<PAGE>
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 3, 1995
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. Yes X No ___
As of January 12, 1996 there were outstanding 10,155,568 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
12, 1996) was $50,558,070.
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 3, 1995
- Parts I and II (attached as Exhibit 13 hereto).
Proxy Statement Dated January 29, 1996 - Part III.
THE EXHIBIT INDEX IS ON PAGE 16 OF FORM 10-K
<PAGE>
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. (73% of consolidated
revenue for fiscal 1995) manufactures and sells a variety of casual and dress
apparel to retailers throughout the United States. Farah International (20% of
consolidated revenue for fiscal 1995) 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 (7% of
consolidated revenue for fiscal 1995) 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 3, 1995, Value Slacks had 38 retail stores, all located in the United
States.
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, 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 also
sells products under the Farah/Farah Clothing Company and John Henry labels and
private label products 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. Savane
is also offered in certain dress products. The Savane product line is primarily
targeted to the 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 products, the Company offers slacks for boys and shorts under
the Savane label and is in process of introducing women's slacks in 1996.
Farah/Farah Clothing Company -- These labels are used primarily for
dress slacks and suit separates made from blended fibers. The Company also sells
a line of casual slacks with these labels which are made from 100% cotton. Some
casual slacks with these labels are fabricated using wrinkle resistant
technologies. Farah/ Farah Clothing Company are primarily sold to department
stores and national chains.
John Henry -- This label is primarily 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 wrinkle
resistant technologies.
Private Label -- The Company primarily produces casual wrinkle
resistant product for various retailers using their own labels. Such product is
produced to customers' specifications.
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 90% of
branded sales in fiscal 1995 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. In fiscal 1992, Farah U.S.A. established
a private label division to manufacture and sell private label products for
certain customers. Sales in the private label division represented 17% of Farah
U.S.A. sales in fiscal 1995.
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 predominately from
domestic 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 if
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 the Company's cloth cutting facility in El
Paso, Texas. Quality control procedures are in place to test for flaws,
coloring, stretch, shrinkage and other characteristics.
After fabrics are cut, they are 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 all of its products. All products are
then finished at the Company's laundry and pressing facilities in the United
States, Mexico or Costa Rica. In fiscal 1995 approximately 65% of Farah U.S.A.'s
total production was sewn in its own factories, with the balance sewn by
independent contractors. Farah U.S.A. performs most sewing and finishing
offshore in order to keep production costs low. The offshore plants pack the
finished garments and ship them back to El Paso for distribution to Farah
U.S.A.'s customers.
Orders from retailers are filled from inventory at the Company's
facility in El Paso. Most shipments to retailers are sent directly to 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 uses 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 operates with 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. employs regional corporate account executives who are
directly responsible for certain major retail accounts. Farah U.S.A. employs a
field sales force who 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 that carry the Company's branded product and provide
services, such as training and education of in-store sales personnel about the
Company's 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.
Advertising. Farah U.S.A.'s advertising program is comprised of
national media advertising and participation in cooperative advertising programs
with retailers. In fiscal 1994 and 1995, Farah U.S.A. ran national television
advertising campaigns for the Savane product line. These advertisements ran on
major networks and cable television. The Company is in process of reducing its
national advertising campaigns in 1996 in favor of more cost effective print
media and cooperative advertising. 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 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.
Several of Farah's main competitors entered the wrinkle resistant
casual slacks market in 1994. Levi introduced a Dockers(R) label, all cotton,
wrinkle resistant product line and devoted substantial financial resources to
develop and market this new line. Levi and certain other competitors have larger
financial and marketing resources and, therefore, offer significant competition
to the Farah and Savane labels. Such competition adversely affected the price of
Savane products and resulted in a reduction of Farah's share of the wrinkle
resistant slacks market in 1995.
<PAGE>
Farah International
Farah International sells apparel in its primary markets; 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. The Company continually examines the cost
effectiveness of its suppliers, including Company-owned facilities, and from
time to time shifts production to lower cost suppliers. Approximately 85% of
1995 production was sourced from the Company-owned manufacturing facilities. The
Company products are sold internationally primarily under the Farah and Savane
labels, as well as private labels.
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 1995 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.
The United Kingdom is Farah International's principal market and in
fiscal 1995 accounted for approximately 65% 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 products than branded
products. Farah International's primary distribution channels in the United
Kingdom are large retail outlets and independent men's wear stores.
Farah Australia and Farah New Zealand accounted for approximately 33%
of Farah International's sales in fiscal 1995. 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.
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
38 retail outlet stores as of November 3, 1995, all of which were located in the
United States. The stores are generally 2,000 to 5,000 square feet and are
generally located in suburban outlet malls or strip centers.
In prior years, the majority of Value Slacks' stores were in Puerto
Rico. As the factory outlet store concept gained acceptance in the United
States, Value Slacks began reducing operations in Puerto Rico and expanding in
the United States. By the end of the fourth quarter of 1995, all Puerto Rican
stores were closed.
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 1995. In fiscal 1995, Federated Department
Stores accounted for $30,191,000 (12.5%) of the Company's consolidated sales.
<PAGE>
Trademarks
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.
Backlog
Many of Farah U.S.A.'s major customers participate in an inventory
replenishment concept referred to as "Quick Response" as previously discussed.
As a result, customers tend to place orders close to delivery dates. Because of
the trend toward Quick Response, orders which are received are not necessarily
firm commitments. Therefore, the Company does not consider customer orders to be
"backlog" or necessarily an indication 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 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." With the advent of the North American Free
Trade Agreement (NAFTA), import quota regulations are not as significant as in
prior years.
Employees
As of November 3, 1995, the Company had approximately 5,200 employees.
As of that date, Farah U.S.A., Farah International and Value Slacks had
approximately 4,500, 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 115 of Farah U.S.A.'s United States employees are members of the
Amalgamated Clothing and Textile Union and approximately 1,830 of its employees
are members of various unions in Mexico. The collective bargaining agreement
with the Company's United States employees expires in February 1997. The
collective bargaining agreements for the Company's employees in Mexico expired
in December 1995 and January 1996, and are currently under negotiation. 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 capital expenditures, earnings or competitive position of
the Company.
Derivative Financial Instruments
In 1995, the Company did not utilize derivative financial instruments.
<PAGE>
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 Garment manufacturing plant 124,000 Owned
Cartago, Costa Rica Garment manufacturing plant 77,000 Owned
Galway & Kiltimagh, Ireland Two garment manufacturing plants 59,000 Owned
Auckland, New Zealand Office/Warehouse 9,000 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 193,000 Leased
Ballyhaunis, Ireland Garment manufacturing plant 24,000 Leased
Sydney, Australia Office/Warehouse 29,000 Leased
Suva, Fiji Two garment manufacturing plants 35,000 Leased (4)
Witham, United Kingdom Office/Warehouse 57,000 Leased
Retail locations in the
United States 38 Retail stores 117,000 Leased
<FN>
(1) See Note 8 of Notes to Consolidated Financial Statements for a
discussion of lease terms.
(2) Plant currently used for storage. 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.
</FN>
</TABLE>
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
<PAGE>
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 22 of the Company's Annual Report to Shareholders for the
fiscal year ended November 3, 1995 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 23 of the Company's Annual Report to
Shareholders for the fiscal year ended November 3, 1995 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 24 through 28 of the Company's Annual Report to
Shareholders for the fiscal year ended November 3, 1995 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 3, 1995 on page 8 through 22 are incorporated herein
by reference:
Quarterly Data (Unaudited) - Supplementary Data for
fiscal years 1995 and 1994
Consolidated Statements of Operations - Years ended November
3, 1995, November 4, 1994 and November 5, 1993
Consolidated Balance Sheets - November 3, 1995 and November 4, 1994
Consolidated Statements of Shareholders' Equity - Years
ended November 3, 1995 November 4, 1994 and November 5, 1993
Consolidated Statements of Cash Flows - Years ended
November 3, 1995, November 4, 1994 and November 5, 1993
Notes to Consolidated Financial Statements - November 3, 1995,
November 4, 1994 and November 5, 1993
Report of Independent Public Accountants
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
<PAGE>
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 and 5, and "Performance of the
Common Stock" and "Stock Option and Compensation Committee Report on Executive
Compensation" on pages 12 and 13 of the Company's Proxy Statement dated January
29, 1996 prepared in connection with its 1996 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 1996 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 1996 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, 10 and 11, respectively, of the Company's Proxy
Statement prepared in connection with its 1996 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 3, 1995 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
3, 1995, are filed herewith and the remainder of the Annual Report to
Shareholders for the fiscal year ended November 3, 1995 is furnished to the
Commission for its information):
Consolidated Statements of Operations - Years ended November 3, 1995,
November 4, 1994 and November 5, 1993
Consolidated Balance Sheets - November 3, 1995 and November 4, 1994
Consolidated Statements of Shareholders' Equity - Years ended
November 3, 1995, November 4, 1994 and November 5, 1993
Consolidated Statements of Cash Flows - Years ended
November 3, 1995, November 4, 1994 and November 5, 1993
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Quarterly Data (unaudited) - Supplementary Data for
fiscal years 1995 and 1994
Selected Financial Data for fiscal years ended 1991 to 1995
<PAGE>
(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 17, 1988 (filed as
Exhibit 3.1 to Form S-3 as of March 25, 1994).
