional amounts as the Boards
may approve (the "Base Salary"), payable in monthly installments on the last
day of each month throughout the term of such employment, subject to Section 4
hereof. The Board, upon review of the Executive's performance and/or the
profitability of the Company and its subsidiaries, may pay the Executive a
bonus, as the Boards in their sole discretion may determine to be appropriate.
(b) The Company and/or its subsidiaries shall pay to the Executive
such amounts as may be established under any cash or equity incentive plans
approved by the Boards, based upon profit performance or stock values.
<PAGE> 2
(c) During the term of his employment hereunder, the Executive
shall be entitled to participate in or receive benefits under the Company's
employee benefit plans and arrangements which are available to senior executive
officers of the Company or its subsidiaries. Nothing paid to the Executive
under any such plans or arrangements shall be deemed to be in lieu of
compensation to the Executive hereunder.
(d) The Company's agrees to pay the cost of premiums for a reverse
split-dollar life insurance policy for the Executive on such terms and
conditions, and containing such benefits for the Executive and the Company, as
the Company's Stock Option and Compensation Committee may deem appropriate.
The cost of premiums for such reverse split-dollar life insurance policy shall
be not greater than $20,000 per annum, unless otherwise agreed by the Company.
3. UNAUTHORIZED DISCLOSURE AND ACTIVITY.
(a) While employed by the Company and for a period of three (3)
years after termination of employment, the Executive shall not, without a
written consent of the Board or a person duly authorized thereby, disclose to
any person, other than a person to whom disclosure is reasonably necessary or
appropriate in connection with the performance by the Executive of his duties
as an executive officer of the Company or its subsidiaries, any material
confidential information obtained by him while in the employ of the Company or
its subsidiaries with respect to any of the products, improvements, license
agreements, formulas, designs, methods of manufacture, vendors or customers,
the disclosure of which he knows or in the exercise of reasonable care should
know, would be damaging to the Company or its subsidiaries; provided, however,
that confidential information shall not include any information known generally
to the public (other than as a result of unauthorized disclosure by the
Executive) or any information not otherwise considered by the Boards to be
confidential. The Executive shall not disclose any confidential information of
the type described above, except as may be required by law in connection with
any judicial or administrative proceeding or inquiry.
(b) In addition, the Executive shall not either during the term of
this Agreement or within one (1) year following termination of employment from
any cause, solicit any employee of the Company or its subsidiaries to terminate
his relationship with the Company or its subsidiaries or to influence an
employee to seek employment with any competitor of the Company or its
subsidiaries.
In the event of violation of any of the foregoing, the Company or its
subsidiaries may seek such redress in law or in equity to which it may be
entitled; and Executive agrees that no bond shall be required to obtain any
injunctive relief; and shall pay and indemnify the Company or its subsidiaries
for any costs and/or reasonable attorney's fees if they are successful in such
action.
4. TERMINATION.
<PAGE> 3
(a) The Executive's employment hereunder shall terminate upon his
death.
(b) The Company may terminate the Executive's employment hereunder
by giving written Notice of Termination to the Executive in the event of the
Executive's incapacity due to physical or mental illness which prevents the
proper performance of his duties set forth herein or established pursuant
hereto for a substantial portion of any three (3) month period of the
Executive's term of employment hereunder.
(c) The Company may terminate the Executive's employment hereunder
for Cause by giving written Notice of Termination to the Executive. For the
purpose of this Agreement, the Company shall have "Cause" to terminate the
Executive's employment hereunder upon the Executive's (i) willful failure to
materially perform and discharge his duties and responsibilities hereunder or
any breach by the Executive of the provisions of Section 3 herein, or (ii)
misconduct that is materially injurious to the Company or its subsidiaries, or
(iii) conviction of a felony involving the personal dishonesty of the Executive
or moral turpitude.
(d) Any termination by the Company pursuant to the subsections (b)
or (c) above shall be communicated by written Notice of Termination to the
Executive. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision of this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for such termination. The date of
termination specified in the Notice of Termination shall not be earlier than
the date such Notice is delivered or mailed to the Executive.
(e) If the Executive's employment shall be terminated by reason of
death, his estate shall be paid all sums otherwise payable to the Executive
through the end of the month in which his death occurred, and all bonus or
other incentive benefits accrued or accruable to the Executive through the end
of the month in which his death occurred and the Company and its subsidiaries
shall have no further obligations to the Executive under this Agreement. If
the Executive's employment is terminated by reason of incapacity, the Executive
or person charged with legal responsibility for the Executive's estate shall be
paid all sums otherwise payable to the Executive, including all bonus or other
benefits accrued or accruable to the Executive through the date of termination
specified in the Notice of Termination, together with an amount equal to the
annual base salary, to be payable in monthly installments for twelve (12)
months, and the Company or its subsidiaries shall have no further obligations
to the Executive under this Agreement. If the Executive's employment shall be
terminated for Cause, the Company or its subsidiaries shall pay the Executive
his Base Salary through the date of termination specified in the Notice of
Termination, and the Company and its subsidiaries shall have no further
obligations to the Executive under this Agreement.
(f) In the event of a change in control of the Company, the
Executive may terminate his employment during the term of this Agreement, for
Good Reason, by giving written notice to the Company which shall set forth in
reasonable detail the facts and circumstances constituting Good Reason. The
date of termination specified in the notice shall
<PAGE> 4
be no earlier than the date such notice is delivered or mailed to the Company.
For purposes of this Agreement:
(i) A "change in control" of the Company shall mean a
change in control of a nature that would be required to be reported
(assuming each such event has not been "previously reported") in
response to Item 1(a) of the current Report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"), provided that, without
limitation, such a change in control shall be deemed to have occurred
at such time as (A) any "person", as such term is used in Section
14(d) of the Exchange Act, other than the Company, a wholly-owned
subsidiary of the Company or any employee benefit plan of the Company,
or its subsidiaries, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30%
(the "Relevant Percentage") or more of the combined voting power of
the Company's common stock; provided, however, the Relevant Percentage
shall be 40% solely in respect of any acquisitions of common stock by
Marciano Investments, Inc., of any of its affiliates, or (B)
individuals who constitute the Board of Directors of the Company on
the date hereof (the "Incumbent Board") cease for any reason to
constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election or
nomination for election by the Company's shareholders was approved by
a vote of at least three quarters of the directors comprising the
Incumbent Board (either by a specific vote or by approval of the proxy
statement of the Company in which such person is named as a nominee
for the director without objection to such nomination) shall be, for
purposes of this clause (i), considered as though such person were a
member of the Incumbent Board. Notwithstanding anything in the
foregoing to the contrary, no change in control shall be deemed to
have occurred for purposes of this Agreement by virtue of any
transaction which results in the Executive, or a group of persons
which includes the Executive, acquiring, directly or indirectly, 30%
or more of the combined voting power of the Company's common stock.
(ii) "Good Reason" shall mean (A) a substantial adverse
change in the Executive's status or position(s) as an executive
officer of the Company or its subsidiaries as in effect immediately
prior to the change in control, including, without limitation, any
adverse change in the Executive's status or position(s) as a result of
a material diminution in duties or responsibilities or the assignment
to the Executive of any duties or responsibilities which, in the
Executive's reasonable judgment, are inconsistent with such status or
position(s) or any removal of the Executive from or any failure to
reappoint or reelect the Executive to such position(s) (except in
connection with the termination of the Executive's employment for
Cause or incapability, as a result of Executive's death, or by
Executive other than for Good Reason); (B) a reduction by the Company
or its subsidiaries in the Executive's Base Salary as in effect
immediately prior to the change in control; or (C) the Executive' s
office is moved, without his mutual consent, from the city where the
Executive's office is located immediately prior to the change in
control, except for required travel on the Company's and it
subsidiaries' business to an extent substantially consistent
<PAGE> 5
with the business travel obligations which the Executive undertook on
behalf of the Company or its subsidiaries prior to the change in
control.
(g) If the Executive's employment is terminated (i) by the Company
other than as specified in subsections 4(b) or 4(c) above (or other than by
reason of the Executive's death), or (ii) by the Executive as specified in
subsection 4(f) above, the Company and its subsidiaries shall continue to pay
monthly, Base Salary to Executive for 24 months from termination, and the
Company and its subsidiaries shall have no further obligations to the Executive
under this Agreement. In addition, the Company shall maintain in full force
and effect for the Executive's benefit, for the same period for which severance
payments are being made after such termination, all health insurance, long-term
disability, life insurance (excluding the reverse split-dollar policy described
in Section 2(d) and accidental death and disability benefits (collectively, the
"Benefits") in which the Executive was entitled to participate immediately
prior to the date of the change in control; provided that such continued
participation is possible under the general terms and provisions of such
programs, plans and arrangements providing for the Benefits; provided further
that if the Executive's participation in any such plan, program or arrangement
is barred, or any such plan, program or arrangement is discontinued or the
Benefits thereunder materially reduced, the Company and its subsidiaries shall
arrange to provide the Executive with Benefits substantially similar to those
which the Executive was entitled to receive under such plans, programs and
arrangements immediately prior to the date of the change in control. The
Company shall also make available to the Executive federal group health plan
continuation coverage for the period following the period in which Benefits are
provided during the severance period. In addition to the foregoing, if the
Executive's employment is terminated by the Executive as specified in Section
4(f), then in addition to the other amounts payable by the Company pursuant to
this Section 4(g), the Company shall pay one additional annual premium for the
reverse split-dollar life insurance policy described under Section 2(d) unless
prior to the date such annual payments is required under the terms of the
reverse split-dollar life insurance policy no payment is required because of
(i) of death of the Executive, except to the extent of unpaid premiums as of
the date of death, or (ii) no further premium payments are required under the
terms of such policy.
(h) If the Executive's employment is terminated by the Company
without cause, then in addition to any other obligations the Company may have
to the Executive pursuant to this Agreement, the Company shall pay one
additional annual premium for the reverse split-dollar life insurance policy
described under Section 2(d) unless prior to the date such annual payments is
required under the terms of the reverse split-dollar life insurance policy no
payment is required because of (i) of death of the Executive, except to the
extent of unpaid premiums as of the date of death, or (ii) no further premium
payments are required under the terms of such policy.
5. STOCK OPTIONS UPON TERMINATION. To the extent the Executive
is an Optionee (as defined under the Company's 1991 Stock Option and Restricted
Stock Plan (the "Plan")), if the Executive's employment is terminated without
cause, the Executive may elect to extend the period in which he may exercise
his options under the Plan to one (1) year after his termination; provided,
however, that if such options are exercised after a period of ninety
<PAGE> 6
(90) days after his employment is terminated, such options will become
Nonstatutory Options (as defined in the Plan).
6. NOTICES. For the purpose of this Agreement, notices and all
other communications to either party hereunder provided for in the Agreement
shall be in writing and shall be deemed to have been duly given when delivered
in person or mailed by first-class mail or airmail, postage prepaid, addressed:
in the case of the Company, to:
Farah Incorporated
8889 Gateway West
El Paso, Texas 79925
P.O. Box 9519
El Paso, Texas 79985
Attention: Corporate Secretary
in the case of the Executive, to:
James C. Swaim
6313 Camino Fuente
El Paso, Texas 79912
or to such other address as either party shall designate by giving written
notice of such change to the other party.
7. MISCELLANEOUS. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
approved by the Board of Directors of the Company and agreed to in writing
signed by the Executive and such officer as may be specifically authorized by
the Board of Directors of the Company. No waiver by either party hereto of any
breach of this Agreement shall be deemed a waiver of similar or dissimilar
provisions or conditions of this Agreement. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not set forth expressly in this
Agreement.
8. VALIDITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, which shall remain in full force and
effect.
9. SURVIVAL. The provision of this Agreement shall not survive
the termination of the Executive's employment hereunder, except that the
provisions of Sections 3 and 4 hereof shall survive such termination and shall
be binding upon the Executive's personal or legal representative, executors,
administrators, successors, heirs, distributees, devisees and legatees and
except that the provisions of such Section 4 hereof relating to payments and
termination of the Executive's employment hereunder shall survive such
termination and shall be binding upon the Company and its subsidiaries.
<PAGE> 7
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. ENTIRE AGREEMENT. This Agreement constitutes the full
agreement and understanding of the parties hereto regarding the employment of
the Executive with the Company and its subsidiaries and all prior agreements or
understandings are merged herein. This Agreement amends and restates that
certain Employment Agreement by and between the Company and the Executive dated
as of September 30, 1993.
12. ARBITRATION AND ATTORNEYS' FEES. Any dispute arising in
connection with this Agreement shall be finally resolved by arbitration in El
Paso, Texas, conducted pursuant to and in accordance with the commercial rules
of arbitration of the American Arbitration Association. Any party may request
arbitration by sending written notice to the other party. In any such
arbitration, the only issues to be considered and determined by the arbitrators
shall be issues pertaining to rights and obligations of the parties under this
Agreement, and remedies appropriate thereto. The decision and award of the
arbitrator(s) shall be final and may be entered in any court having
jurisdiction thereof, and application may be made to such court for judicial
acceptance and/or an order enforcing such decision and/or award. In the event
the arbitrator(s) determine there is a prevailing party in the arbitration, the
prevailing party shall recover from the losing party all costs of arbitration,
including, but not limited to arbitrator's fees and reasonable attorneys' fees
incurred by the prevailing party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of this 25th day of August, 1994.
FARAH INCORPORATED
By: s/b Richard C. Allender
Title: Chairman and CEO
s/b James C. Swaim
James C. Swaim, Executive
<PAGE> 1
EXHIBIT 10.4
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement entered into by and
between Farah Incorporated (the "Company") and Jackie L. Boatman (the
"Executive").
In consideration of the following and mutual covenants and agreements
hereinafter set forth, the Company and the Executive do hereby agree as
follows:
1. EMPLOYMENT.
(a) The Company hereby employs the Executive and the Executive
hereby agrees to serve as an employee of the Company or one or more of its
subsidiaries on the terms and conditions set forth herein.
(b) The employment term shall commence on the date hereof and shall
end on March 1, 1996, unless mutually extended in writing by both parties
within ninety (90) days prior to the expiration of such term or unless
terminated under the provisions of Section 4 hereunder.
(c) The Executive shall serve as Senior Vice President of Farah U.
S. A., Inc. or such other offices as the Board of the Company or its
subsidiaries (the "Boards") shall assign and shall perform such duties and
responsibilities as may from time to time be prescribed by the Boards, provided
that such other duties and responsibilities are consistent with the Executive's
position. The Executive shall perform and discharge faithfully, diligently and
to the best of his ability such duties and responsibilities and shall devote
all of his working time and efforts to the business and affairs of the Company
and its subsidiaries.
(d) In connection with his employment, the Executive shall be based
at the Company's El Paso office, or such other location as may be agreeable to
both the Company and the Executive.
2. COMPENSATION.
(a) The Company and/or its subsidiaries shall pay to the Executive a
minimum annual salary of $175,000, or such additional amounts as the Boards may
approve (the "Base Salary"), payable in monthly installments on the last day of
each month throughout the term of such employment, subject to Section 4 hereof.
The Board, upon review of the Executive's performance and/or the profitability
of the Company and its subsidiaries, may pay the Executive a bonus, as the
Boards in their sole discretion may determine to be appropriate.
(b) The Company and/or its subsidiaries shall pay to the Executive
such amounts as may be established under any cash or equity incentive plans
approved by the Boards, based upon profit performance or stock values.
<PAGE> 2
(c) During the term of his employment hereunder, the Executive shall
be entitled to participate in or receive benefits under the Company's employee
benefit plans and arrangements which are available to senior executive officers
of the Company or its subsidiaries. Nothing paid to the Executive under any
such plans or arrangements shall be deemed to be in lieu of compensation to the
Executive hereunder.
(d) The Company's agrees to pay the cost of premiums for a reverse
split-dollar life insurance policy for the Executive on such terms and
conditions, and containing such benefits for the Executive and the Company, as
the Company's Stock Option and Compensation Committee may deem appropriate.
The cost of premiums for such reverse split-dollar life insurance policy shall
be not greater than $20,000 per annum, unless otherwise agreed by the Company.
3. UNAUTHORIZED DISCLOSURE AND ACTIVITY.
(a) While employed by the Company and for a period of three (3)
years after termination of employment, the Executive shall not, without a
written consent of the Board or a person duly authorized thereby, disclose to
any person, other than a person to whom disclosure is reasonably necessary or
appropriate in connection with the performance by the Executive of his duties
as an executive officer of the Company or its subsidiaries, any material
confidential information obtained by him while in the employ of the Company or
its subsidiaries with respect to any of the products, improvements, license
agreements, formulas, designs, methods of manufacture, vendors or customers,
the disclosure of which he knows or in the exercise of reasonable care should
know, would be damaging to the Company or its subsidiaries; provided, however,
that confidential information shall not include any information known generally
to the public (other than as a result of unauthorized disclosure by the
Executive) or any information not otherwise considered by the Boards to be
confidential. The Executive shall not disclose any confidential information of
the type described above, except as may be required by law in connection with
any judicial or administrative proceeding or inquiry.
(b) In addition, the Executive shall not either during the term of
this Agreement or within one (1) year following termination of employment from
any cause, solicit any employee of the Company or its subsidiaries to terminate
his relationship with the Company or its subsidiaries or to influence an
employee to seek employment with any competitor of the Company or its
subsidiaries.
In the event of violation of any of the foregoing, the Company or its
subsidiaries may seek such redress in law or in equity to which it may be
entitled; and Executive agrees that no bond shall be required to obtain any
injunctive relief; and shall pay and indemnify the Company or its subsidiaries
for any costs and/or reasonable attorney's fees if they are successful in such
action.
4. TERMINATION.
(a) The Executive's employment hereunder shall terminate upon his
death.
<PAGE> 3
(b) The Company may terminate the Executive's employment hereunder
by giving written Notice of Termination to the Executive in the event of the
Executive's incapacity due to physical or mental illness which prevents the
proper performance of his duties set forth herein or established pursuant
hereto for a substantial portion of any three (3) month period of the
Executive's term of employment hereunder.
(c) The Company may terminate the Executive's employment hereunder
for Cause by giving written Notice of Termination to the Executive. For the
purpose of this Agreement, the Company shall have "Cause" to terminate the
Executive's employment hereunder upon the Executive's (i) willful failure to
materially perform and discharge his duties and responsibilities hereunder or
any breach by the Executive of the provisions of Section 3 herein, or (ii)
misconduct that is materially injurious to the Company or its subsidiaries, or
(iii) conviction of a felony involving the personal dishonesty of the Executive
or moral turpitude.
(d) Any termination by the Company pursuant to the subsections (b)
or (c) above shall be communicated by written Notice of Termination to the
Executive. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision of this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for such termination. The date of
termination specified in the Notice of Termination shall not be earlier than
the date such Notice is delivered or mailed to the Executive.
(e) If the Executive's employment shall be terminated by reason of
death, his estate shall be paid all sums otherwise payable to the Executive
through the end of the month in which his death occurred, and all bonus or
other incentive benefits accrued or accruable to the Executive through the end
of the month in which his death occurred and the Company and its subsidiaries
shall have no further obligations to the Executive under this Agreement. If
the Executive's employment is terminated by reason of incapacity, the Executive
or person charged with legal responsibility for the Executive's estate shall be
paid all sums otherwise payable to the Executive, including all bonus or other
benefits accrued or accruable to the Executive through the date of termination
specified in the Notice of Termination, together with an amount equal to the
annual base salary, to be payable in monthly installments for twelve (12)
months, and the Company or its subsidiaries shall have no further obligations
to the Executive under this Agreement. If the Executive's employment shall be
terminated for Cause, the Company or its subsidiaries shall pay the Executive
his Base Salary through the date of termination specified in the Notice of
Termination, and the Company and its subsidiaries shall have no further
obligations to the Executive under this Agreement.
(f) In the event of a change in control of the Company, the
Executive may terminate his employment during the term of this Agreement, for
Good Reason, by giving written notice to the Company which shall set forth in
reasonable detail the facts and circumstances constituting Good Reason. The
date of termination specified in the notice shall be no earlier than the date
such notice is delivered or mailed to the Company. For purposes of this
Agreement:
<PAGE> 4
(i) A "change in control" of the Company shall mean a
change in control of a nature that would be required to be reported
(assuming each such event has not been "previously reported") in
response to Item 1(a) of the current Report on Form 8-K, as in effect on
the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"), provided that, without
limitation, such a change in control shall be deemed to have occurred at
such time as (A) any "person", as such term is used in Section 14(d) of
the Exchange Act, other than the Company, a wholly-owned subsidiary of
the Company or any employee benefit plan of the Company, or its
subsidiaries, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 30% (the
"Relevant Percentage") or more of the combined voting power of the
Company's common stock; provided, however, the Relevant Percentage shall
be 40% solely in respect of any acquisitions of common stock by Marciano
Investments, Inc., of any of its affiliates, or (B) individuals who
constitute the Board of Directors of the Company on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election or nomination for election
by the Company's shareholders was approved by a vote of at least three
quarters of the directors comprising the Incumbent Board (either by a
specific vote or by approval of the proxy statement of the Company in
which such person is named as a nominee for the director without
objection to such nomination) shall be, for purposes of this clause (i),
considered as though such person were a member of the Incumbent Board.
Notwithstanding anything in the foregoing to the contrary, no change in
control shall be deemed to have occurred for purposes of this Agreement
by virtue of any transaction which results in the Executive, or a group
of persons which includes the Executive, acquiring, directly or
indirectly, 30% or more of the combined voting power of the Company's
common stock.
(ii) "Good Reason" shall mean (A) a substantial adverse
change in the Executive's status or position(s) as an executive officer
of the Company or its subsidiaries as in effect immediately prior to the
change in control, including, without limitation, any adverse change in
the Executive's status or position(s) as a result of a material
diminution in duties or responsibilities (other than, if applicable, any
such change directly attributable to the fact that the Company is no
longer publicly owned) or the assignment to the Executive of any duties
or responsibilities which, in the Executive's reasonable judgment, are
inconsistent with such status or position(s) or any removal of the
Executive from or any failure to reappoint or reelect the Executive to
such position(s) (except in connection with the termination of the
Executive's employment for Cause or incapability, as a result of
Executive's death, or by Executive other than for Good Reason); (B) a
reduction by the Company or its subsidiaries in the Executive's Base
Salary as in effect immediately prior to the change in control; or (C)
the Executive' s office is moved, without his mutual consent, from the
city where the Executive's office is located immediately prior to the
change in control, except for required travel on the Company's and it
subsidiaries' business to an extent substantially consistent with the
business travel obligations which the Executive undertook on behalf of
the Company or its subsidiaries prior to the change in control.
<PAGE> 5
(g) If the Executive's employment is terminated (i) by the Company
other than as specified in subsections 4(b) or 4(c) above (or other than by
reason of the Executive's death), or (ii) by the Executive as specified in
subsection 4(f) above, the Company and its subsidiaries shall continue to pay
monthly, Base Salary to Executive for 18 months from termination, and the
Company and its subsidiaries shall have no further obligations to the Executive
under this Agreement. In addition, if the Executive's employment is terminated
after a change in control (i) by the Company other than as specified in
subsections 4(b) or 4(c) above (or other than by reason of the Executive's
death), or (ii) by the Executive as specified in subsection 4(f) above, the
Company shall maintain in full force and effect for the Executive's benefit,
for the same period for which severance payments are being made after such
termination, all health insurance, long-term disability, life insurance
(excluding the reverse split-dollar policy described in Section 2(d)) and
accidental death and disability benefits (collectively, the "Benefits") in
which the Executive was entitled to participate immediately prior to such
termination; provided that such continued participation is possible under the
general terms and provisions of such programs, plans and arrangements providing
for the Benefits; provided further that if the Executive's participation in any
such plan, program or arrangement is barred, or any such plan, program or
arrangement is discontinued or the Benefits thereunder materially reduced, the
Company and its subsidiaries shall arrange to provide the Executive with
Benefits substantially similar to those which the Executive was entitled to
receive under such plans, programs and arrangements immediately prior to the
date of the change in control. The Company shall also make available to the
Executive federal group health plan continuation coverage for the period
following the period in which Benefits are provided during the severance
period. In addition to the foregoing, if the Executive's employment is
terminated by the Executive as specified in Section 4(f), then in addition to
the other amounts payable by the Company pursuant to this Section 4(g), the
Company shall pay one additional annual premium for the reverse split-dollar
life insurance policy described under Section 2(d) unless prior to the date
such annual payments is required under the terms of the reverse split-dollar
life insurance policy no payment is required because of (i) of death of the
Executive, except to the extent of unpaid premiums as of the date of death, or
(ii) no further premium payments are required under the terms of such policy.