* 3.2 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 August 2, 1994
(filed as Exhibit 10.52 to Form 10-Q dated August 5, 1994).
* 10.2 Amended and Restated Employment Agreement dated August 25, 1994
(filed as Exhibit 10.3 to Form 10-K dated November 4, 1994).
* 10.3 Amended and Restated Employment Agreement dated August 25, 1994
(filed as Exhibit 10.4 to Form 10-K dated November 4, 1994).
* 10.4 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).
* 10.5 Guarantee of Lease by Farah Incorporated (filed as Exhibit 6 to Form 8-K
dated May 25, 1988).
* 10.6 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).
* 10.7 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).
<PAGE>
* 10.8 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).
* 10.9 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).
* 10.10 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).
* 10.11 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).
* 10.12 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).
* 10.13 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).
* 10.14 Form of Pledge and Security Agreement, dated August 2, 1990 (filed as
Exhibit 10.58 to Form 10-K as of October 31, 1990).
* 10.15 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).
* 10.16 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).
* 10.17 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).
* 10.18 Form of Guarantee and Waiver, dated August 2, 1990 (filed as Exhibit
10.64 to Form 10-K as of October 31, 1990).
* 10.19 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).
* 10.20 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).
* 10.21 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).
<PAGE>
* 10.22 Form of Pledge and Security Agreement, dated August 2, 1990 (filed as
Exhibit 10.71 to Form 10-K as of October 31, 1990).
* 10.23 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).
* 10.24 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).
* 10.25 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).
* 10.26 Form of General Security Agreement, dated August 2, 1990 (filed as
Exhibit 10.78 to Form 10-K as of October 31, 1990).
* 10.27 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).
* 10.28 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).
* 10.29 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).
* 10.30 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).
* 10.31 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).
* 10.32 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).
* 10.33 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).
* 10.34 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).
* 10.35 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).
* 10.36 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).
* 10.37 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).
<PAGE>
* 10.38 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).
* 10.39 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).
* 10.40 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).
* 10.41 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).
* 10.42 Deferred Compensation Agreement dated December 20, 1993 (filed as
Exhibit 10.45 to Form 10-K as of November 4, 1994).
* 10.43 Deferred Compensation Agreements dated December 16, 1994 (filed as
Exhibit 10.46 to Form 10-K as of November 4, 1994).
* 10.44 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).
* 10.45 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).
* 10.46 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).
* 10.47 Lease Agreement between Farah U.S.A., Inc. and Bank of America National
Trust & Savings Association dated December 8, 1994 (filed as Exhibit
10.50 to Form 10-K dated November 4, 1994).
* 10.48 Amendment No. 13 dated March 7, 1995 to Accounts Financing Agreement
dated August 2, 1990 between Congress Financial Corporation
(Southwest) and Farah U.S.A., Inc. (filed as Exhibit 10.51 to Form
10-Q as of May 5, 1995).
* 10.49 Amendment No. 14 dated April 5, 1995 to Accounts Financing Agreement
dated August 2, 1990 between Congress Financial Corporation (Southwest)
and Farah U.S.A., Inc. (filed as Exhibit 10.52 to Form 10-Q as of
August 4, 1995).
* 10.50 Amendment No. 15 dated August 1, 1995 to Accounts Financing Agreement
dated August 2, 1990 between Congress Financial Corporation (Southwest)
and Farah U.S.A., Inc. (filed as Exhibit 10.53 to Form 10-Q as of
August 4, 1995).
* 10.51 First Amendment dated August 25, 1995 to Lease Agreement between Farah
U.S.A., Inc. and Bank of America National Trust & Savings Association
dated December 8, 1994 (filed as Exhibit 10.54 to Form 10-Q as of
August 4, 1995).
* 10.52 First Amendment dated August 25, 1995 to Guaranty between Farah
U.S.A., Inc. and Bank of America National Trust & Savings Association
dated December 8, 1995 (filed as Exhibit 10.55 to Form 10-Q as of
August 4, 1995).
10.53 Amended and Restated Employment Agreement dated July 10, 1995.
10.54 Form of Deferred Compensation Agreements dated December 21, 1995.
*Incorporated herein by reference.
13 Annual Report to Shareholders for Fiscal Year 1995
21 Subsidiaries of Farah Incorporated
23 Consent of Independent Public Accountants
27 Financial Data Schedule
<PAGE>
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/ James C. Swaim
------------------------------------------
James C. Swaim
Principal Financial Officer
/s/ Russell G. Gibson
------------------------------------------
Russell G. Gibson
Principal Accounting Officer
Dated: January 29, 1996
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 29, 1996.
/s/ Richard C. Allender /s/ Michael R. Mitchell
- ------------------------------------ -----------------------------------
Richard C. Allender Michael R. Mitchell
Principal Executive Officer, Director Director
/s/ Clark L. Bullock /s/ Timothy B. Page
- ------------------------------------ -----------------------------------
Clark L. Bullock Timothy B. Page
Director Director
/s/ Christopher L. Carameros /s/ Charles J. Smith
- ------------------------------------ -----------------------------------
Christopher L. Carameros Charles J. Smith
Director Director
/s/ Sylvan Landau /s/ James C. Swaim
- ------------------------------------ -----------------------------------
Sylvan Landau James C. Swaim
Director Director
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-K INDEX TO ATTACHED EXHIBITS
(All Exhibits listed are on pages 17 through 59)
Page
Numbers
Exhibit 10.53 Amended and Restated Employment Agreement 17
dated July 10, 1995.
Exhibit 10.54 Form of Deferred Compensation Agreements dated 25
December 21, 1995.
Exhibit 13 Annual Report to Shareholders for Fiscal 29
Year 1995.
Exhibit 21 Subsidiaries of Farah Incorporated. 57
Exhibit 23 Consent of Independent Public Accountants. 58
Exhibit 27 Financial Data Schedule 59
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into by and between Farah
Incorporated, a Texas corporation (the "Company"), and Richard C. Allender (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 term of this Agreement shall commence on the date hereof and
shall continue for a three (3) year term (the "Initial Term"). The Agreement
shall be renewed automatically on a daily basis so that the term of this
Agreement shall continue for a full three year term. This term of this Agreement
may be terminated as provided in Section 4.
(c) The Executive shall serve as President and Chief Executive Officer
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 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 $325,000, 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.
(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 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 split-dollar life insurance policy shall be not greater than
$121,000 per annum, unless otherwise agreed by the Company. Except as otherwise
provided in Section 5 of this Agreement, the Company shall be obligated during
the term of this Agreement to pay a minimum of three annual premium payments of
$121,000, or an aggregate amount of premiums of $363,000, including any payments
made during the Initial Term or any term after the Initial Term (the "Minimum
Premium Commitment").
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 three (3) years following termination of employment from any
reason whatsoever, 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.
(c) (i) Executive agrees that he will not (without the prior written
consent of the Company) at any time during the period beginning with termination
of Executive's employment and ending one (1) year from the date thereof (the
"Non-Compete Period), directly or indirectly, either individually or in
partnership or jointly in conjunction with any person or persons, firm,
association, syndicate, company or corporation, as principal, agent,
shareholder, consultant, officer, director, employee or in any other capacity
whatsoever, carry on or be engaged in or be concerned with or financially
interested in, or advise, lend money to, guarantee the debts or obligations of
or permit his name or any part thereof to be used or employed by, any person or
persons, firm, association, syndicate, company or corporation engaged or
interested in or concerned with, any material aspect, directly or indirectly, of
the business in which the Company, or any of its subsidiaries or affiliates, is
engaged on the date of termination in the United States or in any country in
which the Company, or any of its subsidiaries or affiliates conducts such
business (the "Business").
(ii) Notwithstanding subsection (i) above, Executive may own or hold up to
5% of the outstanding shares of capital stock of any company engaged in the
Business that is a publicly-traded company so long as Executive does not have
any other relationship, directly or indirectly, with such company.