(h) If the Executive's employment is terminated by the Company
without cause, then in addition to any other obligations the Company may have
to the Executive pursuant to this Agreement, the Company shall pay one
additional annual premium for the reverse split-dollar life insurance policy
described under Section 2(d) unless prior to the date such annual payments is
required under the terms of the reverse split-dollar life insurance policy no
payment is required because of (i) of death of the Executive, except to the
extent of unpaid premiums as of the date of death, or (ii) no further premium
payments are required under the terms of such policy.
5. STOCK OPTIONS UPON TERMINATION. To the extent the Executive is
an Optionee (as defined under the Company's 1991 Stock Option and Restricted
Stock Plan (the "Plan")), if the Executive's employment is terminated without
cause, the Executive may elect to extend the period in which he may exercise
his options under the Plan to one (1) year after his termination; provided,
however, that if such options are exercised after a period of ninety (90) days
after his employment is terminated, such options will become Nonstatutory
Options (as defined in the Plan).
<PAGE> 6
6. NOTICES. For the purpose of this Agreement, notices and all
other communications to either party hereunder provided for in the Agreement
shall be in writing and shall be deemed to have been duly given when delivered
in person or mailed by first-class mail or airmail, postage prepaid, addressed:
in the case of the Company, to:
Farah Incorporated
8889 Gateway West
El Paso, Texas 79925
P.O. Box 9519
El Paso, Texas 79985
Attention: Corporate Secretary
in the case of the Executive, to:
Jackie L. Boatman
725 Cresta Alta
El Paso, Texas 79912
or to such other address as either party shall designate by giving written
notice of such change to the other party.
7. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is approved
by the Board of Directors of the Company and agreed to in writing signed by the
Executive and such officer as may be specifically authorized by the Board of
Directors of the Company. No waiver by either party hereto of any breach of
this Agreement shall be deemed a waiver of similar or dissimilar provisions or
conditions of this Agreement. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
8. VALIDITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provisions of this Agreement, which shall remain in full force and
effect.
9. SURVIVAL. The provision of this Agreement shall not survive the
termination of the Executive's employment hereunder, except that the provisions
of Sections 3 and 4 hereof shall survive such termination and shall be binding
upon the Executive's personal or legal representative, executors,
administrators, successors, heirs, distributees, devisees and legatees and
except that the provisions of such Section 4 hereof relating to payments and
termination of the Executive's employment hereunder shall survive such
termination and shall be binding upon the Company and its subsidiaries.
<PAGE> 7
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. ENTIRE AGREEMENT. This Agreement constitutes the full agreement
and understanding of the parties hereto regarding the employment of the
Executive with the Company and its subsidiaries and all prior agreements or
understandings are merged herein. This Agreement amends and restates that
certain Employment Agreement by and between the Company and the Executive dated
as of September 30, 1993.
12. ARBITRATION AND ATTORNEYS' FEES. Any dispute arising in
connection with this Agreement shall be finally resolved by arbitration in El
Paso, Texas, conducted pursuant to and in accordance with the commercial rules
of arbitration of the American Arbitration Association. Any party may request
arbitration by sending written notice to the other party. In any such
arbitration, the only issues to be considered and determined by the arbitrators
shall be issues pertaining to rights and obligations of the parties under this
Agreement, and remedies appropriate thereto. The decision and award of the
arbitrator(s) shall be final and may be entered in any court having
jurisdiction thereof, and application may be made to such court for judicial
acceptance and/or an order enforcing such decision and/or award. In the event
the arbitrator(s) determine there is a prevailing party in the arbitration, the
prevailing party shall recover from the losing party all costs of arbitration,
including, but not limited to arbitrator's fees and reasonable attorneys' fees
incurred by the prevailing party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of this 25th day of August, 1994.
FARAH INCORPORATED
By: s/b Richard C. Allender
Title: Chairman and CEO
s/b Jackie L. Boatman
Jackie L. Boatman, Executive
<PAGE> 1
EXHBIT 10.45
DEFERRED COMPENSATION AGREEMENT
This Deferred Compensation Agreement ("Agreement) is made between
Michael R. Mitchell ("Employee") and Farah U.S.A., Inc. ("Employer") on the
following terms and conditions:
1. Beginning January 1, 1994 and continuing through December 31, 1994,
Employee and Employer agree that the Employee's monthly salary shall
be reduced by 7% ("Deferred Income"), which must be at least five
percent (5%) of the Employee's monthly salary on the date of this
Agreement, and monthly payments of the Employee's monthly salary shall
be recalculated accordingly.
2. Employer shall accrue an amount equal to the Employee's total amount
of Deferred Income during 1994 and shall credit that sum to a separate
memorandum account on its books ("[1] 1994 Deferral Account"). In
addition, Employer shall accrue on December 31, 1994 the following and
credit it to the Employee's Deferral Account: (a) an amount in lieu
of interest calculated on the monthly Deferral Account balance times
the Farah U.S.A., Inc. weighted average monthly interest rate on
short-term borrowing during the most recently completed fiscal year
and (b) five percent (5%) of the Employee's total salary during the
time period described in paragraph 1 above ("Matching Amount"), which
amount shall become vested January 1 following the year of deferral.
Thereafter, and until payment of the Deferral Account balance as
provided in paragraph 3, the Deferral Account shall be credited on
December 31 of each year with an amount in lieu of interest calculated
on the total Deferral Account balance (including the Deferral Income,
the vested Matching Amount and previously credited sums in lieu of
interest) times the Farah U.S.A., Inc. weighted average annual
interest rate on short-term borrowing during the most recently
completed fiscal year. In the event of a partial calendar year time
period, the amount in lieu of interest will be calculated as
previously described and prorated for the appropriate time period
using the short-term borrowing rate during the prior fiscal year.
3. The total deferred compensation due to the Employee, consisting of the
total amounts credited to and vested in the Deferral Account, shall be
paid to the Employee in three equal payments with the first payment
due on year from the date of termination, the second payment due three
years from the date of termination. Should the Employee die before
receiving all amounts payable to him pursuant to this Agreement, and
at such time is an Employee of the Employer, the remaining amounts
shall be paid to his
<PAGE> 2
beneficiary(ies) as designated by the Employer's group term life
insurance plan. If not employed by the Employer at the time of death,
all unpaid amounts in the Deferral Account shall be paid to the estate
of the Employee.
<PAGE> 3
4. It is specifically agreed that the amounts credited to Employee in the
Deferral Account shall not be held by Employer in a trust, escrow or
similar arrangement or other fiduciary capacity. The Deferral Account
shall not be subject in any manner to attachment or other legal
process for debts of Employee or his successors or legal
representatives for any reason; and neither Employee, nor any legal
representative or successor shall have any right against Employer with
respect to any portion of the Deferral Account, except as a general
unsecured creditor of the Employer. Neither Employee, his successors
or legal representatives shall have any right to assign, transfer,
pledge, hypothecate, anticipate or otherwise alienate and payment of
deferred compensation to become due in the future to such person, and
any attempt to do so shall be void and will not be recognized by the
Employer.
5. Employee acknowledges that he has received a copy of the 1993 Farah
Incorporated Unfunded Deferred Compensation Plan (the "Plan") and that
he understands the terms and conditions of the Plan.
6. Employee agrees that by executing this Agreement he and his
beneficiary(ies) and their successors or legal representatives and any
other person claiming any amount pursuant to the Agreement are bound
by the terms of the Plan, pursuant to which this Agreement is
executed.
7. Employee agrees that his election to defer compensation pursuant to
the Agreement is irrevocable and no sale, transfer, alienation,
assignment, pledge, encumbrance, garnishment, collateralization,
anticipation or attachment of any benefits under the Plan shall be
valid or recognized.
Executed this20th day of December, 1993.
EMPLOYER
By s/b James C. Swaim
EMPLOYEE
s/b Michael R. Mitchell
Michael R. Mitchell
<PAGE> 1
EXHIBIT 10.46
DEFERRED COMPENSATION AGREEMENT
This Deferred Compensation Agreement ("Agreement") is made between
___________________ "Employee") and Farah U.S.A., Inc. ("Employer") on the
following terms and conditions:
1. Beginning January 1, 1995 and continuing through December 31, 1995,
Employee and Employer agree that Employee's monthly salary shall be
reduced ___% (must be 5% or more) each month during the aforementioned
period ("Deferred Income") and the monthly payments of Employee's
salary shall be recalculated accordingly.
2. The following accrual, crediting and vesting rules shall apply with
respect to this Agreement.
a. Employer shall accrue on December 31, 1995 an amount equal to
the Employee's total Deferred Income during 1995 and shall
credit that sum to a separate memorandum account on its books
("________________1995 DEFERRAL ACCOUNT" OR "DEFERRAL
ACCOUNT").
b. In addition, on December 31, 1995 Employer shall accrue and
credit the following to the Employee's Deferral Account: (i)
an amount in lieu of interest equal to the sum of eleven (11)
amounts, each such amount calculated as of the last day of
each month during 1995 other than January 31 by multiplying
the Farah U.S.A., Inc. weighted average monthly interest rate
on short-term borrowing during Farah U.S.A., Inc.'s most
recently completed fiscal year (i.e., the fiscal year ended
October 31, 1995) by the Employee's Deferred Income as of the
last day of the preceding month pursuant to this Agreement
(with the Employee's Deferred Income pursuant to this
Agreement with respect to each month deemed accrued as of the
last day of such month) and (ii) five percent (5%) of the
Employee's total salary during the time period described in
paragraph 1 above ("Matching Amount"). No amount in lieu of
interest shall be accrued or credited to the Deferral Account
for 1995 on the amounts described in (ii) above.
c. After December 31, 1995, until payment of the Employee's
vested Deferral Account balance as provided in paragraph 3
hereof, the Deferral Account shall be credited on December 31
of each year with an amount in lieu of interest calculated by
multiplying the Employee's total Deferred Account balance as
of that December 31 (including his Deferral Income, Matching
Amount and previously credited sums in lieu of interest) times
the Farah U.S.A., Inc. weighted average annual interest rate
on short-term borrowing
<PAGE> 2
during Farah U.S.A., Inc.'s most recently completed fiscal
year. In the event of a partial calendar year time period,
the amount in lieu of interest for post-1995 calendar years
shall be calculated as previously described and prorated for
the appropriate time period using the Farah U.S.A., Inc.
weighted average annual interest rate on short-term borrowing
during Farah U.S.A. Inc.'s prior fiscal year, even if the
partial calendar year time period ends on or after the last
day of Farah U.S.A., Inc.'s current fiscal year.
d. Notwithstanding the foregoing to the contrary, if Employee
terminates his employment with Farah Incorporated and all of
its wholly owned subsidiaries incorporated in the United
States ("Farah Entities" or, individually, a "Farah Entity")
during calendar year 1995, the following rules shall apply
with respect to the matching amount that Employee shall (or
shall not) be entitled to with respect to calendar year 1995:
i. If Employee's termination of employment was voluntary
and for a reason other than retirement on or after
age 60 or involuntary and for cause, Employee shall
not be entitled to nor credited with any matching
amount with respect to calendar year 1995; and
ii. If Employee's termination of employment was voluntary
and because of retirement on or after age 60 or
involuntary and not for cause (including, but not
limited to, termination of employment due to death or
permanent and total disability), Employee shall be
entitled to a prorated matching amount with respect
to the calendar year in which his termination of
employment occurs equal to five percent (5%) of
Employee's total salary during the portion of
calendar year 1995 with respect to which he has
deferred compensation pursuant to Farah Incorporated
1993 Unfunded Deferred Compensation Plan ("Plan").
The Stock Option and Compensation Committee of the Board of Directors
of Farah Incorporated (or its authorized representative) shall
determine, in its sole discretion, whether the Employee is entitled to
a matching amount pursuant to the foregoing paragraphs of this
Agreement and the Plan (including, but not limited to determining
whether Employee's termination of employment was voluntary or
involuntary or for cause or not for cause).
e. If Employee terminates his employment with all Farah Entities,
Employee shall receive amounts in lieu of interest in the
manner described in the preceding paragraphs until payment of
Employee's entire vested Deferred Account balance is made.
However, notwithstanding the foregoing to the contrary, with
respect to the calendar year in which the last payment is made
to Employee pursuant to paragraph 3 (or the only payment, if a
lump sum payment is to be made) of this Agreement, no amounts
in lieu of interest shall
<PAGE> 3
be accrued or paid later than the date of such last payment
and the rules for the determination of amounts in lieu of
interest for partial calendar year time periods shall be
utilized to determine the amount in lieu of interest which
shall be included with the last payment made to Employee with
respect to the Agreement.
3. The total deferred compensation due to Employee, consisting of the
total amounts credited to and vested in the Deferral Account, SHALL BE
PAID TO THE EMPLOYEE IN THE FORM OF A LUMP SUM ON
___________________________. Should Employee die before receiving all
amounts payable to him pursuant to this Agreement, and at such time is
an employee of Farah Entity, the remaining amounts shall be paid in a
lump sum (or in a lump sum to each beneficiary if there is more than
one beneficiary, the sum of which shall not exceed the remaining
amounts payable to Employee) 30 days after Employee's death to his
beneficiary(ies) under Employee's primary life insurance plan (per
total death benefit payable due to Employee's death) maintained by a
Farah Entity with respect to which a Farah Entity defrays or has
defrayed Employee's cost of coverage. If Employee is not employed by
a Farah Entity at the time of death, all unpaid amounts in the
Deferral Account shall be paid in a lump sum 30 days after Employee's
death to the estate of the Employee.
4. It is specifically agreed that the amounts credited to Employee in the
Deferral Account shall not be held by a Farah Entity in a trust,
escrow or similar arrangement or other fiduciary capacity. The
Deferral Account shall not be subject in any manner to attachment or
other legal process for debts of Employee or his successors or legal
representatives for any reason; and neither Employee, nor any legal
representative or successor shall have any right against a Farah
Entity with respect to any portion of the Deferral Account, except as
a general unsecured creditor of a Farah Entity. Neither Employee, his
successors or legal representatives shall have any right to assign,
transfer, pledge, hypothecate, anticipate or otherwise alienate any
payment of deferred compensation to become due in the future to such
person, and any attempt to do so shall be void and will not be
recognized by a Farah Entity.
5. Employee acknowledges that he has received a copy of the Plan and that
he understand the terms and conditions of the Plan.
6. Employee agrees that by executing this Agreement he and his
beneficiary(ies) and their successors or legal representatives and any
other person claiming any amount pursuant to this Agreement are bound
by all of the terms of the Plan, pursuant to which this Agreement is
executed.
7. Employee agrees that his election to defer compensation pursuant to
this Agreement is irrevocable and no sale, transfer, alienation,
assignment, pledge, encumbrance, garnishment, collateralization,
anticipation or attachment of any benefits under the Plan shall be
valid or recognized.
<PAGE> 4
Executed this 16th day of December, 1994.
EMPLOYER
By __________________________________
EMPLOYEE
By ___________________________________
<PAGE> 5
ANNEX A TO EXHIBIT 10.46
Below is a list of the variables to the Deferred Compensation Agreements chosen
by the officers required to file with this Form 10-K.
<TABLE>
<CAPTION>
Period of %
Name Deferral Deferred Payment Date
- --------- --------
<S> <C> <C> <C>
Richard C. Allender January 1, 1995 to 5% January 15, 1995
December 31, 1995
Michael R. Mitchell January 1, 1995 to 7% Upon termination
December 31, 1995
James C. Swaim January 1, 1995 to 5% January 15, 1995
December 31, 1995
Jackie L. Boatman January 1, 1995 to 5% January 15, 1995
December 31, 1995
</TABLE>
<PAGE> 1
EXHIBIT 10.50
Lease No. 940118
LEASE INTENDED AS SECURITY ("Lease") dated as of
December 8, 1994, between BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION, A NATIONAL BANKING ASSOCIATION with an
office at Four Embarcadero Center, Suite 1200, San
Francisco, California, 94111 ("Lessor") and FARAH U.S.A.,
INC., a Texas corporation, with its principal office at 8889
Gateway West, El Paso, Texas, 79925 ("Lessee").
Lessor agrees to acquire, lease and sell to Lessee and Lessee agrees
to hire and purchase from Lessor certain personal property (the "Units" and
individually a "Unit") described in the Appendix to the Lease (the "Appendix")
attached hereto and made a part hereof, on the terms and conditions set forth
herein and in the Appendix.
Section 1. PROCUREMENT, DELIVERY AND ACCEPTANCE.
1.1 Lessee has ordered or shall order the Units pursuant to one or
more purchase orders or other contracts of sale ("Purchase Agreements" and
individually a "Purchase Agreement") from one or more vendors ("Vendors" and
individually a "Vendor"). Before the earlier of the time title to any Unit is
transferred by the applicable Vendor or the date Lessee receives the Unit,
Lessee shall assign to Lessor all the right, title and interest of Lessee in
and to the applicable Purchase Agreement as it relates to the Unit by executing
and delivering to Lessor a Purchase Agreement Assignment substantially in the
form of Exhibit A. The Delivery Date of each Unit shall be the date on which
the Unit is received by Lessee or if the Unit requires installation and
testing, the date such installation and testing is completed and the Unit is
accepted by Lessee. Lessor agrees to accept the assignment and, subject to
Section 1.2, assume the obligations of Lessee under the Purchase Agreement to
purchase and pay for the Unit, but no other duties and obligations thereunder.
Nevertheless, Lessee shall remain liable to Vendor in respect of its duties and
obligations in accordance with the Purchase Agreement. Lessee represents and
warrants in connection with the assignment of any Purchase Agreement that (a)
Lessee has the right to assign the Purchase Agreement, (b) the right, title and
interest of Lessee in the Purchase Agreement so assigned is and shall be free
from all claims, liens, security interests and encumbrances, (c) Lessee will
warrant and defend the assignment against claims and demands of all persons and
(d) the Purchase Agreement contains no conditions under which Vendor may
reclaim title to any Unit after delivery, acceptance and payment therefor.
1.2 The obligation of Lessor to pay for each Unit is subject to the
following conditions:
(a) Lessee shall have accepted the Unit on its Delivery
Date and delivered the Acceptance Certificate
required under Section 1.3;
(b) its Delivery Date shall be during the Utilization
Period set forth in the Appendix;
(c) there shall exist no Event of Default nor any event
which, with notice or lapse of time or both, would
become an Event of Default (a "Default");
(d) no material adverse change in Lessee's or any
guarantor's financial condition shall have occurred
since the date hereof; and
(e) satisfactory resolution of any environmental issues.
If any of the foregoing conditions is not met with respect to any
Unit, Lessor shall assign to Lessee all the right, title and interest of Lessor
in and to the Unit and any Purchase Agreement theretofore assigned to Lessor as
it relates to the Unit.
1.3 Lessee shall execute and deliver to Lessor, within 15 days of
the Delivery Date of each Unit accepted by Lessee, an Acceptance Certificate in
the form of Exhibit B (a "Certificate") confirming the Delivery Date of the
Unit and the acceptance of the Unit as of its Delivery Date. Each Certificate
shall be accompanied by the original invoice relating to any Unit covered by
the Certificate.
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1.4 As soon as possible, but no later than the first assignment by
Lessee of a Purchase Agreement hereunder (or, in the case of a sale and
leaseback, the first Delivery Date), Lessee shall, at its sole expense deliver
to Lessor (but in the case of (c) and (d.2) below, Lessor shall obtain, at
Lessee's expense, subject to Section 19 hereof) the following documents, in
form and substance satisfactory to Lessor:
(a) evidence of Lessee's and any Guarantor's authority to
enter into and perform its obligations under this
Lease and of the incumbency of the person or persons
authorized to execute and deliver this Lease and any
other agreement or document required hereunder,
including specimen signatures of such persons;
(b) certificates of insurance, including loss payable and
other endorsements complying with, or other evidence
acceptable to Lessor that Lessee has complied with,
Section 7;
(c) an Intercreditor Agreement, in the form of Exhibit E
duly executed by Congress Financial Corporation
(Southwest) and Lessor;
(d) UCC financing statements executed by Lessee together,
at Lessor's option, with certificates of filing
officers as to the non existence of any prior UCC
filings for Units located in Texas, verification of
Lessor's first lien position of all of Lessee's
equipment, machinery, computers and computer
hardware, vehicles, tools, dies, jigs, furniture, and
trade fixtures owned by Lessee as of the date of the
Lease ("Equipment"), subordination by Congress
Financial Corporation (Southwest) in the Equipment,
and second lien position on all accounts receivable
and Lessee's pledge of sixty six percent (66%) of the
issued and outstanding shares of capital stock in
Dimmit Industries, S.A. de C.V. and Touche
Industrial, S.A. de C.V.;
(e) 1) opinion(s) of counsel, substantially in the form
of Exhibit(s) D-1, D-2 and D-3 and 2) Lessor's Texas,
Mexico and Costa Rican counsel will deliver opinions
satisfactory to Lessor confirming Lessor's interest
in the Units and satisfaction of any other filing,
recording and registration requirements of the Lease
deemed appropriate by Lessor;
(f) an Agreement and Consent to Removal substantially in
the form of Exhibit F for Units to be located in
Texas;
(g) a guaranty of Farah Incorporated, Value Slacks, Inc.
and Farah International, Inc., substantially in the
form of Exhibit G;
(h) security agreements, pledge agreements and any other
documents reasonably necessary to grant to Lessor and
perfect Lessor's security interest in the Collateral
described in the Appendix;
(i) documentation satisfactory to Lessor to be filed, as
deemed appropriate by Lessor, at Lessee's expense, in
appropriate locations in Mexico, Costa Rica and Texas
establishing Lessor's first priority right, title and
interest to the Units under the laws of the
respective jurisdictions, including but not limited
to the right to repossess and sell the Units if an
Event of Default has occurred and is continuing;
(j) assignment, in form and substance satisfactory to
Lessor, of Piedras Negras, Mexico facility leases for
the locations of the Units;
(k) copies of maquiladora agreements satisfactory to
Lessor for the facilities in which the Units will be
located;
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(l) a commodatum agreement executed by Lessee, Radco
Sportwear, Inc. and each maquiladora, in form and
substance satisfactory to Lessor, to be filed in such
jurisdictions as deemed appropriate by Lessor;
(m) a declaration, executed by Lessee and each of
Lessee's subsidiaries in Costa Rica using the Units,
in form and substance satisfactory to Lessor;
(n) any other documents specified in the Appendix and
such other documents as Lessor may reasonably
request.
Section 2. TERM, RENT AND PAYMENT.
2.1 The term of this Lease as to each Unit shall commence upon its
receipt and acceptance by Lessee and continue as specified in the Appendix.
2.2 Lessee shall pay to Lessor rent for each Unit as described in
the Appendix and in the amounts and at the times set forth in the Schedule to
Acceptance Certificate in the form of Exhibit C (the "Schedule").
2.3 Rent and all other sums due Lessor hereunder shall be paid at
the office of Lessor set forth below unless otherwise specified by Lessor.
2.4 This Lease is a net lease and Lessee shall not be entitled to
any abatement or reduction of rent or any setoff against rent, whether arising
by reason of any past, present or future claim of any nature by Lessee against
Lessor or otherwise. Except as otherwise expressly provided herein, this Lease
shall not terminate, nor shall the obligations of Lessor or Lessee be otherwise
affected by reason of (a) any defect in, damage to, loss of possession or use
or destruction of any Unit, however caused, (b) the attachment of any lien,
encumbrance, security interest or other right or claim of any third party to
any Unit, (c) any prohibition or restriction of or interference with Lessee's
use of any Unit by any person or entity, (d) the insolvency of or the
commencement by or against Lessee of any bankruptcy, reorganization or similar
proceeding, or (e) any other cause, whether similar or dissimilar to the
foregoing, any present or future law to the contrary notwithstanding. It is
the intention of the parties that all rent and other amounts payable by Lessee
hereunder shall be payable in all events in the manner and at the times herein
provided unless Lessee's obligations in respect thereof have been terminated
pursuant to the express provisions of this Lease.
2.5 Subject to Section 19 hereof, payments shall be applied in the
following order: (a) expenses, including allocated time charges of internal
counsel for Lessor and any other attorneys' fees; (b) interest on late
payments; and (c) rent and all other sums due hereunder. Payments shall be
evidenced by entries in records maintained by Lessor which shall be conclusive.
Section 3. WARRANTIES.
LESSEE ACKNOWLEDGES AND AGREES THAT (A) EACH UNIT IS OF A SIZE,
DESIGN, CAPACITY AND MANUFACTURE SELECTED BY LESSEE, (B) LESSEE IS SATISFIED
THAT THE SAME IS SUITABLE FOR ITS PURPOSES, (C) LESSOR IS NOT A MANUFACTURER
THEREOF NOR A DEALER IN PROPERTY OF SUCH KIND AND (D) LESSOR HAS NOT MADE, AND
DOES NOT HEREBY MAKE, ANY REPRESENTATION, WARRANTY OR COVENANT WITH RESPECT TO
THE TITLE, MERCHANTABILITY, CONDITION, QUALITY, DESCRIPTION, DURABILITY,
FITNESS FOR PURPOSE OR SUITABILITY OF ANY UNIT IN ANY RESPECT OR IN CONNECTION
WITH OR FOR THE PURPOSES AND USES OF LESSEE. Lessor hereby assigns to Lessee,
to the extent assignable, any warranties, covenants and representations of
Vendor with respect to any Unit, but any action taken by Lessee by reason
thereof shall be at Lessee's expense and shall be consistent with Lessee's
obligations under Section 2.
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In addition, if such warranties, covenants or representations are not
assignable, to Lessee, then Lessor shall upon written request of Lessee pursue
any and all remedies available against a vendor of a Unit, to the extent
requested by Lessee; provided however, any costs or expenses incurred by Lessor
to pursue such remedies shall be borne by Lessee. Lessor and Lessee shall
cooperate to coordinate the pursuit of such remedies.
Section 4. POSSESSION, USE AND MAINTENANCE.
4.1 Lessee shall not (a) use, operate, maintain or store any Unit
improperly, carelessly or in violation of any applicable law or regulation of
any government authority, (b) abandon any Unit, (c) sublease any Unit or permit
its use by anyone other than Lessee or an entity operating pursuant to a
maquiladora agreement and has satisfied the requirements in Section 1.4 without
the prior written consent of Lessor, not to be unreasonably withheld, (d)
permit any Unit to be removed from the location specified in the Certificate
without the prior written consent of Lessor, (e) affix or place any Unit to or
on any other personal property or any real property without first obtaining and
delivering to Lessor such waivers as Lessor may reasonably require to assure
Lessor's legal title and security interest and right to remove the Unit free
from any lien, encumbrance right of distraint or any other claim that may be
asserted by any third party, or (f) sell, assign or transfer, or directly or
indirectly create, incur or suffer to exist any lien, claim, security interest
or encumbrance of any kind on any of its rights hereunder or in any Unit.
Notwithstanding the foregoing, Lessee may grant a second priority security
interest in the Units to Congress Financial, Inc. provided that Lessor is
granted a second priority security interest in collateral securing obligations
owed by the Lessee to Congress Financial Corporation (Southwest) as set forth
in Section N of the Appendix and the Intercreditor Agreement.
4.2 Lessee shall at its expense at all times during the term of
this Lease maintain the Units in good operating order, repair, condition and
appearance and in accordance with the manufacturer's recommended procedures,
normal wear and tear excepted.
4.3 Lessee shall not alter any Unit or affix or place any
accessory, equipment or device on any Unit if such alteration or addition would
impair any applicable warranty or the originally intended function or use or
reduce the value of the Unit. All repairs, parts, accessories, equipment and
devices furnished, affixed or installed to or on any Unit, excluding temporary
replacements, shall thereupon become subject to the security interest of
Lessor.
4.4 If Lessor supplies Lessee with labels, plates or other
markings stating that the Units are leased from Lessor, Lessee shall affix and
keep the same on a prominent place on the Units during the term of this Lease.
4.5 Upon reasonable prior notice to Lessee, Lessor and its
designees shall have the right at all reasonable times to inspect any Unit,
observe its use and inspect records related thereto.
Section 5. GENERAL TAX INDEMNITY.
5.1 Lessee shall pay or reimburse Lessor for, and indemnify and
hold Lessor harmless from, all fees (including, but not limited to, license,
documentation, recording or registration fees), and all sales, use, gross
receipts, property, occupational, value-added or other taxes, levies, imposts,
duties, assessments, charges or withholdings of any nature whatsoever, together
with any penalties, fines or additions to tax, or interest thereon (all of the
foregoing being hereafter referred to as "Impositions"), arising at any time
before or during the term of this Lease, or upon any termination of this Lease
or return of the Units to Lessor, and levied or imposed on Lessor, directly or
otherwise, by any federal, state or local government or taxing authority in the
United States or by any foreign country or foreign or international taxing
authority on or with respect to (a) any Unit, (b) the exportation, importation,
registration, purchase, ownership, delivery, leasing, possession, use,
operation, storage, maintenance, repair, transportation, return, sale, transfer
of title or other disposition thereof, (c) the rents, receipts, or earnings
arising from any Unit or (d) this Lease or any payment made hereunder,
excluding, however, taxes measured by Lessor's net income imposed or levied by
the United States or any state thereof or by any foreign country or foreign or
international taxing authority, except to the extent such taxes arise solely as
a result of this Lease or any payment made hereunder, or the presence of any
Unit in such foreign country, but not excluding any such net income taxes
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that by the terms of the statute imposing such tax expressly relieve Lessee or
Lessor from the payment of any Impositions Lessee would otherwise have been
obligated to pay, reimburse or indemnify.
5.2 Lessee shall pay on or before the time or times prescribed by
law any Impositions (as defined in Section 5.1) (except any Impositions
excluded by Section 5.1), but Lessee shall have no obligation to pay any such
Imposition while Lessee is contesting such Imposition in good faith and by
appropriate legal proceedings and the nonpayment thereof does not, in the
opinion of Lessor, adversely affect the title, property, use, disposition or
other rights of Lessor with respect to the Units. If any Impositions (except
any Imposition excluded by Section 5.1) is charged or levied against Lessor
directly and paid by Lessor, Lessee shall reimburse Lessor on presentation of
an invoice therefor.
5.3 If Lessor is not entitled to a corresponding and equal
deduction with respect to any Imposition Lessee is required to pay or reimburse
under Section 5.1 or 5.2 and the payment or reimbursement constitutes income to
Lessor, then Lessee shall also pay to Lessor the amount of any Imposition
Lessor is obligated to pay in respect of (a) such payment or reimbursement by
Lessee and (b) any payment by Lessee made pursuant to this Section 5.3.
5.4 Lessee shall prepare and file, in a manner satisfactory to
Lessor, any reports or returns required with respect to any Impositions with
respect to this Lease and the Units. Lessee shall furnish on Lessor's request
COPIES OF reports or returns so filed.
5.5 Notwithstanding Section 5.1, Lessor will bear the
responsibility for withholding taxes on interest income imposed by Mexican and
/or Costa Rican tax authorities, if any, to the extent that such taxes are
imposed at a rate of less than 5% of the interest portion of any payment made
under the Lease. Any such taxes shall reduce the amount of any payment due
hereunder to Lessor that is subject thereto.
To the extent that such taxes are imposed at a rate which
equals or exceeds 5% of the interest portion of any payment made under the
Lease, Lessee will bear the responsibility for all taxes (including any
additional amounts which Lessor specifies as necessary to preserve its
after-tax yield on the transaction), referred to hereafter as "Additional
Amounts"). Any such taxes shall not reduce the amount of any payment due
hereunder to Lessor that is subject thereto.
Regardless of the rate at which such withholding taxes are
imposed, Lessee will pay the full amount of such taxes to the relevant taxing
or other authority in accordance with applicable law. Lessee will bear the
responsibility for all penalties, interest and other costs associated with any
failure by Lessee to pay such taxes in accordance with applicable law. Lessor
will have complete control over any administrative or judicial contest of
whether any such taxes are lawfully imposed on any payment under the Lease.
Lessee will bear the responsibility for all transfer,
documentary or similar taxes arising from or relating to the Units.
Within thirty (30) days after the date of payment for any
withholding taxes imposed on any payment under the Lease (regardless of the
rate at which such taxes are imposed, or whether the taxes are imposed on
interest), Lessee shall provide Lessor with original tax receipts, certified
copies of tax receipts, or other documentation acceptable to Lessor (together,
"Tax Payment Documentation"), for all such taxes paid by Lessee pursuant to
this Section (regardless of whether Lessor or Lessee bears the responsibility
for the taxes).
To the extent that such taxes are imposed at a rate of less
than 5% of the interest portion of any payment made under the Lease, Lessee
will bear the responsibility for any such taxes with respect to which Lessee
fails to provide Lessor with Tax Payment Documentation. Lessee shall pay
Lessor the amount of any such taxes upon demand.
5.6 Upon the request of Lessee, Lessor agrees to provide Lessee
with an annual statement by a responsible officer of Lessor that identifies the
extent to which, if any, Lessor is able to obtain a current (including foreign
tax credits attributable to prior years) U.S. tax benefit as a result of
foreign tax credits relating to the
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withholding taxes described in Section 5.5, to the extent such taxes are
imposed at a rate which equals or exceeds 5% of the interest portion of any
payment made under the Lease. Such statement shall be provided within 30 days
of Lessee's request, but in no event not earlier than October 15 of the year
following the year to which the statement relates. Lessor's determination of
any such tax benefit will be in its sole discretion, subject to good faith, and
will be binding upon Lessee. Lessee will have no right to review such
determination.
If Lessor determines that it is able to obtain such a U.S. tax
benefit, Lessor will pay Lessee the amount of that tax benefit (plus any
Additional Amounts received from Lessee pursuant to Section 5.5, with respect
to any foreign taxes which gave rise to such tax benefit).
5.7 Without prejudice to the survival of any other agreement of
Lessee under the Lease, the agreements and obligations of Lessee and Lessor
contained in Section 5 shall survive the payment in full of all amounts due
under the Lease, including but not limited to the obligation of Lessor in
Section 5.6 to pay to Lessee a U.S. tax benefit for foreign tax credits in
taxable years occurring during the term of the Lease.
5.8 Lessor hereby represents and warrants that it qualifies with
the Mexican tax authorities as a financial institution eligible to receive
interest payments from sources within Mexico subject to Mexican withholding tax
at a rate of 4.9%, with respect to interest payments on or before December 31,
1995.
Section 6. RISK OF LOSS; WAIVER AND INDEMNITY.
6.1 If any Unit is worn out, lost, stolen, destroyed or
irreparably damaged, from any cause whatsoever, or taken or requisitioned by
condemnation or otherwise (any such occurrence being hereinafter called a
"Casualty Occurrence") before or during the term of this Lease as to such Unit,
Lessee shall give Lessor prompt notice thereof. On the first rent payment date
after the Casualty Occurrence or, if there is no such rent payment date, 30
days after the Casualty Occurrence, Lessee shall pay to Lessor an amount equal
to the then "Balance Due" (as hereinafter defined) for the Unit plus any
termination charges and interest on late payments required under the Appendix
("Other Charges"). The Balance Due for each Unit is the sum of
(a) any and all amounts with respect to such Unit which
under the terms of this Lease may be then due (other
than any Other Charges) or which may have accrued to
such payment date (computing the rent for any number
of days less than a full rent period by multiplying
the rent for such rental period by a fraction of
which the numerator is such number of days and the
denominator is the total number of days in such full
rent period); plus
(b) before the Base Date for such Unit as set forth in
the Appendix, the amount Lessor is obligated to pay
for such Unit, and thereafter, the sum of (i) the
present value, as of such payment date, of the entire
unpaid balance of all rent for such Unit that would
otherwise have accrued hereunder from such payment
date to the end of the term of this Lease as to such
Unit and (ii) the present value, as of such payment
date, of the amount of the mandatory or optional
payment required or permitted to be paid by Lessee to
Lessor at the end of the term of this Lease in
accordance with the Appendix.
Present values are to be computed in each case by discounting at the
Implicit Interest Rate set forth in the Appendix.
Upon the making of such payment by Lessee in respect of any Unit, the
rent for the Unit shall cease to accrue, the term of this Lease as to such Unit
shall terminate and Lessee shall be entitled to possession of such Unit. If
Lessor receives the Balance Due and Other Charges for a Unit, Lessee shall be
entitled to the proceeds of any recovery in respect of the Unit, from insurance
or otherwise, and Lessor, subject to the rights of any insurer insuring the
Units as provided herein, shall execute and deliver, to Lessee, or to its
assignee or nominee, a bill of sale (without representations or warranties
except that the Unit is free and clear of all claims, liens, security interests
and other encumbrances by or in favor of any person claiming by, through or
under Lessor) for the Unit, and such other
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documents as may be required to release the Unit from this Lease and to
transfer title thereto to Lessee or such assignee or nominee, in such form as
may reasonably be requested by Lessee, all at Lessee's expense. Except as
provided in this Section 6.1, Lessee shall not be released from its obligations
hereunder in the event of, and shall bear the risk of, any Casualty Occurrence
to any Unit before or during the term of this Lease with respect to the Unit.
6.2 Lessee shall indemnify, reimburse and hold Lessor, any
company controlled by, controlling, or under common control with Lessor and all
of their directors, officers, employees, agents, attorneys, successors and
assigns (each an "Indemnified Person") harmless from, any and all claims
(including, but not limited to, claims based on or relating to copyright,
trademark or patent infringement, environmental liability, negligence, strict
liability in tort, statutory liability or violation of laws), losses, damages,
obligations, penalties, liabilities, demands, suites judgments or causes of
action, and all legal proceedings, and any reasonable costs or expenses in
connection therewith, including reasonable attorneys' fees, including
reasonable allocated time charges of internal counsel, in each case imposed on,
incurred by or asserted against the Indemnified Person in any way relating to
or arising in any manner out of (a) the registration, purchase, taking or
foreclosure of a security interest in, or the ownership, delivery, condition,
lease, assignment, storage, transportation, possession, use, operation, return,
repossession, sale or other disposition of, any Unit, before or during the term
of this Lease as to the Unit, (b) any alleged or actual defect in any Unit
(whether arising from the material or any article used therein, the design,
testing, use, maintenance, service repair, or overhaul thereof or otherwise)
regardless of when such defect is discovered or alleged, whether or not the
Unit is in Lessee's possession and no matter where it is located or (c) this
Lease or any other related document, the enforcement hereof or thereof or the
consummation of the transactions contemplated hereby or thereby. Lessee waives
and releases each Indemnified Person from any claim now or hereafter existing
except any wilful misconduct or gross negligence on the part of Lessor.
Section 7. INSURANCE.
Lessee, at its own cost and expense, shall keep each Unit insured
against all risks, in no event for less than the amount set forth in Section
6.1 with respect to such Unit(provided, however, Lessee's insurance coverage
may allow for a deductible of $100,000), and shall maintain public liability
insurance against such risks and for such amounts as Lessor may require. All
such insurance shall be in such form and with such companies as Lessor shall
approve, shall specify Lessor and Lessee as insureds and shall provide that
such insurance may not be canceled as to Lessor or altered in any way that
would affect the interest of Lessor without at least 30 days prior written
notice to Lessor (10 days in the case of nonpayment of premium). All insurance
shall be primary, without right of contribution from any other insurance
carried by Lessor and shall not be invalidated by the action or inaction of
Lessee or any other person. All insurance shall contain a "breach of warranty"
provision satisfactory to Lessor, and shall provide that all amounts payable by
reason of loss or damage to the Units shall be payable solely to Lessor.
Section 8. DEFAULTS; REMEDIES.
8.1 The following shall constitute events of default ("Events of
Default") hereunder:
(a) Lessee fails to make any payments to Lessor when due
hereunder and such failure is not cured within 3 days
of the date due;
(b) any representation or warranty of Lessee contained
herein or in any document furnished to Lessor in
connection herewith is incorrect or misleading in any
material respect when made;
(c) Lessee fails to observe or perform any other
covenant, agreement or warranty made by Lessee
hereunder and such failure continues for 10 days
after written notice thereof to Lessee;
(d) any default occurs under any other agreement for
borrowing money or receiving credit in excess of $2
million under which Lessee or any guarantor or
general partner of Lessee may be obligated as
borrower or guarantor, if such default consists of
the failure to pay any
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indebtedness when due or if such default gives the
holder of the indebtedness the right to accelerate
the indebtedness;
(e) Lessee, any guarantor of this Lease makes an
assignment for the benefit of creditors or files any
petition or action under any bankruptcy,
reorganization, insolvency or moratorium law, or any
other law or laws for the relief of, or relating to,
debtors;
(f) Any involuntary petition is filed under any
bankruptcy statute against Lessee, any guarantor of
this Lease, or any receiver, trustee, custodian or
similar official is appointed to take possession of
the properties of Lessee, any guarantor of this
Lease, unless such petition or appointment is set
aside or withdrawn or ceases to be in effect within
60 days from the date of the filing or appointment;
or
(g) Lessee, any guarantor of this Lease liquidates,
dissolves, dies or enters into any partnership, joint
venture, (other than in its ordinary course of
business) consolidation, merger, or other
combination, or sells, leases or dispose of a
substantial portion of its business or assets.
8.2 If any Event of Default occurs, Lessor, at its option, may:
(a) proceed by appropriate court action or actions either
at law or in equity, to enforce performance by Lessee
of the applicable covenants of this Lease or to
recover damages for the breach thereof; or
(b) by notice in writing to Lessee terminate this Lease,
whereupon Lessee shall remain liable as hereinafter
provided, and Lessor may, at its option, do any one
or more of the following: (i) declare the aggregate
Balance Due with respect to the Units and all Other
Charges immediately due and payable and recover any
damages and expenses in addition thereto Lessor
sustains by reason of the breach of any covenant,
representation or warranty contained in this Lease
other than for the payment of rent; (ii) enforce the
security interest given hereunder pursuant to the
Uniform Commercial Code or any other law; (iii) enter
upon the premises where any of the Units may be and
take possession of all or any of such Units; and (iv)
require Lessee to return the Units as provided in
Section 9.
8.3 Lessor shall have any and all rights given to a secured party
by law, and may, but is not required to, sell the Units in one or more sales.
Lessor may purchase at such sale. Lessee acknowledges that sales for cash or
on credit to a wholesaler, retailer or user of the Units, or at public or
private auction, are all commercially reasonable. The proceeds of such sale
shall be applied in the following order: First, to the reasonable expenses of
retaking, holding, preparing for sale and selling, including the reasonable
allocated time charges, costs and expenses of internal counsel of or for Lessor
and any other reasonable attorneys' fees and expenses incurred by Lessor;
Second, to the amounts, except those specified below, which under the terms of
this Lease are due or have accrued; Third, to late charges; and Fourth, to the
aggregate Balance Due. Any surplus shall be paid to the person or persons
entitled thereto. If there is a deficiency, Lessee will promptly pay the same
to Lessor.
8.4 Lessee agrees to pay all reasonable allocated time charges,
costs and expenses of internal counsel for Lessor and any other attorneys'
fees, expenses or out-of-pocket costs incurred by Lessor in enforcing this
Lease.
8.5 The remedies hereunder provided in favor of Lessor shall not
be deemed exclusive, but shall be cumulative, and shall be in addition to all
other remedies in its favor existing at law or in equity.
8.6 If Lessee fails to perform any of its agreements contained
herein, Lessor may perform such agreement, and Lessee shall pay the reasonable
expenses incurred by Lessor in connection with such performance, upon demand.
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Section 9. RETURN OF UNITS.
If Lessor rightfully demands possession of any Unit pursuant to this
Lease or otherwise, Lessee, at its expense, shall forthwith deliver possession
of the Unit to Lessor, together with its manuals and maintenance records, at
the option of Lessor (a) by delivering the Unit, appropriately protected and in
the condition required by Section 4, to Lessor [at such place as may be
specified by Lessor within the state in which the Unit was originally delivered
in the United States or (b) by loading the Unit, appropriately protected and in
the condition required by Section 4, on board such carrier as Lessor shall
specify and shipping the same, freight collect, to the destination designated
by Lessor.
Section 10. ASSIGNMENT.
Lessor may at any time assign or transfer all or any of the right,
title or interest of Lessor in and to this Lease, and the rights, benefits and
advantages of Lessor hereunder, including the rights to receive payment of rent
or any other payment hereunder and Lessor's title to the Units and any and all
obligations of Lessor in connection herewith. Lessor may disclose to any
potential or actual assignee or transferee any information in the possession of
Lessor or any Affiliate relating to Lessee or this Lease, provided however that
prior to disclosing any non-public information, Lessor will require such
assignee or transferee execute a Confidentiality Agreement substantially in the
form of Exhibit J. Any such assignment or transfer shall be subject and
subordinate to this Lease and the rights and interests of Lessee hereunder. NO
ASSIGNMENT OF THIS LEASE OR ANY RIGHT OR OBLIGATION HEREUNDER MAY BE MADE BY
LESSEE OR ANY ASSIGNEE OF LESSEE WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR.
Section 11. OWNERSHIP, SECURITY INTEREST AND FURTHER ASSURANCES.
Unless assigned by Lessor, or applicable law otherwise provides, title
to and ownership of the Units shall remain in Lessor as security for the
obligations of Lessee hereunder until Lessee has fulfilled all of its
obligations hereunder. Lessee hereby grants to Lessor a continuing security
interest in the Units to secure the payment of all sums due hereunder. Lessee
confirms there is no pending litigation, tax claim, proceeding or dispute that
may have a material adverse effect on its financial condition or impair its
ability to perform its obligations hereunder. Lessee will, at its expense,
maintain its legal existence in good standing and do any further act and
execute, acknowledge, deliver, file, register and record any further documents
Lessor may reasonably request in order to protect Lessor's title to and
security interest in the Units and Lessor's rights and benefits under this
Lease.
Section 12. LATE PAYMENTS.
Lessee shall pay to Lessor, on demand, interest at the rate set forth
in the Appendix on the amount of any payment not made when due hereunder from
the date due until payment is made.
Section 13. EFFECT OF WAIVER.
No delay or omission to exercise any right, power or remedy accruing
to Lessor upon any breach or default of Lessee hereunder shall impair any such
right, power or remedy nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein or of or in any similar breach or
default thereafter occurring, nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of Lessor of any breach or default under this Lease must
be in writing specifically set forth.
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<PAGE> 10
Section 14. SURVIVAL OF COVENANTS.