(d) (i) Executive acknowledges that a breach by him of Section 3 would
cause irreparable damage to the Company, and in the event of Executive's actual
or threatened breach of Section 3, the Company shall be entitled to a temporary
restraining order and an injunction restraining Executive from breaching such
provisions without the necessity of posting bond or proving irreparable harm,
such being conclusively admitted by Executive. Nothing shall be construed as
prohibiting the Company from pursuing any other available remedies for such
breach or threatened breach, including, without limitation, the recovery of
damages from Executive. Executive acknowledges that the restrictions set forth
in Section 3 are reasonable in scope and duration given the nature of the
business of the Company. Executive agrees that the issuance of an injunction
will not pose an unreasonable restriction on Executive's ability to obtain
employment or other work following termination of this Agreement.
(ii) Executive has carefully read and considered the
provisions of Section 3, and, having done so, agrees that the
restrictions set forth in such sections including, without
limitation, the time period of restriction and geographical
area of restriction are fair and reasonable and are reasonably
required for the protection of the interests of the Company.
Notwithstanding the foregoing, in the event that any of the
provisions of Section 3 hereof shall be held to be invalid or
unenforceable, the remaining provisions hereof shall
nevertheless continue to be valid and enforceable as though
the invalid or unenforceable part(s) had not been included
therein. In the event that any provisions of subsection (b)
and (c) relating to the time period and/or the area of
restriction shall be declared by a court of competent
jurisdiction to exceed the maximum time period or area such
court deems reasonable and enforceable, this Agreement shall
be reformed by such court and the time period and/or area of
restriction deemed reasonable and enforceable by the court
shall become and thereafter be the maximum time period and/or
area of restriction.
4. Termination.
(a) Death. The Executive's employment hereunder shall terminated
upon his death.
(b) Incapacity. The Company may terminate the Executive's employment
hereunder by giving written Notice of Termination, as defined below, 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 six (6) month
period of the Executive's term of employment hereunder.
(c) Cause. 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 gross
failure to materially perform and discharge his duties and responsibilities
hereunder or any breach by the Executive of the provisions of Section 3 herein,
(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) Change in Control. In the event of a change in control of the
Company, the Executive may terminate his employment (i) at any time 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, or (ii) on or after the date of the change in control
of the Company for a period of one hundred and eighty (180) day from and after
the date of the change in control of the Company, in his sole discretion, by
providing written notice thereof to the Company. The date of termination
specified in the notice shall be no earlier than the date 60 days after the date
such notice is delivered or mailed to the Company. For purposes of this
Agreement:
(i) "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 20% (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 Georges or
Paul Marciano, of any of their respective 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 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, 20% 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 with the business travel obligations
which the Executive undertook on behalf of the Company or its
subsidiaries prior to the change in control.
(e) Notice of Termination. Any termination by the Company pursuant to
the Sections 4(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.
5. Payments to Executive upon Termination.
(a) Death. If the Executive's employment shall be terminated by reason
of death, his estate shall be paid all salary, bonus or other Benefits, as
defined below, otherwise payable 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.
(b) Incapacity. 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 entitled to be paid the following:
(i) all salary , bonus or other Benefits accrued
or accruable to the Executive through the date of
termination specified in the Notice of Termination;
(ii) salary for thirty-six (36) months after the date of
such termination based on the Base Salary immediately
prior to the date of termination; and
(iii) the annual premiums for the split-dollar life
insurance policy described under Section 2(d) until
the earlier to occur of the date (A) of death of the
Executive,
except to the extent of unpaid premiums as of the date of death, (B) no further
premium payments are required under the terms of such policy, or (C) the Minimum
Premium Commitment has been paid.
After such payments, the Company or its subsidiaries shall have no further
obligations to the Executive under this Agreement.
(c) Cause. If the Executive's employment shall be terminated for Cause,
the Company or its subsidiaries shall pay the Executive his Base Salary and
Benefits 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, including, but not limited to, any obligations
in respect of the Minimum Premium Commitment.
(d) Change in Control and Other Than Cause. If the Executive's
employment is terminated (i) by the Company other than as a result of death,
disability or Cause as specified in Sections 4(a), (b) or (c) above, or (ii) by
the Executive as specified in Section 4(d), the Executive shall be entitled to
the following:
(i) payment of salary for thirty-six (36)
months after the date of such termination based on
the Base Salary immediately prior to the date of
termination, except in the event of termination by
Executive pursuant to Section 4 (d)(ii) in which case
the obligation shall be payment of salary for
eighteen (18) months after the date of such
termination based on the Base Salary immediately
prior to the date of termination;
(ii) the Company shall maintain in full
force and effect for the Executive's benefit, for
thirty-six (36) months (eighteen (18) months in the
event of termination by Executive pursuant to Section
4(d)(ii)) after such termination, the Benefits, as
defined below; and
(iii) payment of the annual premiums for the
split-dollar life insurance policy described under
Section 2(d) until the earlier to occur of the date
(A) of death of the Executive, except to the extent
of unpaid premiums as of the date of death, (B) no
further premium payments are required under the terms
of such policy, or (C) the Minimum Premium Commitment
has been paid.
The term "Benefits shall mean all health insurance, long-term disability, life
insurance (excluding the split-dollar policy described in Section 2(d) and which
benefits in respect thereof are described below) and accidental death and
disability 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.
6. 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).
7. Limitation on Payments.
If any payments made pursuant to the terms of this Agreement
(or any other agreement or arrangement between the Company and the Executive),
when aggregated with any other payments made to the Executive, would result in
the imposition of an excise tax under Section 4999 of the Internal Revenue Code
of 1986, as amended, the Company shall pay to the Executive, in addition to
amounts otherwise payable under this Agreement, an amount sufficient, after
federal and state income taxes, to pay the excise tax so payable and all
directly related interest and penalties such that the net amount to the
Executive would be the same as if no excise tax had been imposed.
8. 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:
Richard C. Allender
900 Broadmoor
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.
9. 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.
10. Validity. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under any present or future law, such provision shall
be fully severable, this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
the remaining provisions of this Agreement shall remain in full force and effect
and shall not be affected by the illegal, invalid or unenforceable provision or
by its severance herefrom, and in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as a part of this Agreement a
legal, valid and enforceable provision as similar to the terms and intent of
such illegal, invalid or unenforceable provision as may be possible.
11. Survival. The provisions of this Agreement shall not survive the
termination of the Executive's employment hereunder, except that the provisions
of Sections 3, 4, 5 and 6 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 Sections 2, 4, 5, 6 and 7 hereof shall survive
such termination and shall be binding upon the Company and its subsidiaries.
12. 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.
13. Entire Agreement. This Agreement, together with any awards of stock
options or stock awards under the Company's stock option and restricted stock
plans, 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.
14. 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 binding upon the parties, shall constitute the sole and exclusive
remedy for any dispute between the parties, 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. Notwithstanding this Section 14, and as
provided in Section 3(d) above, nothing in this arbitration provision shall
prevent the Company from applying to a court of law or equity for a temporary
restraining order, an injunction, or similar relief, in order to enforce its
rights under Section 3 of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of this 10th day of July, 1995.
FARAH INCORPORATED
By: /s/ Timothy B. Page
Title: Executive Vice President
Chief Operating Officer
/s/ Richard C. Allender
----------------------------------
Richard C. Allender, Executive
EXHIBIT 10.54
FORM OF 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, 1996 and continuing through December 31, 1996,
Employee and Employer agree that Employee's monthly salary shall be reduced 5%
(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, 1996 an amount equal to the
Employee's total Deferred Income during 1996 and shall credit that sum to a
separate memorandum account on its books ("______________ 1996 Deferral Account"
or "Deferral Account").
b. In addition, on December 31, 1996 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 1996 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, 1996) 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 1996 on the amounts described in (ii)
above.
c. After December 31, 1996, 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 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-1996 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 1996, 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 1996:
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 1996; 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 (5%) of Employee's total salary during the portion of calendar year 1996
with respect to which he has deferred compensation pursuant to Farah
Incorporated 1993 Unfunded Deferred Compensation Plan ("Plan").
iii) 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 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 January 10, 1997. 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 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 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.
Executed this 21ST day of December, 1995.
EMPLOYER
By____________________________________________
EMPLOYEE
By____________________________________________
<PAGE>
ANNEX TO EXHIBIT 10.54
Below is a list of variables to the Deferred Compensation Agreements chosen by
the officers required to file with this Form 10-K.