All obligations of Lessee under Sections 1, 2, 4, 5, 6, 8, 9, 11 and
12 shall survive the expiration or termination of this Lease to the extent
required for their full observance and performance.
Section 15. APPLICABLE LAW; SEVERABILITY.
This Lease shall be governed by and construed under the laws of
California, to the jurisdiction of which, and of federal courts in California,
the parties hereto submit. If any provision hereof is held invalid, the
remaining provisions shall remain in full force and effect.
Section 16. FINANCIAL INFORMATION.
Lessee shall, and shall cause any guarantor to, keep its books and
records in accordance with generally accepted accounting principles in the case
of Farah Incorporated and practices consistently applied in the case of Lessee,
Value Slacks, Inc. and Farah International, Inc. and shall, and shall cause any
guarantor to, deliver to Lessor such financial statements and information as
may be set forth in the Appendix or as Lessor may reasonably request. Credit
information relating to Lessee, any guarantor or any general partner of Lessee
may be disseminated among Lessor and any of its affiliates and any of their
respective successors and assigns; however, any non-affiliated successors and
assigns will execute a Confidentiality Agreement substantially in the form of
Exhibit J before Lessor or any of its affiliates disseminates non-public
information.
Section 17. NOTICES.
All demands, notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when personally delivered,
or five (5) days after it is deposited in the mail, first class postage
prepaid, or delivered to an express carrier, charges prepaid, or sent by
facsimile (with electronic confirmation) addressed to each party at the address
set forth below the signature of such party on the signature page, or at such
other address as may hereafter be furnished in writing by such party to the
other.
Section 18. COUNTERPARTS.
Two counterparts of this Lease have been executed by the parties
hereto. One counterpart has been prominently marked "Lessor's Copy". One
counterpart has been prominently marked "Lessee's Copy". Only the counterpart
marked "Lessor's Copy" shall evidence a monetary obligation of Lessee.
Section 19. TRANSACTION COSTS.
Lessee will reimburse Lessor for any reasonable out-of-pocket costs or
expenses incurred in connection with the preparation and negotiation of the
lease documents, including but not limited to UCC searches, UCC filing, title
searches and title insurance (collectively, the "Out-of-Pocket Expenses". If
Lessor uses counsel in connection with negotiating, drafting, or any altering
any lease documents, Lessee shall reimburse Lessor for any legal expenses of
Lessor (including allocated time charges of internal counsel for Lessor)
(collectively, the "Legal Expenses"). The Lessee's obligations to reimburse
Out-of-Pocket Expenses and Legal Expenses is limited to $25,000.00. The
foregoing legal expenses will be capitalized by Lessor under a Schedule.
-10-
<PAGE> 11
Section 20. EFFECT AND MODIFICATION OF LEASE.
This Lease and the Appendix to the Lease exclusively and completely
state the rights of Lessor and Lessee with respect to the leasing of the Units
and supersede all prior agreements, oral or written, with respect thereto. No
variation or modification of this Lease and Appendix to the Lease shall be
valid unless in writing.
_________________________
(LESSEE'S INITIALS)
The parties hereto have executed this Lease as of the day and year
first above written.
<TABLE>
<S> <C>
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION FARAH U.S.A., INC.
By ________________________________________________ By ______________________________________
Title _____________________________________________ Title ___________________________________
By ________________________________________________ By ______________________________________
Title _____________________________________________ Title ___________________________________
Address: 8889 Gateway West
Address: Four Embarcadero Center El Paso, Texas 79925
Suite 1200
San Francisco, CA 94111
Attn: Contract Administration
</TABLE>
-11-
<PAGE> 12
Lease No. 940118
APPENDIX TO LEASE INTENDED AS SECURITY dated as of
DECEMBER 8, 1994 between BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION and FARAH U.S.A., INC.
A. UNITS.
The Units to be leased hereunder consist of new and used personal
property comprising laundry, sewing, cutting room and pressing equipment and
all modifications, replacements and substitutions; provided that Lessor
reserves the right to disapprove any equipment for leasing hereunder.
B. PURCHASE PRICE.
"Purchase Price" with respect to each Unit means the amount Lessor
pays for such Unit. Without the prior written consent of Lessor, the sum of
the Purchase Price of all Units leased hereunder shall not exceed
$10,000,000.00 (the "Maximum Purchase Price"). Further, the Purchase Price of
each Unit shall not exceed, in the case of new equipment, the amount invoiced
by Vendor therefor and, in the case of used equipment, the fair market value
for similar used equipment, and the aggregate amount of installation,
transportation and any applicable sales, use or similar front-end tax which
Lessor may agree to pay with respect to any Unit, and any software, licensing
and similar costs, shall not exceed 20% of the total Purchase Price for the
Unit.
Lessor retains the exclusive right, on a best efforts basis, to locate
entities to participate in an additional $10 million of equipment financing
under this Lease, thereby increasing the Maximum Purchase Price to up to $20
million to be financed hereunder. This right will expire on March 31, 1995.
Lessor may cancel its exclusive right prior to March 31, 1995 by written notice
to Lessee.
In no event will any Certificate contain Units with an aggregate
Purchase Price of less than $5,000.
C. TERM.
The lease term for each Unit shall consist of an Interim Term followed
immediately by a Base Term. The Interim Term for each Unit shall commence on,
and include, the date the Unit is purchased by Lessor and shall continue until,
but not include, its Base Date. The Base Term for each Unit shall commence on,
and include, its Base Date and shall continue for 60 months. The Base Date for
each Unit shall be a date specified by Lessor, which date shall not be earlier
than the Delivery Date and not later than 15 days thereafter. However, if
Lessee does not deliver the Certificate to Lessor as required by Section 1.3,
Lessor may either terminate this Lease as to such Unit or reschedule the Base
Date to the next succeeding month, in which event the provisions of this
sentence shall continue to apply.
<PAGE> 13
D. UTILIZATION PERIOD.
All Delivery Dates for Units leased hereunder must occur between the
date of this Lease and December 31, 1995, inclusive, which date may be extended
by Lessor by notice to Lessee (the "Utilization Period").
E. LOCATION.
The Units shall be located in the state of Texas, Piedras Negras and
Chihuahua, Mexico, and San Jose and Cartoga, Costa Rica, and on the Certificate
relating to each Unit shall set forth the city, county, state, and country, as
applicable, in which such Unit is to be principally located.
F. RENT.
1. Interim Rent: Lessor agrees to advance funds for the purchase
of a Unit before its Delivery Date if, with respect to each advance, Lessee
executes and delivers to Lessor, a Request for Advance substantially in the
form of Exhibit H. With respect to each such advance, Lessee shall pay rent
("Interim Rent") for each day of the Interim Term for each Unit ("Interim
Rent") at a daily rate equal to the daily equivalent of the Implicit Interest
Rate in effect on the date Lessor advances funds (the "Funding Date"), computed
on the amount of the advance. In any event, Lessee shall pay rent ("Interim
Rent") for each Unit for each day of the Interim Term for the Unit at a daily
rate equal to the daily equivalent of the Implicit Interest Rate in effect on
the date the Unit is purchased by Lessor (the "Funding Date"), computed on the
amount paid by Lessor.
Interim Rent shall be payable when billed by Lessor. Interim rent is
determined, in part, on the basis of a 360-day year and actual days elapsed
which results in a higher rent than if a 365-day year is used.
2. Base Rent. Lessee shall pay rent ("Base Rent") for each Unit
during the Base Term in arrears in 20 consecutive quarterly installments, with
the first such installment due 3 months following the Base Date.
Each Base Rent installment for the first 3 months of the Base Term of
each Unit will be an amount sufficient to amortize the Purchase Price for the
Unit over the Base Term down to the Purchase Amount at the Implicit Interest
Rate in effect on the Base Date for the Unit.
On each Adjustment Date, the Base Rent installments will be adjusted
to amortize the unamortized portion of the Purchase Price over the remaining
Base Term, assuming the Base Rent for the Unit through such Adjustment Date is
paid and applied first to interest at the applicable Implicit Interest Rate and
then to the amount, at the Implicit Interest Rate in effect on the Adjustment
Date.
"Adjustment Date" shall mean the Base Date and the same date of the
month every 3 months thereafter.
Base Rent is determined, in part, on the basis of a 360-day year and
actual days elapsed, which may result in a higher rent than if a 365-day year
is used.
<PAGE> 14
G. IMPLICIT INTEREST RATE.
The Implicit Interest Rate shall equal the sum of the Index Rate plus
3.1875 percentage points, computed on the basis of a 360-day year, actual days
elapsed, which results in more interest than if a 365-day year were used. The
Implicit Interest Rate shall be adjusted on each Adjustment Date.
"Index Rate" with respect to each Unit means the rate of interest at
which 3-month U.S. dollar deposits are offered by Bank of America National
Trust and Savings Association ("Bank") at its London Branch, London England, to
major banks ("LIBOR") at approximately 11:00 a.m. London time two business days
before the relevant Adjustment Date. Any Interim or Base Rent indexed to LIBOR
shall be subject to further adjustment at any time to reflect any reserve
requirements or other charges that may be imposed on Bank by the Board of
Governors of the Federal Reserve System or the Federal Deposit Insurance
Corporation, or any other regulatory agency. The Index Rate, as of September
19, 1994, was 5.0625% per annum.
H. OTHER CHARGES.
1. Late Payment Charges. The interest rate on late payments
shall be 16% per annum computed daily on the basis of a 360-day year and actual
days elapsed which results in more interest than if a 365-day year is used.
2. Termination Charges. Upon any termination of this Lease
before the scheduled expiration of the Base Term upon the exercise of any early
termination option, a casualty occurrence or a default, in addition to all
other amounts to be paid by Lessee, Lessee shall pay Lessor an amount equal to
i) 2% of the Balance Due in the case of (a) the exercise of an early
termination option because Lessor's Mexican withholding tax rate equals or
exceeds 10% or (b) a default, or ii) 5% of the Balance Due in the event of (c)
a casualty occurrence or (d) the exercise of an early termination option for
any other reason than (i)(a) above.
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<PAGE> 15
I. EARLY TERMINATION.
If no Event of Default exists, Lessee may, by notice to Lessor,
terminate this Lease with respect to all but not less than all the Units for
which the Lease expires on the same date. Such notice shall specify a date
(the "Termination Date") with respect to each Unit, not more than 120 and not
less than 30 days after such notice is given, which shall be a Base Rent
payment date on or after the later of the 24th month of the Base Term or
one-half of the Base Term, except that if Lessor's Mexican withholding tax rate
equals or exceeds 10%, the Termination Date may be any Base Rent payment date.
On the Termination Date, with respect to each Unit Lessee shall pay to Lessor
the Balance Due for the Unit computed as of such date and any Other Charges
required hereunder. Upon such payment, the obligation of Lessee to pay rent
hereunder with respect to the Unit after the Termination Date shall cease, the
term for the Unit shall end on the Termination Date, and Lessor shall execute
and deliver to Lessee or its assignee or nominee a bill of sale (without
representations or warranties except that the Unit is free and clear of all
claims, liens, security interests and other encumbrances by or in favor of any
person claiming by, through or under Lessor) for the Unit, and such other
documents as may be required to release the Unit from the terms of this Lease
and to transfer title thereto to Lessee or such assignee or nominee, in such
form as may reasonably be requested by Lessee, all at Lessee's expense.
J. PURCHASE PROVISION.
At the end of the lease term for a Unit, as set forth in this
Appendix, if this Lease has not been earlier terminated with respect to the
Unit, Lessee shall purchase the Unit for an amount equal to 15% of the original
Purchase Price of the Unit (the "Purchase Amount").
Upon Lessee's payment of the Purchase Amount, Lessor shall execute and
deliver, to Lessee, or its assignee or nominee, a bill of sale (without
representations or warranties except that the Unit is free and clear of all
claims, liens, security interests and other encumbrances by or in favor of any
person claiming by, through or under Lessor) for the Unit, and such other
documents as may be required to release the Unit from this Lease and to
transfer title thereto to Lessee or such assignee or nominee, in such form as
may reasonably be requested by Lessee, all at Lessee's expense.
K. SALE-LEASEBACK
Section 1.1 shall not be applicable with respect to the Units
identified in Annex A to the Bill of Sale. The following provisions shall
govern the procurement, delivery and acceptance of such Units:
1. On a date or dates to be agreed upon by Lessor and Lessee
(individually a "Delivery Date"), Lessor will purchase from and lease back to
Lessee for an amount equal to the agreed upon value of the Units identified in
Annex A to the Bill of Sale, and Lessee will sell to and lease back from Lessor
each Unit, but all Delivery Dates for such Units must be during the Utilization
Period set forth in this Appendix.
2. The obligation of Lessor to pay for each Unit is subject to
the following additional conditions:
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<PAGE> 16
(a) On or before its Delivery Date, Lessee shall execute
and deliver to Lessor a Bill of Sale in the form of Exhibit I with respect to
the Unit, dated that Delivery Date; and
(b) Lessor shall receive evidence, satisfactory to
Lessor, that each Unit is free and clear of all claims, liens, security
interests and encumbrances.
If any of the foregoing conditions is not met with respect to any such
Unit, Lessor shall have no obligation to either Lessee or any third party to
pay the purchase price for such Unit.
Any attempted or purported sale of a Unit by Lessee to Lessor after
its Delivery Date shall not be effective whether or not accepted by Lessor and
Lessor shall not incur any obligations with respect to the Unit, including the
obligation to pay for the Unit.
3. Lessee represents, warrants and covenants with respect to each
Unit that (a) Lessee has the right to sell the Unit as set forth herein, (b)
both the Unit and Lessee's right, title and interest in the Unit are, or will
be as of its Delivery Date, free from all claims, liens, security interests and
encumbrances, (c) Lessee will defend the sale against claims and demands of all
persons and (d) the purchase price of the Unit is equal to its fair market
value at the time of the sale.
L. SECURITY.
Lessee shall grant to Lessor a first perfected security interest in
all Equipment of Lessee owned as of the date of the Lease (subject to existing
purchase money liens) and a second position security interest in accounts
receivable and sixty six percent (66%) of the issued and outstanding shares of
capital stock in Dimmit Industries, S.A. de C.V. and Touche Industrial, S.A.
de C.V. pledged to Congress Financial Corporation (Southwest) ("Congress
Financial" (the "Collateral") and take such actions as may be necessary or
advisable to assure Lessor the applicable security interest in the Collateral,
including, but not limited to, execution of a security agreements in the form
of Exhibits K, L and M as soon as possible, but no later than the first
assignment by Lessee of a Purchase Agreement under this Lease or the first
Delivery Date, in the case of a sale and leaseback. The Collateral shall be
security for Lessee's obligations under this Lease or any agreement between
Lessee and Lessor or Lessor's affiliates. If there is any Event of Default,
Lessor may apply the security to cure the default. After any such application,
Lessee shall, upon demand, restore the security.
If the financing currently being provided by Congress Financial should
be substantially replaced by financing from the commercial banking division of
a national commercial banking institution, Lessee will make a reasonable effort
to cause said new financial institution to allow Lessor to have a first lien
and pledge of two thirds of issued and outstanding shares of capital stock of
Dimmit Industries, S.A. de C.V., Touche Industrial, S.A. de C. V.; provided,
Lessor shall permit Lessee to grant such national commercial banking
institution a second lien on such stock on such terms which are reasonably
acceptable to Lessor. Such reasonable effort by Lessee shall include not
making an express offering of such stock to the national commercial banking
institution as a condition of such replacement borrowing. The foregoing shall
not be deemed to diminish any of Congress Financial's first lien rights in the
stock in the event such financing remains with Congress Financial or the
ability of lessee to grant such first lien rights to any other financial
institution other than the commercial banking division of a
-5-
<PAGE> 17
national commercial banking institution which provides replacement financing
for Congress Financial. Notwithstanding the foregoing, in the event that an
uncured Event of Default exists at the time Lessee obtains replacement
financing from the commercial banking division of a national commercial banking
institution, Lessee will grant a first lien and pledge on the aforesaid stock
to Lessor and such other financial institution shall be entitled to a second
lien on such stock on such terms which are reasonably acceptable to Lessor.
M. COMMODATUM.
Dimmit Industries, S.A. de C.V. and Touche Industrial, S.A. de C.V.
will each enter into a Commodatum Agreement (herein so called) with Lessee,
Lessor and Radco Sportwear, Inc. in respect of Units to be located in Mexico.
The Commodatum Agreements have been prepared for Mexican law purposes to put
third parties on notice of Lessor's rights in respect of the Units. The
Commodatum Agreements may contain certain rights and remedies of Lessor, or
other terms and conditions which conflict with, or are inconsistent with, the
rights and remedies of Lessor or other terms and conditions set forth in the
Lease. Lessor and Lessee agree that to the extent such rights, remedies, terms
or conditions are inconsistent, the provisions of the Lease shall control.
N. ASSIGNMENT OF LEASE BY DIMMIT INDUSTRIES S.A. DE C.V..
In connection with the Lease, Dimmit Industries S.A. de C.V.
("Dimmit") has entered into that certain Assignment of Lease (the "Assignment")
pursuant to which it has granted Lessor certain rights in leasehold interests
in Mexico. Lessor and Lessee acknowledge it is not practical for Mexican law
purposes to adequately secure its interest in the Units in Mexico.
Accordingly, Lessor has requested Dimmit to enter into the Assignment to
facilitate the ability of Lessor to recover and realize value in the Units
located at the premises in Mexico and is not intended to convey to Lessor any
value in the leasehold interest as collateral for Lessee's obligations under
the Lease. This provision shall not diminish or affect any of Lessor's rights
under the Assignment.
O. FINANCING STATEMENT FOR EQUIPMENT COLLATERAL.
Lessor shall file a UCC-1 financing statement in connection with the
Lease listing as collateral "all Equipment" of Lessee. Lessor and Lessee agree
that the security interest granted in this Lease shall only relate to and
attach to Equipment owned by Lessee as of the date of this Lease and shall not
attach to Equipment acquired by Lessee from and after the date of this Lease
("Future Equipment"). In connection with Lessee's future financing of Future
Equipment from lenders other than Lessor (the "Other Lenders"), Lessor agrees
to execute and promptly deliver to Lessee, upon Lessee's written request, any
and all documents and instruments (including, without limitation, UCC-3 partial
releases) reasonably requested by Lessee to enable Lessee to grant to such
Other Lenders a first priority security interest in such Future Equipment.
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<PAGE> 18
EXHIBIT A
TO
LEASE INTENDED AS SECURITY
PURCHASE AGREEMENT ASSIGNMENT dated
_____________________________, 19__ between FARAH U.S.A.,
INC., a ______________________ corporation ("Assignor"), and
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, a
national banking association ("Assignee").
INTRODUCTION
A. Assignor has entered into a purchase agreement #___________,
dated ___________________________, 19__ , ("Purchase Agreement") between
Assignor and _______________________________("Vendor"), a copy of which
Purchase Agreement is attached hereto, providing for the sale to Assignor of
_______________________ _____________(the "Units").
B. Assignor desires that Assignee acquire the Units, as
delivered, and lease the Units to Assignor under to the terms of a Lease
Intended as Security dated as of _____________________________, 19__ between
Assignor and Assignee (the "Lease").
NOW, THEREFORE, the parties hereto agree as follows:
1. Assignor hereby assigns to Assignee all of Assignor's right,
title and interest in and to the Purchase Agreement and the Units. Assignee
hereby accepts such assignment.
2. Neither Assignor nor Assignee may amend, modify, rescind, or
terminate the Purchase Agreement without the prior express written consent of
the other party to this Purchase Agreement Assignment.
3. It is agreed that, anything herein contained to the contrary
notwithstanding, (a) Assignor shall at all times remain liable to Vendor under
the Purchase Agreement to perform all the duties and obligations of the
purchaser thereunder to the same extent as if this Purchase Agreement
Assignment had not been executed, (b) the exercise by Assignee of any of the
rights assigned hereunder shall not release Assignor from its duties or
obligations to Vendor under the Purchase Agreement, (c) Assignee shall not be
obligated to make any payment to Vendor other than an amount equal to the
purchase price of the Units as shown on the Purchase Agreement attached hereto
and (d) the obligation of Assignee to purchase the Units is conditioned upon
acceptance of the Units by Assignor and the fulfillment by Assignor of the
conditions set forth in the Lease.
4. At any time and from time to time, upon the written request of
Assignee, Assignor agrees to promptly and duly execute and deliver any and all
such further documents and take such further actions as Assignee may reasonably
request in order to obtain the full benefits of this Purchase Agreement
Assignment and of the rights and powers herein granted.
5. Assignor represents and warrants that the Purchase Agreement
is in full force and effect and enforceable in accordance with its terms and
Assignor is not in default thereunder.
6. Assignor further represents and warrants that (a) the Assignor
may assign the Purchase Agreement without Vendor's consent or, if not
assignable, consent has been obtained and is attached hereto, (b) the right,
title and interest of Assignor in the Purchase Agreement so assigned is and
will be free from all claims, liens, security interests and encumbrances, (c)
Assignor will warrant and defend the assignment against lawful claims and
demands of all persons, and (d) the Purchase Agreement contains no conditions
under which Vendor may reclaim title to any Units after delivery, acceptance
and payment therefor.
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have caused this Purchase
Agreement Assignment to be duly executed as of the day and year first written
above.
FARAH U.S.A., INC. BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION
By ________________________________ By ________________________________
Title _____________________________ Title _____________________________
By ________________________________ By ________________________________
Title _____________________________ Title _____________________________
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<PAGE> 20
EXHIBIT B
TO
LEASE INTENDED AS SECURITY
ACCEPTANCE CERTIFICATE NO.
Reference is made to the Lease Intended as Security dated as of
_______________________________________, 19__ between BANK OF AMERICA NATIONAL
TRUST & SAVINGS ASSOCIATION, as Lessor, and FARAH U.S.A., INC., as Lessee
(together with the Appendix thereto, the "Lease"; capitalized terms not
otherwise defined herein having the same meanings as in the Lease). The Lease
is incorporated herein by reference.
1. ACCEPTANCE; CONFIRMATIONS. Lessee confirms that (A) the equipment
described in Paragraph 2 (the "Units") has been delivered to, is in the
possession of and is accepted by Lessee for leasing under, and constitutes
"Units" subject to and governed by, the Lease, (B) the Units (i) have been
fully inspected by qualified agents of Lessee and are in good order, operating
condition and repair, (ii) have been properly installed (subject only to any
minor undischarged obligations of suppliers, manufacturers or installers
thereof to promptly update and conform the same as provided by their respective
agreements and warranties), (iii) meet all recommended or applicable safety
standards, (iv) are, as of the Delivery Date set forth below, available for use
and service by Lessee and Lessor, and (v) have been marked or labeled showing
Lessor's interest in the form and to the extent required by the Lease and (C)
Lessee must pay the rent and all other sums provided for in the Lease with
respect to such Units.
2. THE EQUIPMENT.
<TABLE>
<CAPTION>
Quan- Manufacturer; Make; Seria Location (Street Address, Purchase
tity Model No. Description l No. City, County, State) Price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales Tax
Transportation
Installation
Total Purchase Price
Less Progress Payments
Balance Due Vendor
</TABLE>
-3-
<PAGE> 21
3. DELIVERY DATE. The Delivery Date of the Units is
____________________________, 19_____.
4. CHATTEL PAPER COUNTERPARTS. Two counterparts of this Acceptance
Certificate have been executed by the parties hereto. One counterpart has been
prominently marked "Lessor's Copy". One counterpart has been prominently
marked "Lessee's Copy". Only the counterpart marked "Lessor's Copy" shall
evidence a monetary obligation of Lessee.
-4-
<PAGE> 22
IN WITNESS WHEREOF, Lessor and Lessee have executed this ACCEPTANCE
CERTIFICATE as of the Delivery Date set forth above.