Name Period of Deferral % Deferred Payment Date
Richard C. Allender January 1, 1996 to 5% January 10, 1997
December 31, 1996
Jackie L. Boatman January 1, 1996 to 5% January 10, 1997
December 31, 1996
Michael R. Mitchell January 1, 1996 to 7% January 10, 1997
December 31, 1996
James C. Swaim January 1, 1996 to 5% January 10, 1997
December 31, 1996
EXHIBIT 13
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended November 3, 1995, November 4, 1994 and November 5, 1993
(Thousands of dollars except per share data)
1995 1994 1993
---------------------- --------------- -------------
<S> <C> <C> <C>
Net sales $ 240,797 242,775 180,114
Cost of sales 185,822 172,300 127,020
---------------------- --------------- -------------
Gross profit 54,975 70,475 53,094
Selling, general and administrative expenses 68,002 58,294 47,372
Factory conversion expenses - - 4,000
---------------------- --------------- -------------
Operating income (loss) (13,027) 12,181 1,722
Other income (expense):
Interest expense (4,627) (2,479) (2,175)
Interest income 901 723 723
Foreign currency transaction gains (losses) 512 449 (151)
Gain (loss) on sale of assets 756 (6) 320
Other, net 209 237 (3)
---------------------- --------------- -------------
(2,249) (1,076) (1,286)
---------------------- --------------- -------------
Income (loss) before income taxes (15,276) 11,105 436
Income tax provision (benefit) (2,335) 300 304
---------------------- --------------- -------------
Net income (loss) $ (12,941) 10,805 132
====================== =============== =============
Net income (loss) per share $ (1.28) 1.16 .02
====================== =============== =============
Weighted average shares of common stock
(all periods) and common stock equivalents
(income periods only) outstanding 10,122,308 9,321,761 7,781,193
====================== =============== =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
November 3, 1995 and November 4, 1994 (Thousands of dollars)
1995 1994
-------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,657 2,372
Trade receivables, net of allowance
of $720 in 1995 and $662 in 1994 39,824 36,931
Inventories:
Raw materials 13,391 11,847
Work in process 14,429 16,949
Finished goods 44,943 46,628
-------------- -----------
Total inventories 72,763 75,424
Other current assets 11,667 9,192
-------------- -----------
Total current assets 127,911 123,919
Note receivable 5,600 5,910
Property, plant and equipment, net 33,363 22,872
Other non-current assets 6,953 5,350
-------------- -----------
$ 173,827 158,051
============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 44,779 18,184
Current installments of long-term debt 2,407 874
Trade payables 17,644 22,306
Accrued compensation 3,900 5,178
Other current liabilities 10,173 9,993
-------------- -----------
Total current liabilities 78,903 56,535
Long-term debt, excluding current installments 12,568 5,170
Other non-current liabilities 3,136 3,103
Commitments and contingencies (Note 8)
Deferred gain on sale of building 5,250 7,282
Shareholders' equity:
Common stock, no par value, $.01 stated
value, 20,000,000 shares authorized; issued
10,181,601 in 1995 and 10,116,616 in 1994 46,024 46,018
Additional paid-in capital 29,425 28,497
Cumulative foreign currency
translation adjustment (1,295) (1,066)
Minimum pension liability adjustment (1,635) (1,880)
Retained earnings 1,560 14,501
-------------- -----------
74,079 86,070
Less: Treasury stock, 36,275 shares, at cost 109 109
-------------- -----------
Total shareholders' equity 73,970 85,961
-------------- -----------
$ 173,827 158,051
============== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part 1 of Shareholder Equity Table
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended November 3, 1995, November 4, 1994 and November 5, 1993
(Thousands of dollars except share data) Cumulative
Foreign
Additional Currency
Common Stock Paid-in Translation
--------------------------------
Shares Amount Capital Adjustment
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, November 6, 1992 7,921,917 $ 31,688 $ 20,265 $ (1,892)
Net income - - - -
Foreign currency translation
adjustment - - - (589)
Minimum pension liability
adjustment - - - -
Exercise of stock options
and other 85,983 509 24 -
Sale of treasury stock - - (8,117) -
Reclassification upon change
to no par common stock - 12,172 (12,172) -
-------------- ------------- ------------- -------------
Balance, November 5, 1993 8,007,900 44,369 - (2,481)
Net income - - - -
Foreign currency translation
adjustment - - - 1,415
Minimum pension liability
adjustment - - - -
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)
Net loss - - - -
Foreign currency translation
adjustment - - - (229)
Minimum pension liability
adjustment - - - -
Exercise of stock options -
and other 64,985 6 928 -
-------------- ------------- ------------- -------------
Balance, November 3, 1995 10,181,601 $ 46,024 $ 29,425 $ (1,295)
============== ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Part 2 of Shareholders' Equity Table
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended November 3, 1995, November 4, 1994 and November 5, 1993
(Thousands of dollars except share data)
Minimum
Pension
Liability Retained Treasury Stock
-----------------------------
Adjustment Earnings Shares Amount
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance, November 6, 1992 $ (524) $ 3,564 655,275 $ 14,091
Net income - 132 - -
Foreign currency translation
adjustment - - - -
Minimum pension liability - - -
adjustment (1,526) - - -
Exercise of stock options
and other - - - -
Sale of treasury stock - - (619,000) (13,982)
Reclassification upon change
to no par common stock - - - -
------------ ------------ ----------- -------------
Balance, November 5, 1993 (2,050) 3,696 36,275 109
Net income - 10,805 - -
Foreign currency translation
adjustment - - - -
Minimum pension liability
adjustment 170 - - -
Exercise of stock options
and other - - - -
Sale of common stock - - - -
Tax effect of employee gains
on exercise of stock options - - - -
------------ ------------ ----------- -------------
Balance, November 4, 1994 (1,880) 14,501 36,275 109
Net loss - (12,941) - -
Foreign currency translation
adjustment - - - -
Minimum pension liability
adjustment 245 - - -
Exercise of stock options
and other - - - -
------------ ------------ ----------- -------------
Balance, November 3, 1995 $ (1,635) $ 1,560 36,275 109
============ ============ =========== =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended November 3, 1995, November 4, 1994 and November 5, 1993
(Thousands of dollars)
1995 1994 1993
----------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (12,941) 10,805 132
Adjustments to reconcile net income (loss)
to net cash from (used in)
operating activities:
Depreciation and amortization 4,020 2,966 2,686
Amortization of deferred gain
on building sale (2,032) (2,032) (2,032)
Deferred income taxes (1,934) (2,322) -
Gain on sale of assets (756) 6 (320)
Decrease (increase) in:
Trade receivables, net (2,893) (4,473) (7,258)
Inventories 2,661 (21,030) (13,883)
Other current assets (1,016) (1,840) (797)
Increase (decrease) in:
Trade payables (4,662) 1,982 5,736
Other (1,098) 5,158 (294)
----------------- ----------- -----------
Net cash used in operating activities (20,651) (10,780) (16,030)
----------------- ----------- -----------
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment (11,756) (8,822) (5,951)
Proceeds from disposition of property, plant
and equipment 1,785 36 436
----------------- ----------- -----------
Net cash used in investing activities (9,971) (8,786) (5,515)
----------------- ----------- -----------
Cash flows from (used in) financing activities:
Net increase (decrease) in short-term debt 26,771 (7,791) 15,673
Proceeds from issuance of long-term debt 6,426 1,058 604
Repayment of long-term debt (1,284) (3,650) (487)
Proceeds from sale of common stock 934 29,352 5,881
Other (711) (453) 836
----------------- ----------- -----------
Net cash from financing activities 32,136 18,516 22,507
----------------- ----------- -----------
Foreign currency translation adjustment (229) 1,415 (589)
----------------- ----------- -----------
Net increase in cash 1,285 365 373
Cash, beginning of year 2,372 2,007 1,634
----------------- ----------- -----------
Cash, end of year $ 3,657 2,372 2,007
================= =========== ===========
Supplemental cash flow disclosures:
Interest paid $ 4,116 2,416 3,636
Income taxes paid 1,625 457 878
Assets acquired through direct financing
loans or capital leases 3,923 3,243 852
Exchange of debentures - 1,673 -
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 3, 1995, November 4, 1994 and November 5, 1993
1. Summary of Significant Accounting Policies
NATURE OF OPERATIONS
Farah Incorporated is a multinational apparel marketer and manufacturer
headquartered in the United States. The company's principal business is the sale
of men's and boys' pants and coats. The principal markets for the company's
products are retail customers in the United States, Europe and the South
Pacific.
PRINCIPLES OF PRESENTATION
The consolidated financial statements include the accounts of Farah
Incorporated (the "Parent Company") and its subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform with the 1995
presentation. The Parent Company's assets consist of investments in and advances
to subsidiaries. The Parent Company does not have any significant amount of
separate debt, credit facilities or other liabilities, except for the 8.5%
convertible subordinated debentures discussed in Note 3.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
including allowances for inventory markdown and valuation allowances for
deferred taxes. Such estimates and assumptions also affect the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of first-in, first-out (FIFO) cost
or market and include purchased materials, manufacturing labor and overhead.