FARAH U.S.A., INC. BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION
By ________________________________ By ________________________________
Title _____________________________ Title _____________________________
By ________________________________ By ________________________________
Title _____________________________ Title _____________________________
-5-
<PAGE> 23
EXHIBIT C
TO
LEASE INTENDED AS SECURITY
SCHEDULE TO ACCEPTANCE CERTIFICATE NO.
Reference is made to the Acceptance Certificate No. _____ with a Base
Date commencing on __________________, 19_____.
The Funding Date of the Certificate is ______________________________,
19_____.
TERM. The Term of the Lease with respect to the Units is comprised of
an Interim Term that begins on the Delivery Date and continues until
___________, 19___ (the "Base Date") and a Base Term that begins on the Base
Date and continues until _________________________, 19___.
RENT. Lessee agrees to pay Lessor rent for the Units in the total
amount of $_________________ (subject to adjustment as provided in the Lease),
comprised of Interim Rent of $__________, payable when billed by Lessor and
Base Rent payable in 20 consecutive quarterly installments, with the first such
installment due three months following the Base Date, each Base Rent
installment to be (subject to adjustment as provided in the Lease)
$_______________.
CHATTEL PAPER COUNTERPARTS. Two counterparts of this Schedule to
Acceptance Certificate have been executed by the parties hereto. One
counterpart has been prominently marked "Lessor's Copy". One counterpart has
been prominently marked "Lessee's Copy". Only the counterpart marked "Lessor's
Copy" shall evidence a monetary obligation of Lessee.
IN WITNESS WHEREOF, Lessor and Lessee have executed this SCHEDULE TO
ACCEPTANCE CERTIFICATE as of ______________________________________.
FARAH U.S.A., INC. BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION
By ________________________________ By ________________________________
Title _____________________________ Title _____________________________
By ________________________________ By ________________________________
Title _____________________________ Title _____________________________
-1-
<PAGE> 24
EXHIBIT _
TO
LEASE INTENDED AS SECURITY
REQUEST FOR ADVANCE
Reference is made to the Lease ____________ dated as of ___________
____ 19,__ between BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION as
Lessor and FARAH U.S.A., INC. as Lessee (the "Lease"). All capitalized terms
used herein shall have the same meaning as the terms have in such Lease.
Lessee hereby requests Lessor to make advances to the Vendors in the
amounts indicated below and hereby certifies that in accordance with the terms
of the Purchase Agreements the requisite amount of equipment has been or will
be delivered or the requisite amount of work has been or will be completed so
that the Vendors are entitled to progress payments in the amounts specified
below. Lessee further confirms that Lessee is obligated to pay any INTERIM
Rent provided in the Lease with respect to such advances.
<TABLE>
<CAPTION>
Amount of Date of Lessee Purchase Order Vendor's Name
Requested Advance Requested Advance Number and Date and Address
----------------- ----------------- --------------- -----------
<S> <C> <C> <C>
</TABLE>
IN WITNESS WHEREOF, Lessee has executed this Request for Advance on
_______________ __________, 19__.
FARAH U.S.A., INC.
By:_________________________________________
Title:______________________________________
By:_________________________________________
Title:______________________________________
-1-
<PAGE> 25
EXHIBIT _
TO
LEASE INTENDED AS SECURITY
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
Name ________________________________
Street
Address______________________________
City,
State, Zip___________________________
_____________________________________________
SPACE ABOVE THIS LINE FOR RECORDER'S USE
AGREEMENT AND CONSENT TO REMOVAL OF PERSONAL PROPERTY
KNOW ALL MEN BY THESE PRESENTS:
(i) The undersigned has an interest
as ___________________________________
(OWNER, MORTGAGE HOLDER, TRUST DEED
HOLDER, LESSOR, SELLER UNDER CONDITIONAL
CONTRACT OF PURCHASE AND SALE)
in the real property, described in Annex 1 (the "Real Property"):
(ii) FARAH U.S.A., INC. ("Lessee") has entered into or will enter
into a Lease Intended as Security with BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION ("Lessor"); the Lease covers certain personal property (the
"Personal Property") which is or will be located upon the Real Property, and is
described as follows:
(iii) Lessor, as a condition to entering into the Lease, requires
that the undersigned consent to the removal by Lessor of the Personal Property
from the Real Property, no matter how it is affixed thereto, and to the other
matters set forth below.
NOW, THEREFORE, for a good and sufficient consideration, receipt of
which is hereby acknowledged, the undersigned consents to the placing of the
Personal Property on the Real Property, and agrees with Lessor as follows:
-1-
<PAGE> 26
1. The Personal Property shall be considered to be personal
property and shall not be considered part of the Real Property regardless of
whether or by what means it is or may become attached or affixed to the Real
Property.
2. The undersigned has not and will not claim any interest in the
Personal Property.
3. The undersigned will permit Lessor to enter upon the Real
Property for the purpose of exercising any right it may have under the terms of
the Lease, or otherwise including, without limitation, the right to remove the
Personal Property from the Real Property; provided, however, that if Lessor, in
removing the Personal Property damages any improvements of the undersigned on
the Real Property, Lessor will at its expense, cause same to be repaired.
4. This agreement shall be binding upon the heirs, successors and
assigns of the undersigned.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
_________________ ________, 19__.
________________________________
By:_____________________________ By:_____________________________
The foregoing Agreement and Consent must be
acknowledged before a Notary
Public and returned to
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION
-1-
<PAGE> 27
ANNEX 1
TO
EXHIBIT
That certain real property in the County of _________,
State of ______________, legally described as:
-2-
<PAGE> 28
EXHIBIT _
TO
LEASE INTENDED AS SECURITY
BILL OF SALE
For valuable consideration FARAH U.S.A., INC., ("Seller") sells to
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION ("Buyer"), the property
listed on Annex A (the "Property").
Seller covenants and warrants that:
(1) it is the owner of, and has absolute title to, the Property
which is free and clear of all claims, liens and encumbrances;
(2) it has the present right, power, and authority to sell the
Property to Buyer; and
(3) this Bill of Sale is a legal, valid and binding obligation of
Seller.
Seller shall forever warrant and defend the sale of the Property to
Buyer, its successors and assigns, against any person claiming an interest in
the Property.
This Bill of Sale is binding on the successors and assigns of Seller
and inures to the benefit of the successors and assigns of Buyer.
Executed on __________________________, 19___, at ____________________
FARAH U.S.A., INC.
By _____________________________________________
Title __________________________________________
By _____________________________________________
Title __________________________________________
-1-
<PAGE> 29
ANNEX A
TO
BILL OF SALE
<TABLE>
<CAPTION>
Description of Units Location Purchase Price
- -------------------- -------- --------------
<S> <C> <C>
</TABLE>
-1-
<PAGE> 30
EXHIBIT D-1
TO
LEASE INTENDED AS SECURITY
OPINION OF LESSEE'S COUNSEL
Bank of America National Trust & Savings Association
Four Embarcadero Center, Suite 1200
San Francisco, California 94111
Attention: Contract Administration
Re: Lease Intended as Security dated as of ________________
Bank of America National Trust & Savings Association as Lessor, and
Farah USA, Inc. as Lessee
Ladies and Gentlemen:
The undersigned [is] [are] counsel for Farah USA, Inc. ("Lessee"), a
___________ corporation, having its principal place of business in ___________,
and in such capacity [has] [have] examined counterparts of the documents
executed by Lessee in connection with leasing of certain personal property
pursuant to the Lease Intended as Security (the "Lease") dated as of ________
__ 19,__, between Lessee and Bank of America National Trust & Savings
Association ("Lessor"), the Maquila Assembly Agreement (the "Maquila
Agreement") between Lessee, Corporacion Farah Costa Rica, S.A. ("Corporacion")
and the Commodatum Agreements among Lessee, Lessor, Touche Industrial S.A. DE
C.V. and Dimmit Industries S.A. DE D.V. (collectively, the "Commodatum
Agreements"). We have examined the Lease, the Maquila Agreement, the
Commodatum Agreements, the certificates of officers and representatives of
Lessee and such other documents and papers as [I] [we] have deemed necessary
for the expression of the opinions contained herein. In such examinations [I)
[we] have assumed the authenticity of all documents submitted to [me] [us] as
originals, conformity to the original documents of all documents submitted to
[me] [us] as certified or photostatic copies and the authenticity of the
originals of such latter documents.
Based on [my] [our] examination[s] mentioned above and relying upon
statements of fact contained in the documents [I] [we] have examined, [I am]
[we are] of the opinion that:
(1) Lessee is a corporation duly organized and existing under the laws
of ______________, is qualified to do business in every state in which the
quantity or nature of its business or property make such qualification
necessary, is in good standing in each such state and has full and adequate
corporate powers to carry on and conduct its business as now conducted.
(2) The Lease, the Maquila Agreement and the Commodatum Agreements have
been duly authorized, executed and delivered by Lessee and are legal, valid and
binding agreements of Lessee.
(3) Lessee has full right, power and authority to execute and deliver
the Lease, the Maquila Agreement, and the Commodatum Agreements and perform its
obligations thereunder; and the execution and delivery of the Lease, the
Maquila Agreement and the Commodatum Agreements by Lessee does not, and
performance by Lessee thereof will not, contravene any charter or by-law
provision of Lessee or of any indenture, covenant, instrument or agreement of
to which Lessee is a party or by which Lessee or any of its properties is bound
or affected.
(4) No approval, consent, exemption, authorization or other action by,
or notice to or filing with, any government authority is necessary in
connection with the execution, delivery, performance by Lessee or enforcement
by Lessor of the Lease,
-1-
<PAGE> 31
the Maquila Agreement, or the Commodatum Agreements, or if necessary the same
has been obtained as described in Annex A.
(5) There is no law, rule or regulation that would be contravened by the
execution, delivery, performance by Lessee or enforcement by Lessor of the
Lease, the Maquila Agreement or the Commodatum Agreements, nor to [my] [our]
knowledge are there, as of the date hereof, any actions, suits, or proceedings
(whether or not purportedly on behalf of Lessee) pending, or to [my] [our]
knowledge, threatened against or affecting Lessee, at law or in equity or
before any Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, which involve the
possibility of any judgment, or liability, which items are not fully covered by
insurance, or which may result in any material adverse change in the business,
operations, properties or assets or in the condition, financial or otherwise,
of Lessee, and [I] [we] have no knowledge of any default on Lessee's part with
respect to any order, writ, injunction or decree of any court or Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, that may result in such material adverse change.
(6) The Lease is enforceable against Lessee in accordance with its
terms, subject to applicable bankruptcy, insolvency, moratorium, reorganization
or other similar laws affecting creditors' rights generally now or hereafter in
effect and to the application of equitable principles if equitable remedies are
sought.
Very truly yours,
_________________________________
-1-
<PAGE> 32
EXHIBIT D-3
TO
LEASE INTENDED AS SECURITY
OPINION OF RADCO SPORTWEAR, INC. COUNSEL
Bank of America National Trust & Savings Association
Four Embarcadero Center, Suite 1200
San Francisco, California 94111
Attention: Contract Administration
Re: Lease Intended as Security dated as of ________________
Bank of America National Trust & Savings Association as Lessor, and
Farah USA, Inc. as Lessee
Ladies and Gentlemen:
The undersigned [is] [are] counsel for Radco Sportwear, Inc. ("Radco"), a
Texas corporation, which has acted as export agent on behalf of Farah USA, Inc.
("Lessee"), a ___________ corporation, having its principal place of business
in ___________, and in such capacity [has] [have] examined counterparts of the
documents executed by Lessee in connection with leasing of certain personal
property pursuant to the Lease Intended as Security (the "Lease") dated as of
________ __ 19,__, between Lessee and Bank of America National Trust & Savings
Association ("Lessor") which will be exported for use under the Assembly
(Maquila) and Technical Assistance Agreements entered into between Radco and
Touche Industrial S.A. DE C.V., a Mexican corporation and Dimmit Industries,
S.A. DE C.V., a Mexican corporation, (collectively the "Maquila Agreements").
We have examined the Lease, the Maquila Agreements, the certificates of
officers and representatives of Radco and such other documents and papers as
[I] [we] have deemed necessary for the expression of the opinions contained
herein. In such examinations [I) [we] have assumed the authenticity of all
documents submitted to [me] [us] as originals, conformity to the original
documents of all documents submitted to [me] [us] as certified or photostatic
copies and the authenticity of the originals of such latter documents.
Based on [my] [our] examination[s] mentioned above and relying upon
statements of fact contained in the documents [I] [we] have examined, [I am]
[we are] of the opinion that:
(1) Radco is a corporation duly organized and existing under the laws of
Texas, is qualified to do business in every state in which the quantity or
nature of its business or property make such qualification necessary, is in
good standing in each such state and has full and adequate corporate powers to
carry on and conduct its business as now conducted.
(2) The Maquila Agreements have been duly authorized, executed and
delivered by Radco and are legal, valid and binding agreements of Radco.
(3) Radco has full right, power and authority to execute and deliver the
Maquila Agreements and perform its obligations thereunder; and the execution
and delivery of the Maquila Agreements by Radco does not, and performance by
Radco thereof will not, contravene any charter or by-law provision of Radco or
of any indenture, covenant, instrument or agreement of to which Radco is a
party or by which Radco or any of its properties is bound or affected.
(4) No approval, consent, exemption, authorization or other action by,
or notice to or filing with, any government authority is necessary in
connection with the execution, delivery, performance by Radco.
-1-
<PAGE> 33
(5) There is no law, rule or regulation that would be contravened by the
execution, delivery, performance by Radco, nor are there, as of the date
hereof, any actions, suits, or proceedings (whether or not purportedly on
behalf of Radco) pending, or to [my] [our] knowledge, threatened against or
affecting Radco, at law or in equity or before any Federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, which involve the possibility of any judgment, or liability,
which items are not fully covered by insurance, or which may result in any
material adverse change in the business, operations, properties or assets or in
the condition, financial or otherwise, of Radco, and [I] [we] have no knowledge
of any default
-1-
<PAGE> 34
on Radco's part with respect to any order, writ, injunction or decree of any
court or Federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, that may result in such
material adverse change.
Very truly yours,
_________________________________
-1-
<PAGE> 35
EXHIBIT D-2
TO
LEASE INTENDED AS SECURITY
OPINION OF GUARANTOR'S COUNSEL
Bank of America National Trust & Savings Association
Four Embarcadero Center, Suite 1200
San Francisco, California 94111
Attention: Contract Administration
Re: Lease Intended as Security dated as of ________________
Bank of America National Trust & Savings Association as Lessor and
Farah USA, Inc. as Lessee
Ladies and Gentlemen:
The undersigned [are] [is] counsel for _____________________________
("Guarantor"), a _____________ corporation, having its principal place of
business in ___________, and in such capacity [has] [have] examined
counterparts of the Guaranty dated ___________ __, 19__ (the "Guaranty")
executed by Guarantor relating to the obligations of ____________ ("Lessee") in
connection with the leasing of certain personal property pursuant to the Lease
Intended as Security (the "Lease") dated as of _________________ between Lessee
and BA Leasing & Capital Corporation ("Lessor"). [I] [We] have examined the
Guaranty, the certificates of officers and representatives of Guarantor and
such other documents and papers as [I] [we] have deemed necessary for the
expression of the opinions contained herein. In such examinations we have
assumed the authenticity of all documents submitted to [me] [us] as originals,
conformity to the original documents of all documents submitted to [me] [us] as
certified or photostatic copies and the authenticity of the originals of such
latter documents.
Based on our examinations mentioned above and relying upon statements of
fact contained in the documents [I] [we] have examined, [I am] [we are] of the
opinion that:
1. Guarantor is a corporation duly organized and existing in good
standing under the laws of ____________, is qualified to do business in every
state in which the quantity or nature of its business or property make such
qualification necessary, is in good standing in each such state and has full
and adequate corporate powers to carry on and conduct its business as now
conducted.
2. The Guaranty has been duly authorized, executed and delivered by
Guarantor and is a legal, valid and binding agreement of Guarantor.
3. Guarantor has full right, power and authority to execute and deliver
the Guaranty and perform its obligations thereunder; and the execution and
delivery of the Guaranty by Guarantor does not, and the performance by
Guarantor thereof will not, contravene any charter or by-law provision of
Guarantor or any indenture, covenant, instrument or agreement to which
Guarantor is a party or by which Guarantor or any of its properties is bound or
affected.
4. No approval, consent, exemption or other action by, or notice
to or filing with, any government authority is necessary in connection with the
execution, delivery, performance by Guarantor or enforcement by Lessor of the
Guaranty, or
-1-
<PAGE> 36
of necessary the same has been obtained as described in Annex A.
5. There is no law, rule or regulation that would be contravened
by the execution, delivery, performance by Guarantor or enforcement by Lessor
of the Lease, nor [to [my] our knowledge] are there, as of the date hereof, any
actions, suits, or proceedings (whether or not purportedly on behalf of
Guarantor) pending, or to [my] [our] knowledge, threatened against or affecting
Guarantor, at law or in equity or before any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
which involve the possibility of any judgment, or liability, which items are
not fully covered by insurance, or which may result in any material adverse
change in the business, operations, properties or assets or in the condition,
financial or otherwise, of Guarantor, and [I] [we] have no knowledge of any
default on Guarantor's part with respect to any order, writ, injunction or
decree of any court or Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, that may
result in such material adverse change.
6. The Guaranty is enforceable against Guarantor in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting creditors' rights generally now
or hereafter in effect and to the application of equitable principles if
equitable remedies are sought.
_________________________
-1-
<PAGE> 37
EXHIBIT _
TO
LEASE INTENDED AS SECURITY
GUARANTY
WHEREAS, Bank of America National Trust & Savings Association
("Lessor"), as a condition precedent to entering into a Lease Intended as
Security dated as of ______________________________________ (the "Lease")
between Lessor and Farah U.S.A., Inc. ("Lessee") has requested that FARAH
INCORPORATED, Value Slacks, Inc. and Farah International, Inc. ("Guarantors")
unconditionally guarantee the obligations of Lessee under the Lease and under
any other agreement executed in connection with the Lease (the "Obligations").
NOW, THEREFORE, Guarantors jointly and severally unconditionally
guarantee promise to pay to Lessor, or order, on demand any and all of the
Obligations.
The liabilities of Guarantors are joint and several and separate and
independent of the Obligations, and a separate action may be brought and
prosecuted against Guarantors or any of them whether action is brought against
Lessee or whether Lessee is joined in any such action; and Guarantors waive the
benefit of any Statute of Limitations affecting their liability hereunder or
the enforcement thereof.
The liability under this Guaranty is exclusive of liability under any
other guaranties executed by Guarantors for the benefit of Lessor or any
company related to Lessor.
Guarantors authorize Lessor, without notice or demand and without
affecting their liability hereunder, from time to time, to:
(a) renew, compromise, extend, accelerate or otherwise
change the time for payment of, or otherwise change the terms of the
Obligations or any part thereof;
(b) accept and hold security for the payment of this
Guaranty or the Obligations, and exchange, enforce, waive, release, fail to
perfect, sell or otherwise dispose of any such security;
(c) apply such security and direct the order and manner
of sale thereof as Lessor in its discretion may determine; and
(d) release or substitute any one or more of the
endorsers or guarantors.
Guarantors waive any right to require Lessor to (a) proceed against
Lessee, (b) proceed against or exhaust any security held from Lessee, or (c)
pursue any other remedy in Lessor's power whatsoever. Guarantors waive any
defense arising by reason of any disability or other defense of Lessee or by
reason of the cessation from any cause whatsoever of the liability of Lessee or
any claim that Guarantors' obligations exceed or are more burdensome than those
of Lessee. Until all the Obligations are performed in full, Guarantors shall
have no right of subrogation, and waive any right to enforce any remedy Lessor
now has or may hereafter have against Lessee, and waive any interest in the
property leased and any benefit of, and any right to participate in any
security now or hereafter held by Lessor. Lessor may foreclose, either by
judicial foreclosure or by exercise of power of sale, any deed of trust
securing the Obligations and, even though the foreclosure may destroy or
diminish Guarantors' rights against Lessee, Guarantors shall be liable to
Lessor for any part of the Obligations remaining unpaid after the foreclosure.
Guarantors waive all presentments, demands for performance, notices of
non-performance, protests, notices of protests, notices of dishonor, and
notices of acceptance of this Guaranty and notices of acceptance of this
Guaranty and of the existence, creation, or incurring of new or additional
Obligations. Guarantors expressly waive any and all rights of subrogation,
reimbursement and contribution (contractual, statutory or otherwise), including
without limitation, any "claim" or right of subrogation under Title 11 of the
U.S. Code, against Lessee/Debtor arising from the existence or performance of
this guaranty or the Lease and Guarantors irrevocably waive any right to
enforce any remedy Lessor now has or may hereafter have against Lessee/Debtor,
and waives any benefit of, and any right to participate in, any security now or
hereafter held by Lessor.
In addition to all liens upon, and rights of setoff against the
moneys, securities and other property of Guarantors given to Lessor by law,
Lessor shall have a lien upon and a right of setoff against all moneys,
securities
-3-
<PAGE> 38
and other property of Guarantors now or hereafter in the possession of or on
deposit with Lessor whether held in a general or special account or deposit, or
for safekeeping or otherwise, and every such lien and right of setoff may be
exercised without demand upon or notice to Guarantors. No lien or right of
setoff shall be deemed to have been waived by any act or conduct on the part of
Lessor, or by any neglect to exercise such right of setoff or to enforce such
lien, or by any delay in so doing, and every right of setoff and lien shall
continue in full force and effect until such right of setoff or lien is
specifically waived or released by an instrument in writing executed by Lessor.
Any obligations of Lessee to Guarantors, now or hereafter existing,
including but not limited to any obligations to Guarantors as subrogees of
Lessor or resulting from Guarantors' performance under this Guaranty, are
hereby subordinated to the Obligations and any other indebtedness of Lessee to
Lessor. Such Obligations of Lessee to Guarantors, if Lessor shall so request,
shall be enforced and performance received by Guarantors as trustees for Lessor
and shall be paid over to Lessor on account of the Obligations and any other
indebtedness of Lessee to Lessor, but without reducing or affecting the
liability of Guarantors under the other provisions of this Guaranty.
Guarantors understand and acknowledges that, by virtue of this
Guaranty, they have specifically assumed any and all risks of a bankruptcy or
reorganization case or proceeding with respect to Lessee. As an example and
not by way of limitation, a subsequent assignment, rejection or modification of
the Lease in any reorganization case concerning Lessee shall not affect the
obligation of Guarantors to pay the amounts in accordance with the Lease. If
any amount guaranteed hereunder is paid by Lessee and the payee is required by
court order to return such payment to Lessee or any trustee, receiver,
custodian, liquidator or other similar officer of either of them (and is so
returned) then Guarantor shall, notwithstanding any termination or cancellation
of this Guaranty, remain fully liable with respect to any such amount as if
such amount had not been paid by Lessee.
Guarantors agree to pay all REASONABLE allocated time charges, costs
and expenses of the Legal Department of Bank of America National Trust and
Savings Association and any other attorneys' fees, expenses or out-of-pocket
costs and expenses incurred by Lessor in enforcing this Guaranty.
Guarantors acknowledge and agree that they shall have the sole
responsibility for obtaining from Lessee such information concerning Lessee's
financial condition or business operations as Guarantors may require, and that
Lessor has no duty at any time to disclose to Guarantors any information
relating to the business operations or financial condition of Lessee.
Lessor may, without notice to Guarantors and without affecting
Guarantors' obligations hereunder, assign the Obligations and this Guaranty, in
whole or in part. Guarantors agree Lessor may disclose to any prospective
purchaser and any purchaser of all or part of the Obligations any and all
information in Lessor's possession concerning Guarantors, this Guaranty and any
security for this Guaranty; PROVIDED HOWEVER THAT PRIOR TO DISCLOSING ANY
NON-PUBLIC INFORMATION CONCERNING GUARANTORS, LESSOR WILL REQUIRE SUCH
PURCHASER TO EXECUTE A CONFIDENTIALITY STATEMENT IN THE FORM OF EXHIBIT _ TO
THE LEASE.
When a single Guarantor executes this Guaranty, all words used herein
in the plural shall be deemed to have been used in the singular where the
context and construction so require and when this Guaranty is executed by more
than one Guarantor, the words Guarantor shall mean all and any one or more of
them.
FARAH, INCORPORATED shall, AS OF THE END OF EACH FISCAL QUARTER, BE
IN COMPLIANCE WITH the following covenants (all computations and definitions
being determined in accordance with generally accepted accounting principles):
(1) maintain a minimum current ratio of 1:5;
(2) maintain a tangible net worth of at least $72.5 Million for
fiscal year 1994, increasing by 50% of prior year's net income
for each succeeding fiscal year;
(3) not permit its total liabilities (excluding deferred gains) to
exceed 2 times its tangible net worth;
-4-
<PAGE> 39
(4) not permit its capital expenditures to exceed $20 million in
fiscal year 1995 and $6.5 million in any one fiscal year
thereafter;
(5) not permit its ratio of senior debt to Cash Flow (on a 4
quarter moving basis) to exceed 5:1 (Cash Flow is defined as
net income plus depreciation plus amortization minus
dividends); and
(6) maintain a minimum fixed charge coverage ratio of 1:1 (the
numerator consisting of net income plus depreciation plus
amortization plus interest expense plus lease expense minus
capital expenditures not financed and the denominator
consisting of current maturities of long term debt plus
interest expense plus lease expense).
Additionally Guarantor Farah INCORPORATED will make no dividend
payments to stockholders during the term of this Lease.
Guarantors shall deliver to Lessor financial statements in such form
and at such times as Lessor may require.
DURING THE TERM OF THE LEASE, FARAH INCORPORATED WILL DELIVER TO
LESSOR ITS AUDITED CONSOLIDATED FINANCIAL STATEMENTS WITHIN 120 DAYS OF ITS
FISCAL YEAR END AND ITS 10Q AND QUARTERLY CONSOLIDATING FINANCIAL STATEMENTS
WITHIN 60 DAYS OF THE END OF EACH OF ITS FIRST THREE FISCAL QUARTERS.
IF LESSEE IS A CORPORATION OR A PARTNERSHIP, LESSOR SHALL HAVE NO DUTY
TO INQUIRE INTO THE POWERS OF LESSEE OR THE OFFICERS, DIRECTORS, PARTNERS, OR
AGENTS ACTING OR PURPORTING TO ACT ON ITS BEHALF AND ANY OBLIGATIONS MADE OR
CREATED IN RELIANCE UPON THE PROFESSED EXERCISE OF SUCH POWERS SHALL BE
OBLIGATIONS GUARANTEED HEREUNDER.
ANY MARRIED PERSON WHO SIGNS THIS GUARANTY HEREBY EXPRESSLY AGREES
THAT RECOURSE MAY BE HAD AGAINST SUCH PERSON'S SEPARATE PROPERTY FOR ALL
OBLIGATIONS UNDER THIS GUARANTY.
THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS
OF CALIFORNIA, TO THE JURISDICTION OF WHICH THE PARTIES HERETO SUBMIT.
-5-
<PAGE> 40
IN WITNESS WHEREOF, the undersigned Guarantors have executed this
GUARANTY this _________ day of ______________ ________________, 19_____.
FARAH INCORPORATED
By: __________________________________________
Name: ________________________________________
Title: _______________________________________
(ADDRESS)
Value Slacks, Inc.
By: __________________________________________
Name: ________________________________________
Title: _______________________________________
(ADDRESS)
Farah International, Inc.
By: __________________________________________
Name: ________________________________________
Title: _______________________________________
(ADDRESS)
-6-
<PAGE> 1
EXHIBIT 13
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended November 4, 1994, November 5, 1993 and November 6, 1992
(thousands of dollars except per share data)
<TABLE>
<CAPTION>
1994 1993 1992
------------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 242,775 180,114 151,990
Cost of sales 172,300 127,020 113,509
Gross profit 70,475 53,094 38,481
Selling, general and administrative expenses 58,294 47,372 41,915
Factory conversion expenses - 4,000 -
------------- ----------- -----------
Operating income (loss) 12,181 1,722 (3,434)
Other income (expense):
Interest expense (2,479) (2,175) (2,056)
Interest income 723 723 1,096
Foreign currency transaction gains (losses) 449 (151) 1,460
Gain (loss) on sale of assets (6) 320 9
Provision for Generra bankruptcy - - (6,146)
Other, net 237 (3) (149)
------------- ----------- -----------
(1,076) (1,286) (5,786)
------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 11,105 436 (9,220)
PROVISION FOR INCOME TAXES 300 304 369
------------- ----------- -----------
Net income (loss) $ 10,805 132 (9,589)
============= =========== ===========
Net income (loss) per share $ 1.16 0.02 (1.52)
============= =========== ===========
Weighted average shares of common stock
(all periods) and common stock equivalents
(income periods only) outstanding 9,321,761 7,781,193 6,308,392
============= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 2
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 4, 1994 AND NOVEMBER 5, 1993 (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,372 2,007
Trade receivables, net of allowance
of $662 in 1994 and $805 in 1993 36,931 32,458
Inventories:
Raw materials 11,625 10,628
Work in process 16,949 15,706
Finished goods 46,628 27,838
--------- --------
Total inventories 75,202 54,172
Other current assets 9,414 6,688
--------- --------
Total current assets 123,919 95,325
Note receivable 5,910 6,267
Property, plant and equipment, net 22,872 13,220
Other non-current assets 5,350 4,079
--------- --------
$ 158,051 118,891
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 18,184 25,680
Current installments of long-term debt 874 4,509
Trade payables 22,306 20,324
Accrued compensation 5,178 3,630
Other current liabilities 9,993 7,203
--------- --------
Total current liabilities 56,535 61,346
Long-term debt, excluding current installments 5,170 1,179
Other non-current liabilities 3,103 3,627
Commitments and Contingencies (Note 8)
Deferred gain on sale of building 7,282 9,314
Shareholders' equity:
Common stock, no par value, $.01 stated
value 1994, 20,000,000 shares authorized;
issued 10,116,616 in 1994 and 8,007,900 in 1993 46,018 44,369
Additional paid-in capital 28,497 -
Cumulative foreign currency
translation adjustment (1,066) (2,481)
Minimum pension liability adjustment (1,880) (2,050)
Retained earnings 14,501 3,696
--------- --------
86,070 43,534
Less: Treasury stock, 36,275 shares in
1994 and 1993, at cost 109 109
--------- --------
Total shareholders' equity 85,961 43,425
--------- --------
$ 158,051 118,891
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended November 4, 1994, November 5, 1993 and November 6, 1992
<TABLE>
<CAPTION>
(thousands of dollars except share data) Cumulative
Foreign Minimum
Common Stock Additional Currency Pension
----------------------------- Paid-in Translation Liability
Shares Amount Capital Adjustment Adjustment
------------ -------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1991 6,862,192 $ 27,448 $ 24,327 $ 717 $ -
Net loss - - - - -
Foreign currency translation
adjustment - - - (1,768) -
Minimum pension liability adjustment - - - - (524)
Transfer of cumulative translation
adjustment to currency
transaction gain on closure
of foreign subsidiary - - - (841) -
Exercise of stock options
and other 109,725 440 15 - -
Sale of common stock 950,000 3,800 (4,077) - -
---------- -------------- ---------- ----------- -----------
BALANCE, NOVEMBER 6, 1992 7,921,917 31,688 20,265 (1,892) (524)
Net income - - - - -
Foreign currency translation
adjustment - - - (589) -
Minimum pension liabiliity adjustment - - - - (1,526)
Exercise of stock options
and other 85,983 509 24 - -
Sale of treasury shares - - (8,117) - -
Reclassification upon change
to no par common stock - 12,172 (12,172) - -
---------- -------------- ---------- ----------- -----------
BALANCE, NOVEMBER 5, 1993 8,007,900 44,369 0 (2,481) (2,050)
Net income - - - - -
Foreign currency translation
adjustment - - - 1,415 -
Minimum pension liability
adjustment - - - - 170
Exercise of stock options and other 318,716 1,631 532 - -
Sale of common stock 1,790,000 18 27,172 - -
Tax effect of employee gains
on exercise of stock options - - 793 - -
---------- ------------- ---------- ----------- -----------
BALANCE, NOVEMBER 4, 1994 10,116,616 $ 46,018 $ 28,497 $ (1,066) $ (1,880)
========== ============= ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
(thousands of dollars except share data)
Retained Treasury Stock
Earnings Shares Amount
------------ --------------- ------------
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1991 $ 13,153 904,403 $ 19,792
Net loss (9,589) - -
Foreign currency translation
adjustment - - -
Minimum pension liability adjustment - - -
Transfer of cumulative translation
adjustment to currency
transaction gain on closure
of foreign subsidiary - - -
Exercise of stock options
and other - 872 6
Sale of common stock - (250,000) (5,707)
----------- ------ -----------
BALANCE, NOVEMBER 6, 1992 3,564 655,275 14,091
Net income 132 - -
Foreign currency translation
adjustment - - -
Minimum pension liabiliity adjustment - - -
Exercise of stock options
and other - - -
Sale of treasury shares - (619,000) (13,982)
Reclassification upon change
to no par common stock - - -
----------- ------ -----------
BALANCE, NOVEMBER 5, 1993 3,696 36,275 109
Net income 10,805 - -
Foreign currency translation
adjustment - - -
Minimum pension liability
adjustment - - -
Exercise of stock options and other - - -
Sale of common stock - - -
Tax effect of employee gains
on exercise of stock options - - -
----------- ------ -----------
Balance, November 4, 1994 $ 14,501 36,275 $ 109
=========== ====== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
FARAH INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 4, 1994, NOVEMBER 5, 1993 AND NOVEMBER 6, 1992
(THOUSANDS OF DOLLARS)
1994 1993 1992
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 10,805 132 (9,589)
Adjustments to reconcile net income (loss) to net cash
from (used in) operating activities:
Depreciation and amortization 2,966 2,686 2,446
Amortization of deferred gain
on building sale (2,032) (2,032) (2,032)
Deferred income taxes (2,322) -
Gain on sale of assets 6 (320) (9)
Provision for Generra bankruptcy - - 6,146
Decrease (increase) in:
Trade receivables, net (4,473) (7,258) 2,593
Inventories (21,030) (13,883) 4,406
Other current assets (1,840) (797) (165)
Increase (decrease) in:
Trade payables 1,982 5,736 2,131
Other 5,158 (294) (1,117)
------------- ------------ -----------
Net cash from (used in) operating activities (10,780) (16,030) 4,810
------------- ------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment (8,822) (5,951) (1,457)
Proceeds from disposition of property, plant
and equipment 36 436 177
------------- ------------ -----------
Net cash used in investing activities (8,786) (5,515) (1,280)
------------- ------------ -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net increase (decrease) in short-term debt (7,791) 15,673 (5,202)
Proceeds from issuance of long-term debt 1,058 604 373
Repayment of long-term debt (3,650) (487) (1,530)
Proceeds from sale of common stock 29,352 5,881 5,879
Other (453) 836 (804)
------------- ------------ -----------
Net cash from (used in) financing activities 18,516 22,507 (1,284)
------------- ------------ -----------
Foreign currency translation adjustment 1,415 (589) (2,609)
------------- ------------ -----------
Net increase (decrease) in cash 365 373 (363)
CASH, BEGINNING OF YEAR 2,007 1,634 1,997
------------- ------------ -----------
CASH, END OF YEAR $ 2,372 2,007 1,634
============= ============ ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 2,416 3,636 2,036
Income taxes paid 457 878 1,043
Assets acquired through direct financing
loans or capital leases 3,243 852 63
Exchange of debentures 1,673 - -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 4, 1994, NOVEMBER 5, 1993 AND NOVEMBER 6, 1992
1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Farah
Incorporated (the "Parent Company") and its subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform with the 1994
presentation. The Parent Company's assets consist of investments in and
advances to subsidiaries. The Parent Company does not have any significant
amount of separate debt, credit facilities or other liabilities, except for the
8.5% convertible subordinated debentures discussed in Note 3.
INVENTORIES
Inventories are stated at the lower of first-in, first-out (FIFO) cost
or market and include purchased materials and manufacturing labor and overhead.
Market is based upon estimated selling price less costs to sell.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is
provided by the straight-line method over the estimated useful lives (Note 2)
of the related classes of assets.
Maintenance and repairs are charged to expense as incurred, and
renewals and betterments are capitalized. The cost and accumulated
depreciation of assets retired or otherwise disposed are removed from the
accounts, and the resulting gains and losses are included in operations. Gains
on assets sold and leased back are recognized over the initial lease term, net
of any obligations required by the lease agreements. See Note 8 for further
discussion.
INTANGIBLE ASSETS
At November 4, 1994, and November 5, 1993, intangible assets were
$1,550,000 and $1,610,000, respectively, and consisted primarily of goodwill
and intangible pension assets. Intangible assets, excluding intangible pension
assets, are amortized on a straight-line basis over their estimated useful
lives ranging from 2 to 30 years. Amortization of all intangible assets
approximated $260,000 in 1994, $200,000 in 1993 and $489,000 in 1992, including
amortization of debt issuance costs of approximately $70,000, $58,000 and
$361,000 in 1994, 1993 and 1992, respectively.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product.
1
<PAGE> 6
FOREIGN CURRENCIES
The Company translates its asset and liability accounts at the
exchange rate in effect at the end of the fiscal year. Income and expense
accounts are translated at average rates. Net foreign currency "translation"
gains and losses are not included in operations, but are reflected as a
separate item in the shareholders' equity section of the Consolidated Balance
Sheets. Foreign currency "transaction" gains and losses are included in the
Consolidated Statements of Operations. Also included in foreign currency
transaction gains and losses for 1992 is a gain of $841,000 due to cumulative
translation adjustments transferred from equity to operations upon the
substantial liquidation of one of the Company's foreign subsidiaries.
INCOME TAXES
Effective November 6, 1993, the Company began accounting for income
taxes under Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"), which superseded Statement of Financial
Accounting Standard No. 96, "Accounting for Income Taxes" ("SFAS 96"). Under
both statements, deferred income taxes reflect the tax effect of temporary
differences between the amount of assets and liabilities recognized for
financial reporting and tax purposes. These deferred taxes are measured by
applying currently enacted tax laws. Under SFAS 109, the effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Among other things,
SFAS 109 differs from SFAS 96 in that it limits the restrictions of recognizing
deferred tax assets and changes the criteria used to classify deferred taxes
between current or noncurrent. The adoption of FAS 109 had an immaterial
effect on the consolidated financial statements (Note 6).
INCOME (LOSS) PER SHARE
Income per share is based on the weighted average number of shares and
common stock equivalents outstanding (9,321,761 in 1994 and 7,781,193 in 1993).
Loss per share is based on the weighted average number of shares outstanding
(6,308,392 in 1992). Stock options are included as common stock equivalents
under the treasury stock method, where dilutive. Additional dilution from the
8.5% convertible subordinated debentures (Note 3), which are not common stock
equivalents, is not material.
FISCAL REPORTING PERIOD
The Company reports on a 52/53 week fiscal year, ending on the first
Friday after November 1. The 1992 financial statements contained 53 weeks.
This change was implemented in 1992 in an effort to conform the Company's
accounting periods to that of many of its customers and to minimize heavy
overtime and air freight resulting from calendar month-end deadlines that did
not match customer deadlines. The change did not have a significant impact on
results for 1992.
2
<PAGE> 7
2. Property, Plant and Equipment
PROPERTY, PLANT AND EQUIPMENT IS COMPRISED OF THE FOLLOWING:
<TABLE>
<CAPTION>
Thousands of dollars
Estimated useful --------------------------
lives (years) 1994 1993
---------------- ------------ ----------
<S> <C> <C> <C>
Factory machinery and equipment 9-12 $ 25,507 22,243
Buildings 20-50 3,552 3,375
Building improvements 3-20 4,448 4,196
Other fixtures and equipment 3-20 12,706 9,135
Land 528 528
Construction in progress 4,609 101
---------- ------
Total property, plant and equipment 51,350 39,578
Less accumulated depreciation 28,478 26,358
---------- ------
Net property, plant and equipment $ 22,872 13,220
========== ======
</TABLE>
Depreciation expense approximated $2,706,000 in 1994, $2,486,000 in 1993 and
$1,957,000 in 1992.
3. Debt
SHORT-TERM DEBT
As of November 4, 1994 the Company had one primary credit facility.
The Company's credit facility prohibits the payment of dividends by the Company
and, except for debt service of the Company's 8.5% convertible subordinated
debentures, the credit facility restricts the subsidiaries from transferring
substantially all net assets to the Parent Company through intercompany loans,
advances or dividends.
The credit facility provides up to $40,000,000 of credit through
November 3, 1995 for the Company's United States and United Kingdom operations
for either borrowings or letters of credit. Availability under the facility is
limited by formulas derived from accounts receivable, inventory and fixed
assets. The facility is secured by substantially all assets of Farah U.S.A.,
Farah U.K. and Value Slacks and is guaranteed by the parent company and each of
Farah U.S.A.'s domestic affiliates. Such guarantees are secured by
substantially all of the assets of the related affiliates. The interest rate
is prime (7 3/4% at November 4, 1994) plus 1% for borrowings and 1/6% per
month for letters of credit. An unused credit line fee of 1/2% per annum is
charged on the unused portion of the line when borrowings decrease below
$17,500,000. As of November 4, 1994 usage under the facility was $18,844,000
(including letters of credit of $1,000,000) and the excess credit line
available was $21,156,000. The credit facility restricts indebtedness and
requires the maintenance of minimum net worth (as defined), minimum working
capital and maximum capital expenditures. There are also quarterly and annual
pre-tax profit requirements for Farah U.S.A.
3
<PAGE> 8
The Company expects to meet its long-term liquidity requirements
through its current credit facility or renewals thereof, a lease line of credit
(Note 12) and through cash from operations. If the Company's growth continues
or if additional property, plant and equipment is necessary, it may be
necessary for the Company to seek alternative sources of financing, including
debt, debt convertible into equity or equity. The Company believes that it has
or will be able to obtain sufficient sources of long-term liquidity to meet its
requirements.
The following table reflects short-term debt balances and interest rates in
1994, 1993, and 1992:
<TABLE>
<CAPTION>
Thousands of dollars
------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Average outstanding balance $23,268 22,868 16,839
Maximum month-end
balance outstanding 39,995 25,680 21,785
Weighted average interest rate:
During year 9.0% 8.7% 9.7%
Year-end 8.7% 8.3% 9.0%
</TABLE>
LONG-TERM DEBT
Long-term debt at year-end is as follows:
<TABLE>
<CAPTION>
Thousands of dollars
------------------------------
1994 1993
------------- -----------
<S> <C> <C>
8.5% convertible subordinated debentures $ 1,663 -
due February 1, 2004
5% convertible subordinated debentures due
February 1, 1994 - 3,925
Secured note bearing interest at 8.4% fixed
for four years, then at prime plus 1%
through June 2004, due in monthly
installments 1,469 -
Various secured notes, bearing
interest at rates ranging from 7.25% to
8.01% and prime plus 1%, due in monthly
installments through August 1998 395 435
Obligations under capital leases 2,517 1,328
---------- ------
Total long-term debt 6,044 5,688
Less current installments 874 4,509
---------- ------
Net long-term debt $ 5,170 1,179
========== ======
</TABLE>
The 8.5% convertible subordinated debentures are convertible into the
Company's common stock at $15.2375 per share.
4
<PAGE> 9
As of November 4, 1994, long-term debt and capital lease obligations mature as
follows:
<TABLE>
<CAPTION>
Thousands of Dollars
--------------------------------
Long-term Capital Lease
Debt Obligations
------------ --------------
<S> <C> <C>
1995 $ 356 727
1996 309 719
1997 178 644
1998 160 622
1999 152 283
2000 and beyond 2,372 -
---------- ------
3,527 2,995
Less interest portion - 478
---------- ------
$ 3,527 2,517
========== ======
</TABLE>
4. Shareholders' Equity
In the fourth quarter of 1992 and second quarter of 1993, the Company
sold 1,200,000 and 619,000 shares, respectively, of its common stock to
Marciano Investments, Inc. and affiliates ("Marciano"). Proceeds from the
sales, net of expenses, were approximately $5,430,000 in 1992 and $5,958,000 in
1993. The shares acquired in these transactions, together with separately
acquired shares, gave Marciano approximately 32% of the Company's total
outstanding common stock as of November 5, 1993.
In the second quarter of 1994 the Company completed an 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. Net proceeds from the sale by the
Company were approximately $27,200,000, of which substantially all were
allocated to Additional Paid-in Capital. The remaining Marciano shares
represent approximately 12% of the Company's outstanding shares at November 4,
1994 and give them certain rights with respect to the election of directors.
In the second quarter of 1993 the Company's shareholders approved a
change in the par value of the Company's common stock from $4.00 per share to
no par value. As a result, the Company's additional paid-in-capital account
was reclassified to the common stock account during the second quarter of 1993.
In addition, during 1994 a resolution was adopted by the Company making the
stated value of the Company's common stock $.01 per share. Proceeds in excess
of the stated value for equity transactions are allocated to Additional
Paid-in-Capital.
5
<PAGE> 10
5. Employee, Executive and Director Stock Options and Awards
The Company has granted options to certain employees and directors
pursuant to employee and non-employee director stock option plans to purchase
the Company's common stock at amounts not less than the market price on the
date of the grant.
During 1994 and 1993, 104,000 and 80,000 shares, respectively, of the
Company's common stock were awarded to certain officers and directors pursuant
to the stock option and restricted stock plan. The awards vest over varying
periods ending in 1998, of which 12,500 shares vested and were issued in 1993
and 46,169 vested and were issued in 1994. The Company is recognizing the
expense related to these awards over the period of service called for by the
vesting provision of the awards.
The following table summarizes activity for such options and awards
for the years ended November 4, 1994, November 5, 1993 and November 6, 1992:
<TABLE>
<CAPTION>
Shares Options and Awards Outstanding
Available -----------------------------------
For Grant Shares Price Per Share
--------- ---------- ---------------
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1991 185,590 677,981 $ 4.00 - 10.00
Granted (38,500) 38,500 6.625 - 6.875
Exercised - (109,725) 4.00 - 5.75
Cancelled or terminated 24,912 (24,912) 5.75 - 10.00
--------- ---------
BALANCE, NOVEMBER 6, 1992 172,002 581,844 4.00 - 10.00
New shares authorized 75,000 -
Granted (187,000) 187,000 0 - 10.00
Exercised - (85,983) 0 - 10.00
Cancelled or terminated 42,500 (44,924) 6.00 - 10.00
--------- ---------
BALANCE, NOVEMBER 5, 1993 102,502 637,937 0 - 10.00
New shares authorized 350,000 -
Granted (296,500) 296,500 0- 21.375
Exercised - (330,121) 4.00 - 10.00
--------- ---------
BALANCE, NOVEMBER 4, 1994 156,002 604,316 $ 0 - 21.375
========= =========
Options included above
expire as follows:
Five years after date of grant 2,625
Ten years after date of grant 476,360
Options exercisable at
November 4, 1994 312,735
</TABLE>
6
<PAGE> 11
6. Income Taxes
Effective November 6, 1993, the Company adopted SFAS 109, of which the
effect on operations was immaterial. Similar to SFAS 96, SFAS 109 requires the
recognition of deferred tax assets, net of applicable reserves, related to net
operating loss carryforwards and certain other temporary differences.