Market is based upon estimated selling price less costs to sell.
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
generally the resulting gains and losses are included in operations. Gains on
assets sold and leased back are recognized over the initial lease term, net of
any obligations required by the lease agreements.
See Note 8 for further discussion.
INTANGIBLE ASSETS
At November 3, 1995 and November 4, 1994, intangible assets were
$1,508,000 and $1,550,000, respectively, and consisted primarily of goodwill,
trademarks and other intangible assets. Most intangible assets are amortized on
a straight-line basis over their estimated useful lives ranging from 2 to 30
years. Amortization approximated $283,000 in 1995, $260,000 in 1994 and $200,000
in 1993.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product.
<PAGE>
FOREIGN CURRENCIES
The Company translates its asset and liability accounts denominated in
foreign currencies at the exchange rate in effect at the end of the fiscal
period. Income and expense accounts are translated at average rates. 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.
INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amount of assets and liabilities recognized for financial reporting
and tax purposes and are measured by applying currently enacted tax laws. 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.
INCOME (LOSS) PER SHARE
Income per share in 1994 and 1993 is based on the weighted average
number of shares and common stock equivalents outstanding. Stock options are
included as common stock equivalents under the treasury stock method, where
dilutive. Additional dilution from the 8.5% convertible subordinated debentures
(Note 3), which are not common stock equivalents, is not material. Loss per
share in 1995 is based on the weighted average number of shares outstanding.
FACTORY CONVERSION EXPENSES
In response to the success of the Company's Savane(R) 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.
<PAGE>
2. Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, plant and equipment is comprised of the following:
Estimated useful Thousands of dollars
---------------------------
lives (years) 1995 1994
------------------- ------------- ------------
<S> <C> <C> <C>
Factory machinery and equipment 9-12 $ 34,463 25,507
Buildings 20-50 6,376 3,552
Building improvements 3-20 5,720 4,448
Other fixtures and equipment 3-20 14,386 12,706
Land 395 528
Construction in progress 1,248 4,609
------------- ------------
Total property, plant and equipment 62,588 51,350
Less accumulated depreciation 29,225 28,478
------------- ------------
Net property, plant and equipment $ 33,363 22,872
============= ============
</TABLE>
In October 1995, the Company sold a building, land and factory
equipment located in San Jose, Costa Rica. Total net proceeds were $2,130,000,
including a receivable of approximately $544,000. The transaction resulted in a
gain of approximately $986,000 of which approximately $750,000 was recognized in
1995.
Depreciation expense approximated $3,737,000 in 1995, $2,706,000 in
1994 and $2,486,000 in 1993.
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", was issued. Adoption is required for fiscal years beginning
after December 15, 1995. The Company does not believe that the adoption of this
statement will have a significant impact on the Company.
3. Debt and Liquidity
SHORT-TERM DEBT
The Company's primary Credit Agreement provides up to $50,000,000 of
credit through July 1, 1997, for the Company's United States and United Kingdom
operations for either borrowings or letters of credit. Availability under the
Credit Agreement is limited by formulas derived from accounts receivable and
inventory. The Credit Agreement is secured by substantially all assets of Farah
U.S.A., Farah U.K. Limited and Value Slacks and is guaranteed by its 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 (8 3/4% at November 3, 1995) 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 3, 1995, usage under the Credit Agreement was
$44,774,000 (including letters of credit of $1,000,000) and the excess credit
line available was $5,226,000. The Credit Agreement restricts certain additional
indebtedness and requires the maintenance of minimum tangible net worth, minimum
working capital and maximum capital expenditures. As of November 3, 1995 the
Company was in compliance with all covenants. The Credit Agreement prohibits the
payment of dividends by the Company, and except for debt service of the
Company's 8.5% convertible subordinated debentures, the Credit Agreement
restricts the subsidiaries from transferring substantially all net assets to the
Parent Company through intercompany loans, advances or dividends.
<PAGE>
<TABLE>
<CAPTION>
The following table reflects short-term debt balances and interest
rates in 1995, 1994 and 1993:
Thousands of dollars
------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Average outstanding balance $ 36,842 23,268 22,868
Maximum month-end
balance outstanding 47,338 39,995 25,680
Weighted average interest rate:
During year 9.7% 9.0% 8.7%
Year-end 9.8% 8.7% 8.3%
</TABLE>
LONG-TERM DEBT
In 1995, the Company entered into a capital lease to acquire laundry,
finishing, sewing and cutting equipment in Mexico, Costa Rica and the United
States. As of November 3, 1995, the outstanding lease balance was $7,757,000.
The lease bears interest at LIBOR (5 7/8% at November 3, 1995) plus 3 3/16%.
Scheduled lease payments are due in 20 quarterly installments, with the first
payment due December 1, 1995. The lease contains certain financial covenants
including minimum current ratio, tangible net worth, debt to net worth, cash
flow and capital expenditures. In addition, the lease contains an earnings
before interest and taxes (EBIT) covenant calling for minimum EBIT in 1996 of
$200,000 in the first quarter, $1,100,000 in the second quarter, $1,900,000 in
the third quarter and $2,000,000 in the fourth quarter. The lease also requires
the Company to maintain certain levels of liquidity. As of November 3, 1995, the
Company was in compliance with all covenants.
Both the lease and the Credit Agreement contain provisions which allow
a default under either agreement to cause a default of both agreements.
<TABLE>
<CAPTION>
Long-term debt at year-end is as follows:
Thousands of dollars
-------------------------
1995 1994
------------ ----------
<S> <C> <C>
Capital lease, secured by fixed assets,
bearing interest at LIBOR plus 3 3/16%,
due in 20 quarterly installments, with
a 15% balloon payment in 2000 $ 7,757 -
8.5% convertible subordinated debentures
due February 1, 2004, convertible into
the Company's common stock at $15.2375
per share 1,663 1,663
Secured loan for aircraft purchase bearing
interest at 8.4%, fixed through June 22,
1998, then at prime plus 1% through
June 2004, due in monthly installments 1,317 1,469
Various notes, secured by fixed assets,
bearing interest at rates ranging from
7.25% to 10.77%, due in monthly
installments through 2005 548 395
Various obligations under other capital
leases 3,690 2,517
------------ ----------
Total long-term debt 14,975 6,044
Less current installments 2,407 874
------------ ----------
Net long-term debt $ 12,568 5,170
============ ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Installments of long-term debt and capital lease obligations mature as follows:
Thousands of Dollars
---------------------------------
Long-term Capital Lease
Debt Obligations
-------------- ----------------
<S> <C> <C>
1996 $ 304 3,111
1997 228 3,033
1998 212 2,981
1999 206 2,189
2000 196 3,020
2001 and beyond 2,382 -
-------------- ----------------
3,528 14,334
Less interest portion - 2,887
============== ================
$ 3,528 11,447
============== ================
</TABLE>
The Company believes that its borrowing availability from its Credit
Agreement and its projected cash from operations will be adequate for fiscal
1996 anticipated liquidity requirements. In the event that liquidity shortfalls
occur due to the continuing impact of softness at retail, unforeseen sales
shortfalls or other reasons, it may be necessary for the Company to seek
alternative sources of financing. This may be in the form of additional debt,
equity or a combination thereof.
<PAGE>
4. Shareholders' Equity
In 1994, the Company completed the offering of 2,990,000 shares of its
common stock at a price of $16.375 per share. Of the total shares offered,
1,790,000 shares were sold by the Company with the remaining 1,200,000 shares
sold by Marciano Investments, Inc. and affiliates ("Marciano"). Marciano had
originally purchased the shares in 1992. Net proceeds from the sale to the
Company were approximately $27,200,000, of which substantially all were
allocated to additional paid-in capital.
In 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. Employee, Executive and Director Stock Options and Awards
The Company has granted options to certain employees and directors
pursuant to employee and nonemployee 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 62,666 shares vested and were issued in 1995,
46,169 shares vested and were issued in 1994 and 12,500 shares vested and were
issued in 1993. The Company recognizes the expense related to these awards over
the period of service called for by the vesting provision of the awards.
<TABLE>
<CAPTION>
The following table summarizes activity for such options and awards for
the years ended November 3, 1995, November 4, 1994 and November 5, 1993:
Options and Awards
Outstanding
-------------------------------
Shares
Available
for Grant Shares Price Per Share
------------ ------------ -----------------
<S> <C> <C> <C>
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
Granted (16,000) 16,000 8.375 - 8.625
Exercised - (88,180) 4.00 - 7.50
Cancelled or terminated 13,634 (13,834) 4.00 - 16.50
------------ ------------
BALANCE NOVEMBER 3, 1995 153,636 518,302 $ 0 - 21.375
============ ============
<FN>
Included above are 455,637 options expiring 10 years after the date of grant.
Total options exercisable at November 3, 1995 were 448,637.
</FN>
</TABLE>
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued. The disclosure
requirements of this statement are effective for financial statements for fiscal
years beginning after December 15, 1995. The Company intends to elect the option
allowing it to continue to apply the accounting provisions of APB Opinion 25,
"Accounting for Stock Issued to Employees." With the Company's plan of adoption,
the impact will be limited to additional footnote disclosure.
<PAGE>
6. Income Taxes
<TABLE>
<CAPTION>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at November 3, 1995 and November 4, 1994 are
as follows:
Thousands of dollars
1995 1994
----------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
U.S. federal NOL carryforwards $ 4,477 -
Foreign NOL carryforwards 871 921
Deferred gain 1,785 2,476
Foreign tax credit carryforwards 1,897 1,740
Other accrued expenses 3,644 2,076
Other prepaid assets 276 461
----------- ------------
Total deferred tax assets 12,950 7,674
----------- ------------
DEFERRED TAX LIABILITIES:
Tax in excess of financial statement
depreciation and amortization 1,682 913
Other accrued expenses 490 331
----------- ------------
Total deferred tax liabilities 2,172 1,244
----------- ------------
Net deferred tax asset 10,778 6,430
Valuation allowance (6,576) (4,108)
----------- ------------
Deferred income tax asset, net 4,202 2,322
Less current portion (1,747) (886)
----------- ------------
Long-term deferred income tax
asset, net $ 2,455 1,436
=========== ============
</TABLE>
As of November 3, 1995, the Company's deferred tax assets increased
primarily due to the Company's net operating loss. The Company expects to
utilize a portion of this loss to generate a refund of approximately $1,056,000.
The future tax benefit of the cumulative net operating loss is $4,477,000 as of
November 3, 1995.
Pursuant to the requirements of Statement of Financial Accounting
Standards No. 109, "Accounting for Incomes Taxes," a valuation allowance must be
provided when the deferred income tax asset may not be realized. The Company
provided a valuation allowance against the entire November 5, 1993, net deferred
income tax asset. At November 3, 1995, the Company expects to realize future tax
benefits of approximately $4,200,000 related to net operating loss carryforwards
which can be used to offset future earnings within the next 15 years. The
changes in the valuation allowance for 1995 and 1994 are as follows:
<TABLE>
Thousands of dollars
--------- ---- ----------
1995 1994
--------- ----------
<S> <C> <C>
Increase (decrease) in valuation allowance of:
NOL carryforwards and changes in temporary differences $ 4,348 (2,150)
Change in estimate of realization of deferred income taxes (1,880) (2,322)
--------- ----------
Increase (decrease) in valuation allowance $ 2,468 (4,472)
--------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Income (loss) before taxes and incomes taxes in 1995, 1994 and 1993 are shown
below:
Thousands of dollars
--------------- -- ------------- -- --------------
1995 1994 1993
--------------- ------------- --------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES:
Domestic operations $ (16,728) 9,415 (1,682)
Foreign operations 1,452 1,690 2,118
--------------- ------------- --------------
Total Consolidated $ (15,276) 11,105 436
--------------- ------------- --------------
INCOME TAX PROVISION:
Domestic operations
Current $ (1,087) 2,194 -
Deferred (1,934) (2,322) -
--------------- ------------- --------------
Total Domestic (3,021) (128) -
Foreign operations
Current 686 428 304
Deferred - - -
--------------- ------------- --------------
Total Foreign 686 428 304
--------------- ------------- --------------
Total Consolidated $ (2,335) 300 304
--------------- ------------- -------------
The effective tax rate differs from the statutory U.S. federal tax rate as summarized below:
Thousands of dollars
--------------- -- ------------- -- --------------
1995 1994 1993
--------------- ------------- --------------
Expected income taxes at U.S. statutory rate $ (5,194) 3,776 148
Effect of differing tax rates in foreign
countries 46 160 79
Unrecognized deferred tax benefits 2,633 - -
U.S. taxes on dividends from foreign countries 93 143 1,100
Recognition of previously unrecognized
deferred tax benefits - (4,257) (981)
Other 87 478 (42)
--------------- -------------- --------------
Income taxes, as reported $ (2,335) 300 304
--------------- -------------- --------------
</TABLE>
At November 3, 1995, the Company's foreign subsidiaries have deferred
tax assets of $871,000 due to net operating loss carryforwards that are
available to offset future foreign taxable income. In addition, the Company has
$1,897,000 of domestic tax credit carryforwards that are available to offset
foreign income that could be taxable for U.S. purposes. These credits expire in
1996 through 2000 if not used, with $1,436,000 due to expire in 1996.
Certain of the Company's foreign subsidiaries have undistributed
earnings of approximately $23,175,000 for U.S. tax purposes at November 3, 1995.
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 $7,880,000 at November 3, 1995. If foreign earnings
are repatriated, a limited credit for foreign taxes paid may be taken against
the U.S. taxes on the repatriated earnings.
<PAGE>
7. Employee Benefit Plans
The Company has two retirement plans: (1) a defined contribution plan
established pursuant to Section 401(k) of the Internal Revenue Code which covers
all non-union U.S. employees, and (2) a defined benefit plan which covers
substantially all bargaining unit employees and retirees.
Under the defined contribution plan, each participant may contribute
from 1% to 15% of his/her compensation. The Company matches contributions up to
3% of the participant's compensation. In 1995, 1994 and 1993, the Company's
contribution to the plan was approximately $444,000, $413,000 and $334,000,
respectively.
Under the defined benefit plan, the basic monthly pension payable to a
participant upon normal retirement equals the product of the participant's
deferred monthly retirement income 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.
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 3, 1995, November 4, 1994 and November 5, 1993, included the following
components:
<TABLE>
Thousands of dollars
--------------------------------------------
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 47 50 35
Interest cost on projected benefit obligation 577 528 511
Actual return on plan assets (1,514) (286) (381)
Net amortization and deferral 1,165 (35) (39)
------------ ------------ -------------
Net periodic pension cost $ 275 257 126
============ ============ =============
</TABLE>
The following table sets forth the funded status at November 3, 1995 and
November 4, 1994, of the defined benefit plan:
<TABLE>
Thousands of dollars
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation $ (7,801) (6,941)
Nonvested benefit obligation (150) (102)
------------- -------------
Accumulated benefit obligation $ (7,951) (7,043)
------------- -------------
Projected benefit obligation $ (7,951) (7,043)
Plan assets at market value 6,888 5,284
------------- -------------
Projected benefit obligation in excess of plan assets (1,063) (1,759)
Unrecognized transition liability being recognized over
average future service of plan participants 468 534
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 1,635 1,880
Adjustment required to recognize minimum liability (2,103) (2,414)
------------- -------------
Accrued pension expense $ (1,063) (1,759)
============= =============
</TABLE>
In determining the benefit obligations and service cost of the
Company's defined benefit plan, weighted average discount rates of 7.5% and 8.5%
were used in 1995 and 1994, respectively. The expected long-term rate of return
on plan assets was 9.5% in both years.
<PAGE>
Statements of Financial Accounting Standards No. 106, "Employer's
Accounting for Post-retirement Benefits and Other Pensions," and No. 112,
"Employer's Accounting for Post Employment Benefits," were required to be
adopted in fiscal 1993 and 1994, respectively. The Company generally does not
offer any post-retirement or post-employment benefits, and therefore, the effect
of adopting these statements had no impact on the Company.
8. Commitments and 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
3, 1995 and November 4, 1994, was $5,910,000 and $6,193,000, 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 10 year operating lease of the facility. 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 $5,250,000 remains to be
recognized through 1998.
The Company and its subsidiaries occupy certain facilities and use
certain equipment under operating leases which expire at various dates from
fiscal 1996 to 2016. The following is a summary by year of the noncancelable
portion of future minimum lease payments under operating leases:
<TABLE>
Thousands
of
dollars
-------------
<S> <C>
1996 $ 8,842
1997 8,408
1998 6,035
1999 2,601
2000 1,251
Later 9,731
years
------------
Lease payments* $ 36,868
=============
</TABLE>
*Minimum payments have not been reduced by minimum sublease rental
income of $2,655,000 due in the future under noncancelable subleases.