The tax effects of temporary differences that give rise to deferred
tax assets and deferred tax liabilities at November 4, 1994 and November 6,
1993, the effective date of adoption of SFAS 109, are as follows:
<TABLE>
<CAPTION>
(Thousands of Dollars)
-------------------------------------
November 4, November 6,
1994 1993
--------------- ---------------
<S> <C> <C>
Deferred Tax Assets:
U.S. Federal NOL carryforwards $ - 1,352
Foreign NOL carryforwards 921 1,045
Deferred gain not recognized for book 2,476 3,167
Foreign tax credit carryforwards 1,740 1,710
Other accrued expenses and reserves 2,076 1,840
Other deferred tax assets 461 732
-------- -------
Total deferred tax assets 7,674 9,846
-------- -------
Deferred Tax Liabilities:
Tax over book depreciation and
amortization 913 862
Other deferred tax liabilities 331 404
-------- -------
Total deferred tax liabilities 1,244 1,266
-------- -------
Net deferred tax asset 6,430 8,580
Valuation allowance (4,108) (8,580)
-------- -------
Deferred income taxes, net 2,322 -
Less current portion (886) -
-------- -------
Long-term deferred income taxes, net $ 1,436 -
======== =======
</TABLE>
Pursuant to the requirements of SFAS No. 109, a valuation allowance
must be provided when it is more likely than not that the deferred income tax
asset will not be realized. The Company provided a valuation allowance against
the entire November 6, 1993, net deferred income tax asset. The Company
believes that, as of November 4, 1994, a sufficient history of earnings has
been established to make realization of $2,322,000 of its deferred income tax
asset more likely than not. The total decrease in the valuation allowance from
November 6, 1993, to November 4, 1994, was $4,472,000. This amount was
comprised of the following (in thousands):
<TABLE>
<S> <C>
Decrease in net deferred tax asset resulting from utilization of
NOL carryforwards and changes in temporary differences $ (2,150)
Change in estimate of realization of deferred income tax asset (2,322)
--------
Net change in valuation allowance $ (4,472)
========
</TABLE>
7
<PAGE> 12
Income (loss) before taxes and income taxes in 1994, 1993 and 1992 are shown
below:
<TABLE>
<CAPTION>
Thousands of Dollars
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Income (Loss) Before
Income Taxes
Domestic operations $ 9,415 (1,682) (11,489)
Foreign operations 1,690 2,118 2,269
--------- ------ -------
Total Consolidated $ 11,105 436 (9,220)
========= ====== =======
Income Tax Provision:
Domestic operations
Current $ 2,194 - -
Deferred (2,322) - -
--------- ------ -------
Total Domestic (128) - -
--------- ------ -------
Foreign Operations
Current 428 304 369
Deferred - - -
--------- ------ -------
Total Foreign 428 304 369
--------- ------ -------
Total Consolidated $ 300 304 369
========= ====== =======
</TABLE>
The effective tax rate differs from the statutory U.S. federal tax
rate as summarized below:
<TABLE>
<CAPTION>
Thousands of Dollars
-----------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Expected income taxes at U.S. statutory rate $ 3,776 148 (3,135)
Effect of differing tax rates in foreign countries 160 79 38
U.S. taxes on earnings of foreign subsidiaries - - 232
Unrecognized deferred tax benefits - - 2,264
State income taxes 240 - -
U.S. taxes on dividends from foreign countries 143 1,100 1,020
Recognition of previously unrecognized deferred (4,257) (981) -
tax benefits
Alternative minimum taxes 282 - -
Other (44) (42) (50)
------- ------ ------
Income taxes, as reported $300 304 369
======= ====== ======
</TABLE>
At November 4, 1994 the Company's foreign subsidiaries had net
operating loss carryforwards of $921,000 available to offset future foreign
taxable income. In addition, there were foreign tax credit carryforwards at
November 4, 1994 available to offset limited classes of future U.S. taxable
income of approximately $1,740,000, which expire beginning in 1996 through
1999.
8
<PAGE> 13
Certain of the Company's foreign subsidiaries had undistributed
retained earnings of approximately $21,300,000 at November 4, 1994. No U.S.
tax has been provided on the undistributed earnings because management intends
to indefinitely reinvest such earnings in the foreign operations. The amount
of the unrecognized deferred tax liability for these undistributed earnings is
approximately $7,200,000 at November 4, 1994.
7. Employee Benefit Plans
The Company has two retirement plans. The first is a defined benefit
plan which covers substantially all bargaining unit employees and retirees and
the second is a defined contribution plan established pursuant to Section
401(k) of the Internal Revenue Code which covers certain non-union U.S. and
Puerto Rican employees.
Under the defined benefit plan the basic monthly pension payable to a
participant upon normal retirement equals the product of the participant's
deferred monthly retirement income amount times the number of years of credited
service. Assets of the defined benefit plan are invested primarily in U.S.
government obligations, corporate bonds and equity securities.
Under the defined contribution plan, each participant may contribute
from 1% to 15% of his/her compensation. The Company matches contributions up
to 3% of the participant's compensation. In 1994, 1993 and 1992 the Company's
contribution to the Plan was approximately $413,000, $334,000 and $311,000,
respectively.
The Company's policy is to fund accrued pension cost when such costs
are deductible for tax purposes. Net periodic pension cost for the years ended
November 4, 1994, November 5, 1993 and November 6, 1992 included the following
components:
<TABLE>
<CAPTION>
Thousands of dollars
------------------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 50 35 39
Interest cost on projected benefit obligation 528 511 494
Actual return on plan assets (286) (381) (71)
Net amortization and deferral (35) (39) (370)
------ ---- ----
Net periodic pension cost $ 257 126 92
====== ==== ====
</TABLE>
9
<PAGE> 14
The following table sets forth the funded status at November 4, 1994
and November 5, 1993 of the defined benefit plan:
<TABLE>
<CAPTION>
Thousands of dollars
------------------------------
1994 1993
------------- ------------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation $ (6,941) (7,150)
Non-vested benefit obligation (102) (110)
------------- -------
Accumulated benefit obligation $ (7,043) (7,260)
============= =======
Projected benefit obligation $ (7,043) (7,260)
Plan assets at market value 5,284 5,338
------------- -------
Projected benefit obligation in excess of plan assets (1,759) (1,922)
Unrecognized transition liability being recognized over
average future service of plan participants 534 601
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 1,880 2,050
Adjustment required to recognize minimum liability (2,414) (2,651)
------------- -------
Accrued pension liability $ (1,759) (1,922)
============= =======
</TABLE>
In determining the benefit obligations and service cost of the
Company's defined benefit plan, weighted average discount rates of 8.5% and
7.5% were used in 1994 and 1993, respectively. The expected long-term rate of
return on plan assets was 9.5% in both years.
In 1994, as required by Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions," the Company adjusted its
additional pension liability to $2,414,000 to reflect the excess of the
accumulated benefits over the fair value of plan assets. The adjustment to the
accrued pension liability, which had no effect on 1994 operations, is offset by
an intangible asset of $534,000 and the minimum pension liability adjustment of
$1,880,000 included in shareholders' equity.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 106, "Employer's Accounting for Post-retirement
Benefits Other Than Pensions" which is required to be adopted in fiscal years
beginning after December 15, 1992. The Company generally does not offer any
post-retirement benefits other than those stated above; therefore, the effect
of adopting this statement had no impact on the Company.
In November, 1992, Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Post Employment Benefits," was issued.
Adoption is required for fiscal years beginning after December 15, 1993. The
Company does not believe that the adoption of this statement will have a
significant impact on the Company.
10
<PAGE> 15
8. Commitments & Contingencies
During 1988 the Company consummated a sale and leaseback of its main
El Paso, Texas manufacturing and office facility. A portion of the sale was
paid by delivery of a $7,500,000 promissory note to the Company, secured by a
second mortgage on the property. The balance of the note receivable at
November 4, 1994 and November 5, 1993 was $6,193,000 and $6,450,000,
respectively. The promissory note bears interest at 9.25% with principal and
interest payable in monthly installments through February 2007. In connection
with the sale, the Company entered into a ten-year operating lease of the
facility which is extendible for an additional ten years at the Company's
option. The Company has pledged a $2,500,000 certificate of deposit as
security for this lease. A deferred gain was recognized on the sale, of which
$7,282,000 remains at November 4, 1994 to be recognized over the remaining
years of the initial lease term.
The Company and its subsidiaries occupy certain facilities and use
certain equipment under operating leases which expire at various dates from
fiscal 1995 to 2016. The following is a summary by year of the non-cancelable
portion of future minimum lease payments under operating leases:
<TABLE>
<CAPTION>
Thousands of dollars
----------------------
<S> <C>
1995 $ 7,976
1996 7,272
1997 6,992
1998 4,256
1999 1,578
Later years 918
---------
Lease payments* $ 28,992
=========
</TABLE>
*Minimum payments have not been reduced by minimum sub-lease rental income of
$3,822,000 due in the future under non-cancelable sub-leases.
During 1992 the Company entered into a 6 1/2 year operating sub-lease
agreement for approximately one-half of its El Paso manufacturing facility.
The following is a summary by year of the non-cancelable portion of future
minimum rental income:
<TABLE>
<CAPTION>
Thousands of dollars
----------------------
<S> <C>
1995 $ 1,028
1996 1,028
1997 1,028
1998 738
-----------
Total $ 3,822
===========
</TABLE>
Rental expense for all operating leases for 1994, 1993 and 1992 was
$7,623,000, $6,860,000 and $6,837,000, respectively, (net of sub-lease income
of approximately $881,000 in 1994 and 1993 and $575,000 in 1992).
At November 4, 1994, the Company had commitments for capital
expenditures of approximately $2,858,000.
11
<PAGE> 16
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of trade accounts receivable. The
Company's customers are not concentrated in any specific geographic region but
are concentrated in the retail industry. In 1994 no one customer accounted for
more than 10% of consolidated sales. In 1993 and 1992 one customer accounted
for $22,407,000 (12.4%) and $21,721,000 (14.3%) of the Company's consolidated
sales, respectively. The Company performs ongoing credit evaluations of its
customers' financial condition. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
The Company is involved in certain legal proceedings in the normal
course of business. Based on advice of legal counsel, management believes that
the outcome of such litigation will not materially affect the Company's
Consolidated financial position or results of operations.
9. Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" ("SFAS No. 107"), requires
disclosure of the fair value of financial instruments.
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for its financial instruments. For cash
and the revolving credit facility, the carrying amounts reported in the
Consolidated Balance Sheets approximate fair value. For the note receivable
and other secured indebtedness, the interest rates approximate the current
market rates, therefore the carrying amount approximates the fair value. The
fair value of the Convertible Debentures was based upon quoted market prices at
November 4, 1994 and November 5, 1993.
The carrying amounts and fair values of the Company's financial
instruments at November 4, 1994 and November 5, 1993, are as follows (in
thousands):
<TABLE>
<CAPTION>
November 4, 1994 November 5, 1993
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash $ 2,372 2,372 2,007 2,007
Note Receivable 5,910 5,910 6,267 6,267
Revolving Credit Facility 18,844 18,844 27,246 27,246
Other secured indebtedness 1,864 1,864 435 435
Convertible Debentures 1,663 1,311 3,925 3,133
</TABLE>
12
<PAGE> 17
10. Geographic Segment Information
The Company is engaged in one business segment. This includes the
design, manufacture, distribution and sale of men's, young men's and boys'
apparel in the United States and certain foreign countries, principally in
Europe and the South Pacific. The following tabulation presents information
regarding geographic segments for the years ended 1994, 1993, and 1992.
Transfers between the United States and foreign areas are recorded at normal
selling prices. Operating profit is total revenue less operating expenses. In
computing operating profit, general corporate expenses, interest expense and
income taxes have been excluded.
<TABLE>
<CAPTION>
Thousands of Dollars
-----------------------------------------
1994 1993 1992
----------- --------- -----------
<S> <C> <C> <C>
NET SALES:
United States to unaffiliated customers $ 206,732 151,017 116,031
Transfers between areas 547 480 109
------------ ------- -------
Total United States 207,279 151,497 116,140
Europe 24,119 20,069 26,140
South Pacific 11,924 9,028 9,819
Adjustments and eliminations (547) (480) (109)
------------ ------- -------
Total $ 242,775 180,114 151,990
============ ======= =======
OPERATING PROFIT (LOSS):
United States $ 12,535 1,274 (9,494)
Europe 754 602 671
South Pacific 1,418 1,565 2,097
Adjustments and eliminations (67) (66) (65)
------------ ------- -------
Total $ 14,640 3,375 (6,791)
Net gain on sale of assets (6) 323 9
General corporate expenses (1,773) (1,810) (1,478)
Interest expense, net (1,756) (1,452) (960)
------------ ------- -------
Income (loss) before income taxes $ 11,105 436 (9,220)
============ ======= =======
IDENTIFIABLE ASSETS:
United States $ 132,238 97,811 70,328
Europe 16,342 11,813 12,997
Far East and the South Pacific 13,011 11,842 11,400
Adjustments and eliminations (3,540) (2,575) (1,588)
------------ ------- -------
Total $ 158,051 118,891 93,137
============ ======= =======
</TABLE>
13
<PAGE> 18
11. Other Matters
Generra Bankruptcy
During the second half of 1992, a former subsidiary of the Company,
Generra Sportswear Company, Inc., filed for protection under Chapter 11 of the
federal bankruptcy laws. In conjunction with the 1989 sale of Generra, the
Company retained a 5% ownership interest in Generra, as well as a $5,000,000
note receivable. A $6,146,000 provision for the loss on this investment and
note was made in 1992.
Factory Conversion Expenses
In response to the success of the Company's Savane casual product
line, the Company embarked on a program to convert large portions of its Costa
Rican and Mexican factories from dress to casual in the third quarter of 1993.
Such conversion required the rearrangement, modification or re-engineering of
certain existing equipment, as well as the installation of new equipment.
Certain other costs were also incurred as a result of the conversion. These
included testing and setup of equipment, retraining costs for employees, labor
costs associated with local statutes, additional U.S. import duties on
temporarily higher costs and additional costs resulting from customs and
practices in the countries where the Company operates. Total costs associated
with the factory conversion were approximately $4,000,000 and such amount is
reported in the caption "Factory Conversion Expenses" in the Consolidated
Statements of Operations.
12. Subsequent Event
Subsequent to fiscal year-end, the Company entered into a $10,000,000
lease line of credit which will be used to finance the purchase of laundry,
finishing, sewing and cutting equipment in Mexico, Costa Rica and the United
States. The line of credit is for five years bearing interest at LIBOR plus
3.125%. The line of credit contains certain quarterly and yearly financial
covenants.
14
<PAGE> 19
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated balance sheets of Farah
Incorporated (a Texas corporation) and subsidiaries as of November 4, 1994 and
November 5, 1993 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years ended November 4,
1994, November 5, 1993 and November 6, 1992. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Farah Incorporated
and subsidiaries as of November 4, 1994 and November 5, 1993 and the results of
their operations and their cash flows for each of the years ended November 4,
1994, November 5, 1993 and November 6, 1992 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
December 16, 1994
15
<PAGE> 20
Quarterly unaudited information for fiscal 1994 compared to fiscal 1993 is as
follows:
<TABLE>
<CAPTION>
Thousands of dollars except share data
---------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
1994
Net sales $ 51,270 66,170 61,169 64,166
Gross profit 15,384 19,468 18,479 17,144
Net income 2,011 3,530 3,732 1,532
Net income per share 0.25 0.41 0.37 0.15
Weighted average shares
of common stock and
common stock equivalents
outstanding 8,204,472 8,704,973 10,191,141 10,189,305
1993
Net sales $ 35,316 41,748 43,773 59,277
Gross profit 10,640 12,017 11,509 18,928
Net income (loss) 604 1,289 (5,179) 3,412
Net income (loss) per share 0.08 0.17 (0.65) 0.42
Weighted average shares
of common stock and common
stock equivalents outstanding 7,318,463 7,742,098 7,939,768 8,124,443
</TABLE>
- - In the second quarter of 1993, the Company sold 619,000 shares of its common
stock (see Note 4 to the consolidated financial statements for more
discussion).
- - In the second quarter of 1994, 1,790,000 shares were sold in a public
offering by the Company (see Note 4 to the consolidated financial
statements for more discussion).
- - For loss quarters, common stock equivalents are excluded from the "weighted
average shares of common stock and common stock equivalents outstanding" line.
16
<PAGE> 21
COMMON STOCK
There were 10,117,534 shares of the Company's common stock, no par
value outstanding as of January 13, 1995, owned of record by approximately
2,400 shareholders. Trading volume during fiscal 1994 averaged approximately
96,675 shares per day. The common stock is listed on the New York Stock
Exchange which is its principal U.S. trading market (trading symbol: FRA). The
Company terminated its listing on the Pacific Stock Exchange on June 26, 1991,
but the stock continues to be traded on such exchange under the symbol FRA.
The following table sets forth the high and low sales prices for the common
stock on the New York Stock Exchange for each quarterly period during the last
two fiscal years.:
<TABLE>
<CAPTION>
1994 1993
-------------------------- ----------------------
High Low High Low
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
1st Quarter $ 14 3/4 8 3/4 9 7/8 5 1/2
2nd Quarter 21 7/8 12 5/8 10 1/4 6 1/2
3rd Quarter 18 1/2 13 3/4 8 6 1/8
4th Quarter 16 1/8 8 1/4 10 7/8 6 7/8
</TABLE>
The closing sales price of the Company's common stock on the New York
Stock Exchange as of January 13, 1995 was $8.375.
As of November 4, 1994, there were $1,663,000 aggregate principal
amount of the Company's 8.5% convertible subordinated debentures due February
1, 2004 outstanding, owned of record by 30 holders.
The Company has not paid any dividends on its common stock since 1986.
The Company's U.S. credit facility prohibits the payment of dividends by the
Company.
17
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain
financial data as percentages of net sales:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Net sales:
Farah U.S.A. 78.8% 75.9% 67.1%
Farah International 14.9% 16.2% 23.7%
Value Slacks 6.3% 7.9% 9.2%
------ ------ ------
Total net sales 100.0% 100.0% 100.0%
Cost of sales 71.0% 70.5% 74.7%
------ ------ ------
Gross profit 29.0% 29.5% 25.3%
Selling, general and administrative
expenses 24.0% 26.3% 27.6%
Factory conversion expenses - 2.2% -
------ ------ ------
Operating income (loss) 5.0% 1.0% (2.3%)
Other income (expense), net (0.4%) (0.7%) 0.2%
Provision for Generra bankruptcy - - (4.0%)
------ ------ ------
Income (loss) before income taxes 4.6% 0.3% (6.1%)
Provision for income taxes (0.1%) (0.2%) (0.2%)
------ ------ ------
Net income (loss) 4.5% 0.1% (6.3%)
====== ====== ======
</TABLE>
1994 SALES COMPARED TO 1993
Sales increased from $180,114,000 in 1993 to $242,775,000 in 1994, a
$62,661,000 increase (34.8%). The increase was led by a 40.0% increase at
Farah U.S.A., whose sales increased from $136,767,000 in 1993 to $191,406,000
in 1994. Similarly, Farah International, comprised primarily of sales in the
United Kingdom and Australia, reflected sales growth of 23.9%. Sales at Farah
International, increased from $29,097,000 in 1993 to $36,043,000 in 1994.
Value Slacks, the Company's factory outlet store division, also reported
increases in sales from $14,250,000 in 1993 to $15,326,000 in 1994, a 7.6%
increase.
Sales at Farah U.S.A. accounted for 79% of the Company's consolidated
sales in 1994 compared to 76% in 1993. Unit sales increased by approximately
37%, while average unit selling prices increased by approximately 2%. The
substantial growth in Farah U.S.A. sales is
18
<PAGE> 23
primarily the result of the market's continued acceptance of the Company's
Savane brand of casual cotton no wrinkle pants. Overall, the Savane brand had
1994 sales of $114,395,000 compared to $60,387,000 in 1993, an 89% increase.
This growth is attributable to a number of factors, including the shift in
consumer preferences toward a more casual lifestyle and the ease of care that
no wrinkle products offer. In addition, the Company offered several innovative
new fabric treatments in 1994 and expanded its Savane products to include a new
line, Savane Friday Wear(R), which is designed as an upscale collection of
casual wear, both of which contributed to sales increases. The Company also
continued its national television advertising campaign which started in 1993
and which helped stimulate sales. Sales of Farah(R) and Farah Clothing Co.(R)
branded product decreased from $52,949,000 in 1993 to $47,239,000 in 1994.
Sales of these brands were primarily of dress product, although Farah branded
sales trended more toward casual no wrinkles product in 1994. The sales
decrease was caused by a shift from Farah to Savane by certain customers and by
the continuing shift in consumer demand from dress to casual products. Sales
of the Company's John Henry(R) product decreased slightly from $14,739,000 in
1993 to $14,381,000. The final significant component of Farah U.S.A.'s sales
was its private label division where sales continued to increase. The Company
expanded its business in this area because of its unique and innovative
processes in fabric finishing. Sales in this division increased from
$7,516,000 in 1993 to $15,391,000 in 1994, a 105% increase. As discussed
above, Farah U.S.A.'s overall average unit selling price was 2% higher in 1994
than 1993. The increase in the average unit selling price was due to higher
Savane sales, offset somewhat by a higher percentage of private label products
which carry a lower selling price.
Farah International accounted for 15% of the Company's consolidated
sales in 1994 and 16% in 1993. While Farah International sales as a percent of
consolidated sales declined by 1%, overall sales in Farah International
increased 24% in 1994 compared to 1993. The Company's largest international
subsidiary in 1994 was Farah U.K. with sales of $22,963,000 followed by Farah
Australia and Farah New Zealand with combined sales of $11,924,000. Sales at
Farah U.K. increased by $3,736,000 in 1994, a 19% increase. Unit sales
increased by 14% while the average unit selling price increased by 5%. The
increase in unit sales was largely due to the introduction of new Farah branded
product, higher private label sales and the introduction of the Savane brand
into the U.K. market. The average unit selling price in British Pound Sterling
increased by 4%, while the average unit selling price in equivalent U.S. Dollar
increased by 5% due to the weakening of the U.S. Dollar. Sales at Farah
Australia and Farah New Zealand increased by $2,896,000 primarily due to higher
sales of the Savane no wrinkles product and private label business. In
addition, the U.S. Dollar weakened by 6% compared to the Australian Dollar in
1994 which contributed to the higher average unit selling price in U.S. Dollar
terms. Unit sales at Farah Australia and New Zealand increased by 21% due to
increased market penetration.
Value Slacks accounted for 6% of the Company's consolidated sales in
1994 and 8% in 1993. Value Slacks sales increased 8% in 1994 compared to 1993.
As of the end of fiscal 1994, Value Slacks operated 26 U.S. stores and 7 Puerto
Rican stores compared to 20 U.S. stores and 11 Puerto Rican stores at the end
of fiscal 1993. Sales in Value Slacks U.S. stores increased by 28% in 1994
while Puerto Rican store sales decreased by 23%. Overall, the average unit
selling price decreased by 7% in 1994 and unit sales increased by 15%. The
sales price decrease was due primarily to the change in product mix in the U.S.
stores and, to a lesser extent, to more promotional activity in older locations
precipitated by growth in competition. The unit increase came from the U.S.
stores due to more stores in 1994 compared to last year. At the same time,
19
<PAGE> 24
unit sales at the Puerto Rican stores were down due to fewer stores operating
and the general economic conditions that were less favorable to the Value
Slacks business.
The Company expects that consolidated sales will grow in 1995 at a
lesser rate than in 1994. The expected increase in sales is anticipated to
result primarily from the expansion of the Company's private label business.
Growth in the Company's Savane and other branded business will be contingent
upon a number of factors, including competition in the no wrinkles casual pant
market, consumer demand for apparel products and the ability of the Company's
shirt licensee to deliver an adequate quantity of shirts to support the
Company's effort to market Savane products as a "collection" of pants and
shirts. There can be no assurances that the Company's sales growth will
continue in the future.
1993 SALES COMPARED TO 1992
Sales increased from $151,990,000 in 1992 to $180,114,000 in 1993, a
$28,124,000 increase (18.5%). Leading the increase was a 34.1% increase at
Farah U.S.A., which reported sales of $136,767,000 in 1993 compared to sales of
$101,981,000 in 1992. Sales at Farah International declined from $35,959,000
in 1992 to $29,097,000 in 1993, a 19.1% decrease. Sales at Value Slacks
increased from $14,050,000 in 1992 to $14,250,000 in 1993, a 1.4% increase.
Farah U.S.A. accounted for 76% of the Company's consolidated sales in
1993 compared to 67% in 1992. Leading the increase in sales at Farah U.S.A.
was the Savane brand. Savane, which sold primarily in the men's market in 1993
and 1992, had sales of $60,387,000 in 1993 compared to $17,230,000 in 1992, a
250% increase. Sales of Farah and Farah Clothing Co. branded product decreased
from $64,239,000 in 1992 to $52,949,000 in 1993. The Company's John Henry
product sales also decreased from $18,300,000 in 1992 to $14,739,000 in 1993.
The increase in Savane sales and decrease in sales of the other Farah brands
reflected the shift in consumer preference from dress product to casual product
and the recognition of the no wrinkles design of the Savane products. Sales of
the Company's private label division increased from $1,104,000 in 1992 to
$7,516,000 in 1993. 1993 was the first full year of sales in the private label
division. Overall, Farah U.S.A. unit sales prices were comparable between
years, with higher prices from Savane sales being offset by lower private label
unit sales prices.
Farah International accounted for 16% of the Company's consolidated
sales in 1993 and 24% in 1992. Overall there was an 11% decline in unit sales
and a 9% decline in sales prices. Farah U.K. reported sales of $19,227,000,
followed by Farah Australia and Farah New Zealand with combined sales of
$9,028,000. Sales at Farah U.K. decreased by $6,276,000 in 1993, a 25%
decrease. Unit sales decreased by 15% while unit prices declined by 12%. The
decrease in unit sales was due to softness in the U.K. economy which resulted
in lower sales of certain seasonal product and lower closeout sales in 1993
compared to 1992. While unit sales prices in British Pound Sterling increased
by 1%, sales prices in equivalent U.S. dollars decreased due to the
strengthening of the U.S. Dollar compared to the British Pound Sterling. Sales
at Farah Australia and Farah New Zealand decreased by $302,000, primarily due
to unit sales price reductions resulting from lower import duties that were
passed on to customers and the strengthening of the U.S. Dollar by over 9%
compared to the Australian Dollar in 1993. Unit sales at Farah Australia and
New Zealand increased by 7% due to more market penetration in New Zealand where
unit sales increased 52%.
20
<PAGE> 25
Value Slacks accounted for 8% of the Company's consolidated sales in
1993 and 9% in 1992. As of the end of fiscal 1993, Value Slacks operated 20
U.S. stores and 11 Puerto Rican stores compared to 14 U.S. stores and 15 Puerto
Rican stores at the end of fiscal 1992. Overall unit sales prices increased by
10% in 1993 and unit sales decreased by 8%. The unit sales price increase was
due to the opening of more U.S. stores where the mix of product sold included
more first quality merchandise and higher sales of the Savane product in 1993.
The unit decrease occurred in the Puerto Rican stores where there were fewer
stores operating and the general economic conditions were less favorable to the
Value Slacks business.
1994 GROSS PROFIT COMPARED TO 1993
Gross profit as a percent of sales was 29.0% in 1994 compared to 29.5%
in 1993. Gross profit in 1994 was 26% at Farah U.S.A., 35% at Farah
International and 48% at Value Slacks, compared to 1993 gross profit of 27% at
Farah U.S.A., 37% at Farah International and 42% at Value Slacks.
A number of factors occurred during fiscal 1994 having both a positive
and negative impact on Farah U.S.A. gross profit margins which resulted in
1994 gross profit as a percent of sales being slightly lower compared to 1993.
Contributing to an increase in the gross profit margin is the 89% growth in
sales of Savane branded products in 1994 discussed above. Savane generally
carries a higher gross profit percent than other Farah brands. The Company
also continued to reconfigure its plants to more efficiently sew the Savane
product. In addition, production levels increased over 1993 because of the
significant increase in unit sales in 1994, thus utilizing the Company's
factories at near capacity levels and increasing gross profit margins. Gross
profits were also improved by the enactment of the North American Free Trade
Agreement (NAFTA) which went into effect in January 1994 and had the effect of
reduced import duties on products produced in Mexico. The increase in the
gross profit percent was offset by an increase in the use of outside
contractors which are generally more costly and an increase in lower gross
margin private label sales.
The decrease in gross profit percent at Farah International was
largely due to lower manufacturing efficiencies in the Company's Irish plants
during the second half of fiscal 1994. The lower efficiencies were due to
start up costs associated with hiring a substantial number of new production
employees. In addition, there were more units sold at lower than standard
selling prices in Farah U.K.
The increase in gross profit percent at Value Slacks was primarily due
to the shift in stores located in the United States in 1994. The gross profit
percent in the U.S. stores was 52% in 1994 compared to 46% in 1993, and the
gross profit percent in the Puerto Rican stores was 39% in 1994 and 35% in
1993. The increase in both instances was due to fewer markdowns and higher
Savane sales. In addition, during 1994 Value Slacks implemented a new
computerized point of sale system which enabled management to more effectively
monitor and utilize inventories which helped increase the gross profit percent.
21
<PAGE> 26
The Company expects consolidated gross profit margins to decrease in
1995. The Company believes that sales of its Savane branded products will have
a modest increase in 1995; however, because of a substantial increase in
competition in no wrinkles casual wear, the Company anticipates there will be
greater pressures to control prices on certain products. In addition, the
Company also expects substantial growth in the private label division which
generally carries lower profit margins. Plans are also underway to expand the
Company's production capacities by opening a new cutting facility in El Paso
and opening new laundry and pressing facilities in Mexico and Costa Rica.
Start up costs associated with these new facilities will lower the gross profit
percentage for the first three quarters of 1995. NAFTA will continue to have a
favorable impact through lower import duties, the recent devaluation of the
Mexican Peso which will also have a favorable impact on costs when translated
to U.S. Dollars. The Company believes that such benefit will be offset in part
by increased labor and other costs in Mexico. Most of the Company's Mexican
net assets are denominated in U.S. Dollars and therefore balance sheet exposure
to currency fluctuations is minimized. Finally, the Company is entering 1995
with higher finished goods inventory levels than it traditionally has had.
This may cause lower production levels in the early part of 1995 resulting in
higher costs per unit. The Company anticipates that the lower gross profit
margins at Farah U.S.A. will have an adverse effect on net income for 1995,
particularly for the first half of the year.
1993 GROSS PROFIT COMPARED TO 1992
Gross profit as a percent of sales was 29.5% in 1993 compared to 25.3%
in 1992. Gross profit in 1993 was 27% at Farah U.S.A., 37% at Farah
International and 42% at Value Slacks, compared to 1992 gross profit of 20% at
Farah U.S.A., 35% at Farah International and 37% at Value Slacks.
The improvement in gross profit as a percent of sales at Farah U.S.A
was primarily due to higher sales of Savane product which carried a higher
gross profit percent than other Farah brands. In addition, Farah U.S.A. more
fully utilized its factories in 1993 than it did in 1992. In 1992, production
levels were increased in the first part of the year to meet projected sales
levels of dress products. While sales did increase in the first half of 1992,
they did not reach the expected levels due to lower sales of dress product at
retail. As a result, production was reduced in the second and third quarters
to levels below plan. This resulted in decreased plant efficiencies and lower
gross profit percents in 1992. With the large shift in sales from dress
product to casual product in 1993, Farah U.S.A. was able to better utilize its
factories. However, since its factories were configured primarily for dress
production, it was necessary late in the second quarter of 1993 to begin
converting large portions of Costa Rican and Mexican factories from dress to
casual. The impact of such conversion resulted in approximately $4,000,000 of
"factory conversion expenses." In addition, Farah U.S.A. incurred certain
other additional costs resulting in plant inefficiencies both before and during
the conversion process which had an adverse effect on 1993 gross profit
percents.
The improvement in gross profit percent in 1993 compared to 1992 at
Farah International was due to lower closeout sales at Farah U.K., as well as
lower markdowns in general at Farah U.K. In addition, the Company was able to
more fully utilize its Irish factories in 1993 which also contributed to the
improvement.
22
<PAGE> 27
Similar to 1994, the increase in gross profit percent at Value Slacks
in 1993 compared to 1992 was primarily due to favorable results at its U.S.
stores. The gross profit percent in the U.S. was 46% in 1993 compared to 40%
in 1992, and the gross profit percent in the Puerto Rican stores was 35% in
1993 and 34% in 1992. The increase in both instances was due to fewer
markdowns and higher Savane sales.
1994 SELLING, GENERAL & ADMINISTRATIVE EXPENSES COMPARED TO 1993
Selling, General and Administrative expenses ("SG&A") as a percent of
sales was 24.0% in 1994 compared to 26.3% in 1993. SG&A was 21% of sales at
Farah U.S.A. compared to 23% in 1993, 32% at Farah International compared to
33% in 1993 and 50% at Value Slacks compared to 45% in 1993.
The decrease in SG&A as a percent of sales at Farah U.S.A. was mainly
attributable to a revised compensation structure for salesmen and fixed costs
that did not increase in relation to increased sales levels. The Company
continued its national television advertising campaign initiated in 1993;
however, as a percent of sales, advertising decreased in 1994 even though
advertising expenses increased by over $2,900,000 compared to 1993. Finally,
SG&A associated with private label sales is lower than SG&A associated with
branded sales and this also had the effect of reducing overall SG&A as a
percent of sales.
The decrease in SG&A as a percent of sales at Farah International
occurred due to the substantial increase in sales with little change in its
general and administrative expenses. This reduction was partially offset by an
increase in advertising expenses in the U.K.
The increase in SG&A as a percent of sales at Value Slacks resulted
from higher expenses associated with the closure of certain Puerto Rico stores
and higher advertising, salaries and wages, and certain other operating costs
that did not increase in proportion to the increase in sales.
1993 SELLING, GENERAL & ADMINISTRATIVE EXPENSES COMPARED TO 1992
SG&A as a percent of sales was 26.3% in 1993 compared to 27.6% in
1992. SG&A was 23% of sales at Farah U.S.A. compared to 22% in 1992, 33% at
Farah International compared to 35% in 1992 and 45% at Value Slacks compared to
48% in 1992.
The increase in SG&A as percent of sales at Farah U.S.A. was primarily
due to increased advertising in 1993 with the introduction of a national
television advertising campaign for Father's Day 1993 to promote its Savane
products. Advertising costs increased approximately $4,600,000 at Farah U.S.A.
in 1993 compared to 1992, or an additional 2.0% of Farah U.S.A. sales.
Partially offsetting this higher expense were certain fixed costs which did not
increase in proportion to the increase in sales.
The decrease in SG&A as a percent of sales at Farah International
occurred at Farah U.K. where the number of retail outlets maintained in
customers' stores decreased. In addition, certain other cost cutting measures
at Farah U.K. reduced its SG&A percent.
23
<PAGE> 28
SG&A at Value Slacks as a percent of sales was lower in 1993 compared
to 1992. The higher percentage in 1992 resulted from higher costs associated
with the closure of certain Puerto Rican stores and higher occupancy,
advertising and labor costs as a percent of sales in the Puerto Rican stores.
OTHER INCOME (EXPENSE)
The following table illustrates the changes in interest expense, net
of interest income, over the past three fiscal years:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest expense, net (000s) $ 1,756 1,452 960
Interest expense, net,
as a % of sales .7% .8% .6%
Average debt (000s) $ 26,689 23,394 21,283
Average interest rate 9.0% 8.7% 9.7%
</TABLE>
The decrease in interest expense as a percent of sales in 1994 was due
to lower borrowings as a result of funds generated through the sale of common
stock and other sources of funds discussed further below. This was partially
offset by higher inventory levels also discussed below. The increase in net
interest expense as a percent of sales in 1993 was due to higher borrowings as
a result of higher receivable and inventory levels in support of the sales
growth of Savane.
Foreign currency transaction gains (losses) were $449,000, ($151,000)
and $1,460,000 in 1994, 1993 and 1992, respectively. Foreign currency
transaction gains (losses) related primarily to the strength of the U.S. Dollar
compared to the British Pound Sterling. Included in 1992 is an $841,000
currency gain which was recognized upon the closure of one of the Company's
foreign subsidiaries.
Excluding net interest expense and foreign currency transaction gains
(losses), there was $231,000 and $317,000 of other income in 1994 and 1993,
respectively, and $6,286,000 of other expense in 1992. Included in 1992 was a
provision of $6,146,000 related to the bankruptcy of Generra Sportswear
Company, Inc., a former subsidiary of the Company. Generra filed for
protection under Chapter 11 of the federal bankruptcy laws during the second
half of 1992. In conjunction with the 1989 sale of Generra, the Company
retained a 5% ownership interest in Generra and obtained a $5,000,000 note
receivable.
24
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
Key statistics demonstrating financial condition of the Company are as
follows:
<TABLE>
<CAPTION>
Thousands of dollars
---------------------
1994 1993
---- ----
<S> <C> <C>
Working capital $67,384 $32,773
Total debt 24,228 31,368
Long-term debt 5,170 1,179
Shareholders' equity 85,961 43,425
Current ratio 2.2:1 1.5:1
Long-term debt-to-equity .06:1 .03:1
Total debt-to-equity .28:1 .72:1
Days sales in accounts receivable 51 48
Inventory turnover 2.7 2.7
</TABLE>
The improvement in the Company's liquidity demonstrated by the above
statistics was due to improvements in cash flows generated from operating
activities and the sale of 1,790,000 shares of the Company's common stock in
April 1994 with corresponding net proceeds of approximately $27,200,000. These
were partially offset by increases in inventories and accounts receivable,
purchases of property, plant and equipment of $8,822,000 and the repayment of
short-term debt of $7,791,000.
While working capital increased by $34,611,000 certain components of
working capital required cash in 1994. These included trade receivables which
increased by $4,473,000 due to the increase in sales. Inventories increased by
$21,030,000 with the majority of the increase occurring at Farah U.S.A. where
sales increased by 40% in 1994. Higher inventory levels were in support of
such higher sales. Accounts payable and accrued expenses increased by
$6,320,000 as a result of higher raw material inventories and other higher
miscellaneous accrued expenses.
25
<PAGE> 30
The Company's primary Credit Agreement, which expires November 3,
1995, provides up to $40,000,000 of credit. Farah U.S.A., Value Slacks and
Farah U.K. are parties to the Credit Agreement. Availability under the
Agreement is limited by formulas derived from accounts receivable, inventory
and fixed assets. The Credit Agreement is secured by substantially all of the
Company's assets, except for certain fixed assets, and is guaranteed by Farah
Incorporated and each of Farah U.S.A.'s domestic affiliates. As of November 4,
1994, usage under the Credit Agreement was $18,844,000 and available credit was
$21,156,000. The maximum credit available to Farah U.K. is $2,500,000 and the
maximum credit that may be used related to inventory is $25,000,000 in the U.S.
and $1,750,000 in the U.K. In months where receivables are the lowest and
inventories are the highest, availability of credit under the Agreement is the
lowest. Typically, the months for lowest credit availability are January,
February, July and August.
There are three financial covenants for both Farah Incorporated
consolidated and Farah U.S.A. in the Credit Agreement: minimum working capital,
minimum tangible net worth and maximum capital spending. Furthermore, there is
a quarterly and annual minimum profitability covenant for Farah U.S.A. As of
November 4, 1994 the Company was in compliance with all of these covenants.
The Agreement also prohibits the payment of dividends and, except to service
its convertible subordinated debentures, it restricts the subsidiaries from
transferring substantially all their net assets to the Parent Company, Farah
Incorporated, through intercompany loans, advances or dividends. See Note 3 to
the Consolidated Financial Statements for further discussion.
Subsequent to fiscal year-end, the Company entered into a $10,000,000
lease line of credit which will be used to finance the purchase of laundry,
finishing, sewing and cutting equipment in Mexico, Costa Rica and the United
States. The line of credit is for five years bearing interest at LIBOR plus
3.125%. The line of credit contains certain quarterly and yearly financial
covenants. The Company believes that its borrowing availability from its Credit
Agreement, its cash from operations and liquidity which will be provided from
the lease line of credit will be adequate for fiscal 1995 anticipated liquidity
requirements. In addition, the Company believes that it will be able to renew
or replace the Credit Agreement when it expires in November 1995 with other
financing on similar terms, although the Company has not obtained any
commitment for such financing. In fiscal 1995, major liquidity requirements
will be the financing of anticipated growth and capital expenditures.
The Company expects to meet its long-term liquidity requirements
through its previously discussed Credit Agreement or renewals thereof and
through cash from operations. If the Company's growth continues or if
additional property, plant and equipment is necessary, it may be necessary for
the Company to seek alternative sources of financing, including debt, debt
convertible into equity or equity. The Company believes that it has or will be
able to obtain sufficient sources of long term liquidity to meet its
requirements.
Capital expenditures for fiscal years 1994, 1993 and 1992 were
$12,065,000, $6,800,000 and $1,500,000, respectively. As of November 4, 1994
material commitments for capital expenditures were approximately $2,858,000 and
are expected to be financed primarily by the lease line of credit discussed
above. The Company expects that capital expenditures in fiscal 1995 will not
exceed $15,000,000 and will be primarily for factory machinery and information
equipment and related software. The Company is in the process of adding three
new manufacturing facilities which will become operational in the second and
third quarters of fiscal
26
<PAGE> 31
1995. These will be financed primarily by the lease line of credit discussed
above, together with cash generated from operations and borrowing availability
from the Company's Credit Agreement.
Most of Farah U.S.A.'s major fabric suppliers provide 60-day terms,
subject to certain limits. During fiscal 1994, the maximum outstanding balance
at any month-end under these credit terms was $10,375,000.
Inflation did not materially impact the Company in fiscal 1994, 1993 or 1992.
27
<PAGE> 32
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
(thousands of dollars)
Net sales $ 242,775 180,114 151,990 151,202 139,616
Cost of sales 172,300 127,020 113,509 112,308 115,468
Selling, general and
administrative expenses 58,294 47,372 41,915 41,687 41,494
Factory conversion expenses - 4,000 - - -
Operating income (loss) 12,181 1,722 (3,434) (2,793) (17,346)
Other income (expense):
Foreign currency gains (losses) 449 (151) 1,460 (832) 851
Gains (losses) on asset sales (6) 320 9 127 9,697
Provision for Generra bankruptcy - - (6,146) -
Other, net 237 (3) (149) (559) 1,568
Interest expense, net (1,756) (1,452) (960) (1,145) (1,199)
Income (loss) before income taxes 11,105 436 (9,220) (5,202) (6,429)
Income tax provision 300 304 369 306 168
Net income (loss) 10,805 132 (9,589) (5,508) (6,597)
PER SHARE INFORMATION:
Net income (loss) $ 1.16 0.02 (1.52) (0.93) (1.06)
Book value per share based on shares
outstanding at balance sheet dates $ 8.53 5.45 5.37 7.70 8.72
Shares outstanding 10,080,341 7,971,625 7,266,642 5,957,789 5,950,568
FINANCIAL POSITION AT YEAR-END:
(thousands of dollars)
Current assets $ 123,919 95,325 71,808 79,583 88,942
Property, plant and equipment, net 22,872 13,220 10,376 10,970 11,336
Other assets, non-current 11,260 10,346 10,953 16,274 19,288
Total assets 158,051 118,891 93,137 106,827 119,566
Current liabilities 56,535 61,346 34,983 38,358 41,645
Long-term debt 5,170 1,179 4,452 5,192 6,176
Other liabilities 3,103 3,627 3,346 4,046 4,467
Deferred gain on sale of building 7,282 9,314 11,346 13,378 15,411
Shareholders' equity 85,961 43,425 39,010 45,853 51,867
Total liabilities and shareholders' equity 158,051 118,891 93,137 106,827 119,566
Current ratio 2.2 to 1 1.5 to 1 2.1 to 1 2.1 to 1 2.1 to 1
</TABLE>
<PAGE> 1
EXHIBIT 21
FARAH INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT
NAME INCORPORATION OWNED
<S> <C> <C>
PARENT:
Farah Incorporated
SUBSIDIARIES OF FARAH INCORPORATED:
Farah U.S.A., Inc. Texas 100%
Farah International, Inc. Texas 100%
Value Slacks, Inc. Texas 100%
Farah (Far East) Limited Hong Kong 100%
Exportadora Triple Siete, S.A. Costa Rica 100%
SUBSIDIARIES OF FARAH U.S.A., INC.:
Farah Manufacturing Services, Inc. Texas 100%
Farah Manufacturing Company, Inc. Texas 100%
Farah Manufacturing Company of
New Mexico, Inc. New Mexico 100%
Farah Clothing Company, Inc. Texas 100%
FTX, Inc. Texas 100%
Radco Sportswear, Inc. Texas 100%
Dimmit Industries, S.A. de C.V. Mexico 100%
Touche Industrial, S.A. de C.V. Mexico 100%
SUBSIDIARIES OF FARAH INTERNATIONAL, INC.:
Farah Manufacturing (U.K.) Limited England 100%
Farah (Australia) Pty. Limited Australia 100%
Farah Limited (Ireland) Ireland 100%
Farah (New Zealand) Limited New Zealand 100%
SUBSIDIARIES OF VALUE SLACKS, INC.:
Value Clothing Company, Inc. Texas 100%
SUBSIDIARIES OF FARAH (FAR EAST) LIMITED:
Corporacion Farah - Costa Rica, S.A. Costa Rica 100%
Farah (Fiji) Limited Fiji 50%
Farah (Exports) Ireland Ireland 100%
South Pacific Investments Limited Fiji 50%
SUBSIDIARY OF FARAH LIMITED (IRELAND):
Farah Manufacturing Company
(Ireland) Limited Ireland 100%
</TABLE>
<PAGE> 1
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 No. 2-75949, 33-11930 and 33-46661.
ARTHUR ANDERSEN LLP
Dallas, Texas
January 27, 1995
1
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000034501
<NAME> FARAH INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-04-1994
<PERIOD-END> NOV-04-1994
<CASH> 2,372
<SECURITIES> 0
<RECEIVABLES> 36,931
<ALLOWANCES> 662
<INVENTORY> 75,202
<CURRENT-ASSETS> 123,919
<PP&E> 51,350
<DEPRECIATION> 28,478
<TOTAL-ASSETS> 158,051
<CURRENT-LIABILITIES> 56,535
<BONDS> 1,663
<COMMON> 46,018
0
0
<OTHER-SE> 39,943
<TOTAL-LIABILITY-AND-EQUITY> 158,051
<SALES> 242,775
<TOTAL-REVENUES> 242,775
<CGS> 172,300
<TOTAL-COSTS> 172,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,479
<INCOME-PRETAX> 11,105
<INCOME-TAX> 300
<INCOME-CONTINUING> 10,805
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,805
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