During 1992, the Company entered into a 6 1/2 year operating sublease
agreement for approximately one-half of its El Paso manufacturing facility. The
following is a summary by year of the noncancelable portion of future minimum
rental income:
Thousands
of dollars
------------
1996 $ 1,028
1997 1,028
1998 599
------------
Total $ 2,655
============
Rental expense for all operating leases for 1995, 1994 and 1993 was
$8,659,000, $7,623,000 and $6,860,000, respectively (net of sublease income of
approximately $1,015,000 in 1995 and $881,000 in 1994 and 1993).
At November 3, 1995, the Company had commitments for capital
expenditures of approximately $551,000.
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 1995, one customer accounted for
$30,191,000 (12.5%) of the Company's consolidated sales, and in 1993, another
customer accounted for $22,407,000 (12.4%) of consolidated sales. In 1994, no
one customer accounted for more than 10% of consolidated sales. 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, historic 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
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 agreement, 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 3, 1995 and November 4, 1994.
The carrying amounts and fair values of the Company's financial
instruments at November 3, 1995 and November 4, 1994, are as follows (in
thousands of dollars):
<TABLE>
November 3, 1995 November 4, 1994
----------- -- --------- ---------- --- ---------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Cash $ 3,657 3,657 2,372 2,372
Note Receivable 5,600 5,600 5,910 5,910
Revolving Credit Agreement 44,774 44,774 18,844 18,844
Capital Lease 7,757 7,757 - -
Other Secured Indebtedness 1,614 1,614 1,864 1,864
Convertible Debentures 1,663 1,039 1,663 1,311
</TABLE>
<PAGE>
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 table presents information regarding
geographic segments for 1995, 1994 and 1993. 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>
Thousands of dollars
-------------------------------------------
1995 1994 1993
------------ ------------- ------------
<S> <C> <C> <C>
NET SALES:
United States to unaffiliated customers $ 193,274 206,732 151,017
Transfers between areas 266 547 480
------------ ------------- ------------
Total United States 193,540 207,279 151,497
Europe 32,033 24,119 20,069
South Pacific 15,490 11,924 9,028
Adjustments and eliminations (266) (547) (480)
------------ ------------- ------------
Total $ 240,797 242,775 180,114
============ ============= ============
OPERATING PROFIT (LOSS):
United States $ (12,489) 12,535 1,274
Europe 385 754 602
South Pacific 1,549 1,418 1,565
Adjustments and eliminations - (67) (66)
------------ ------------- ------------
Total (10,555) 14,640 3,375
Net gain (loss) on sale of assets 755 (6) 323
General corporate expenses (1,751) (1,773) (1,810)
Interest expense, net (3,725) (1,756) (1,452)
------------ ------------- ------------
Income (loss) before income taxes $ (15,276) 11,105 436
============ ============= ============
IDENTIFIABLE ASSETS:
United States $ 146,172 132,238 97,811
Europe 17,326 16,342 11,813
Far East and the South Pacific 14,357 13,011 11,842
Adjustments and eliminations (4,028) (3,540) (2,575)
------------ ------------- ------------
Total $ 173,827 158,051 118,891
============ ============= ============
</TABLE>
Approximately 55% and 30% of all product sold in the United States in
1995 was assembled in Mexico and Costa Rica, respectively. Included in the
Company's consolidated balance sheet at November 3, 1995 were net assets located
in Mexico and Costa Rica totaling approximately $17,030,000 and $12,023,000,
respectively.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated balance sheets of Farah
Incorporated (a Texas corporation) and subsidiaries as of November 3, 1995, and
November 4, 1994, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years ended November 3,
1995, November 4, 1994, and November 5, 1993. 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 3, 1995, and November 4, 1994, and the results
of their operations and their cash flows for each of the years ended November 3,
1995, November 4, 1994, and November 5, 1993, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
December 15, 1995
<PAGE>
Quarterly unaudited information for fiscal 1995 compared to fiscal 1994
is as follows:
<TABLE>
Thousands of dollars except share data
------------------------------------------------------------------------
First Second Quarter Third Quarter Fourth Quarter
Quarter
------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
1995
Net sales $ 49,949 56,782 60,865 73,201
Gross profit 12,811 12,374 13,934 15,856
Net loss (1,255) (3,832) (5,115) (2,739)
Net loss per share (.12) (.38) (.50) (.27)
Weighted average shares of common
stock outstanding 10,096,111 10,125,186 10,131,027 10,136,908
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
<FN>
In the second quarter of 1994, 1,790,000 shares were sold in an
offering by the Company (see Note 4 to the consolidated financial
statements for more discussion).
</FN>
</TABLE>
COMMON STOCK
There were 10,155,568 shares of the Company's common stock, no par
value, outstanding as of January 12, 1996, owned of record by approximately
2,300 shareholders. Trading volume during fiscal 1995 averaged approximately
38,000 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 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>
1995 1994
--------------------------- ----------------------------
High Low High Low
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
1st Quarter $ 9 6 5/8 $ 14 3/4 8 3/4
2nd Quarter 8 5/8 6 7/8 21 7/8 12 5/8
3rd Quarter 8 3/8 6 18 1/2 13 3/4
4th Quarter 8 1/8 6 1/4 16 1/8 8 1/4
</TABLE>
The closing sales price of the Company's common stock on the New York
Stock Exchange as of January 12, 1996, was $5.00.
As of November 3, 1995, 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 28 holders.
The Company has not paid any dividends on its common stock since 1986.
The Company's U.S. Credit Agreement prohibits the payment of dividends by the
Company.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Thousands of Dollars
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- -------------- ------------- ------------ --------------
Summary of Operations:
<S> <C> <C> <C> <C> <C>
Net sales $ 240,797 242,775 180,114 151,990 151,202
Cost of sales 185,822 172,300 127,020 113,509 112,308
Selling, general and
administrative expenses 68,002 58,294 47,372 41,915 41,687
Factory conversion expenses - - 4,000 - -
Operating income (loss) (13,027) 12,181 1,722 (3,434) (2,793)
Other income (expense):
Foreign currency gains (losses) 512 449 (151) 1,460 (832)
Gains (losses) on asset sales 756 (6) 320 9 127
Provision for Generra bankruptcy - - - (6,146) -
Other, net 209 237 (3) (149) (559)
Interest expense, net (3,726) (1,756) (1,452) (960) (1,145)
Income (loss) before income taxes (15,276) 11,105 436 (9,220) (5,202)
Income tax provision (benefit) (2,335) 300 304 369 306
Net income (loss) (12,941) 10,805 132 (9,589) (5,508)
Per Share Information:
Net income (loss) $ (1.28) 1.16 0.02 (1.52) (0.93)
Book value per share based on shares
outstanding at balance sheet dates $ 7.29 8.53 5.45 5.37 7.70
Shares outstanding 10,145,326 10,080,341 7,971,625 7,266,642 5,957,789
Financial Position at Year-End:
Current assets $ 127,911 123,919 95,325 71,808 79,583
Property, plant and equipment, net 33,363 22,872 13,220 10,376 10,970
Other assets, non-current 12,553 11,260 10,346 10,953 16,274
Total assets 173,827 158,051 118,891 93,137 106,827
Current liabilities 78,903 56,535 61,346 34,983 38,358
Long-term debt 12,568 5,170 1,179 4,452 5,192
Other liabilities 3,136 3,103 3,627 3,346 4,046
Deferred gain on sale of building 5,250 7,282 9,314 11,346 13,378
Shareholders' equity 73,970 85,961 43,425 39,010 45,853
Total liabilities and shareholders' equity 173,827 158,051 118,891 93,137 106,827
Current ratio 1.6 to 1 2.2 to 1 1.5 to 1 2.1 to 1 2.1 to 1
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
<TABLE>
<CAPTION>
The following sets forth, for the years indicated, certain financial data as
percentages of net sales:
Fiscal Year Ended
------------ -- ------------ -- -------------
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
Net sales:
Farah U.S.A. 73.5% 78.8% 75.9%
Farah International 19.7% 14.9% 16.2%
Value Slacks 6.8% 6.3% 7.9%
------------ ------------ -------------
Total net sales 100.0% 100.0% 100.0%
Cost of sales 77.2% 71.0% 70.5%
------------ ------------ -------------
Gross profit 22.8% 29.0% 29.5%
Selling, general and
administrative expenses 28.2% 24.0% 26.3%
Factory conversion expenses - - 2.2%
------------ ------------ -------------
Operating income (loss) (5.4%) 5.0% 1.0%
Other expense, net (0.9%) (0.4%) (0.7%)
------------ ------------ -------------
Income (loss) before income
taxes (6.3%) 4.6% 0.3%
Income tax benefit (expense) 0.9% (0.1%) (0.2%)
------------ ------------ -------------
Net income (loss) (5.4%) 4.5% 0.1%
------------ ------------ -------------
</TABLE>
1995 Sales Compared to 1994
Sales decreased $1,978,000 or .8%, from $242,775,000 in 1994 to
$240,797,000 in 1995. The decrease was the result of a 7.5% reduction in
revenues in the Company's U.S. subsidiary, Farah U.S.A. Farah International,
comprised primarily of sales in the United Kingdom and Australia, recorded sales
growth of 32%. Sales at Farah International increased from $36,043,000 in 1994
to $47,523,000 in 1995. Value Slacks, the Company's factory outlet store
division, also reported an increase in sales from $15,326,000 in 1994 to
$16,239,000 in 1995, a 6.0% increase.
Sales at Farah U.S.A. as a percent of consolidated sales decreased from
79% in 1994 to 73% in 1995. Overall, unit sales and the average unit selling
price decreased in 1995 from 1994 by approximately 3% and 5%, respectively. The
following table demonstrates sales by product line:
<TABLE>
Thousands of dollars
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Savane(R) $ 107,559 114,395
Farah(R) and
Farah Clothing Co. (R) 27,145 47,239
John Henry(R) 11,477 14,381
Private Label 30,853 15,391
------------ ------------
$ 177,034 191,406
============ ============
</TABLE>
The sales reduction was primarily in the Company's branded product and
principally the result of: (1) increased market penetration in the wrinkle free
casual pant market by the Company's competitors; (2) the soft retail market that
intensified through 1995; (3) lost sales as a result of the effect of the
startup of new laundry and finishing facilities in Mexico and Costa Rica, as
well as a new cutting room and cloth warehouse in the United States; and (4) a
continued shift from Farah and Farah Clothing Co. to Savane and other products
by certain customers. The demand for the Company's private label products
steadily increased because of the Company's unique and innovative processes in
fabric finishing, together with the new laundry and finishing facilities and
competitive pricing. As discussed above, Farah U.S.A.'s overall average unit
selling price in 1995 was 5% lower than in 1994. The reduction was due to more
closeout sales of branded products and the higher percentage of private label
products which carry a lower average unit selling price.
Farah International accounted for 20% of the Company's consolidated
sales in 1995 and 15% in 1994. Overall sales at Farah International increased
31.9% in 1995 compared to 1994. The Company's largest international subsidiary
in 1995 was Farah U.K. with sales of $31,042,000 followed by Farah Australia and
Farah New Zealand with combined sales of $15,490,000. Sales at Farah U.K.
increased by $8,079,000 in 1995, a 35.2% increase. Unit sales at Farah U.K.
increased by 28% while the average unit selling price increased by 6%. The
increase in unit sales was due to higher sales in all categories, including
Savane and Farah branded products and private label products. The average unit
selling price in British Pound Sterling increased by 2%, while the average unit
selling price in equivalent U.S. Dollars increased by 6% due to the weakening of
the U.S. Dollar. Sales at Farah Australia and Farah New Zealand increased by
$3,566,000 primarily due to higher sales of the Savane no wrinkle product and
private label business. Unit sales at Farah Australia and New Zealand increased
by 22% due to increased market penetration. In addition, the U.S. Dollar
weakened by 4% compared to the Australian Dollar in 1995 which contributed to
the 6.7% increase in the average unit selling price in U.S. Dollar terms.
Value Slacks accounted for 7% of the Company's consolidated sales in
1995 and 6% in 1994. As of the end of 1995, Value Slacks operated 38 retail
stores in the U.S., and while it operated in Puerto Rico during 1995, it closed
its last stores in the fourth quarter of 1995. At the end of 1994, Value Slacks
operated 26 U.S. and 7 Puerto Rican stores. Sales in Value Slacks' U.S. stores
increased by 26% in 1995 while Puerto Rican store sales decreased by 45%. The
overall average unit selling price decreased by 2% in 1995; however, overall
unit sales increased by 8%. The reduction in the average unit selling price was
due to growth in competition and the weakening retail market in the U.S. During
1995, the Company closed 7 Puerto Rican stores and opened a net 12 new stores in
the U.S.
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 recorded sales growth of 23.9%. Sales at Farah
International increased from $29,097,000 in 1993 to $36,043,000 in 1994. Value
Slacks also reported increases in sales from $14,250,000 in 1993 to $15,326,000
in 1994, a 7.6% increase.
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
the average unit selling price increased by approximately 2%.
The following table demonstrates sales by product line:
<TABLE>
Thousands of dollars
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Savane $ 114,395 60,386
Farah and
Farah Clothing Co. 47,239 54,125
John Henry 14,381 14,739
Private Label 15,391 7,516
------------ ------------
$ 191,406 136,766
============ ============
</TABLE>
The substantial growth in Farah U.S.A. sales in 1994 was primarily the
result of the market's continued acceptance of the Company's Savane brand of
casual cotton no wrinkle pants. The growth was 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. Sales of Farah and Farah Clothing Co. were primarily of
dress product, although Farah branded sales trended more toward casual no
wrinkle product in 1994. The sales decrease for Farah and Farah Clothing Co.
products was caused by a shift to Savane by certain customers and by the
continued shift in consumer demand from dress to casual products. 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 the higher
Savane unit sales, offset somewhat by a higher percentage of private label
products which carry a lower average unit 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. Farah U.K. sales in 1994 were
$22,963,000 and were 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 at Farah U.K. 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. Dollars 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 the customer acceptance of the Savane
no wrinkle product and greater sales in the private label business. Unit sales
increased 21%, while the average unit selling price also increased (principally
the result of the weakening of the U.S. Dollar by 6% in 1994 as compared to
1993).
Value Slacks sales as a percent of consolidated sales decreased by 2%.
However, overall sales in Value Slacks increased 8% in 1994 compared to 1993. As
of the end of 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 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 average unit selling price
reduction 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 greater competition. The unit sales increase came from the U.S. stores due to
more stores in 1994 compared to 1993. At the same time, unit sales at the Puerto
Rican stores were down due to fewer stores operating and less favorable economic
conditions.
1995 Gross Profit Compared to 1994
Gross profit as a percent of sales was 22.8% in 1995 compared to 29.0%
in 1994. Gross profit in 1995 was 18% at Farah U.S.A., 33% at Farah
International and 51% at Value Slacks, compared to 1994 gross profit of 26% at
Farah U.S.A., 35% at Farah International and 48% at Value Slacks.
There were several factors during fiscal 1995 that contributed to the
lower gross profit margins in Farah U.S.A. As discussed above, the progressive
weakening of the retail market in 1995 had an adverse impact on gross profit
margins by forcing the Company to offer more promotional products at amounts
below its normal selling prices. In addition, because the sales volume declined
and inventory levels rose during the year, it became necessary for the Company
to record additional markdown allowances. Also, the breadth and complexity of
the Company's product lines resulted in some excess inventories and additional
markdowns. As indicated above, the Company more than doubled its private label
business which generally carries lower gross profit margins, contributing to the
reduction in the overall gross profit margin for Farah U.S.A. Transitional
issues associated with the start up of the new laundry, finishing and cutting
facilities prevented the Company from delivering all of its orders, resulting in
higher inventory quantities and larger markdowns than normal. Additional
manufacturing costs were also incurred in the first half of 1995 due to the
startup efforts of the new facilities.
The decrease in gross profit percent at Farah International was due
primarily to lower manufacturing efficiencies in the Company's Irish plants
during fiscal 1995. In addition, because of the softening of the retail market
in the U.K., the Company offered more promotional prices than in 1994. Similar
to the U.S., private label sales in Farah U.K. were a larger percentage of total
sales. Such sales carry lower gross profit margins, thereby placing downward
pressures on the Company's overall gross profit margin.
The gross profit margin at Value Slacks increased 2%. The increase was
largely due to improved margins at stores located in Puerto Rico, where the
margin increased from 40% to 43%. The gross profit margin for U.S. stores
remained stable at 52% compared to 1994. The increase in the gross profit margin
in Puerto Rico resulted from change in product mix.
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. These 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 was the 89% growth in
sales of Savane branded products in 1994 discussed above. Savane generally
carried 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.
1995 Selling, General and Administrative Expenses Compared to 1994
Selling, General and Administrative expenses ("SG&A") as a percent of
sales increased by 4.2% from 24.0% in 1994 to 28.2% in 1995. SG&A was 25% of
sales at Farah U.S.A. compared to 21% in 1994, 31% at Farah International
compared to 32% in 1994, and 52% at Value Slacks compared to 50% in 1994.
As noted above, the increase in SG&A as a percent of sales was
primarily in the Farah U.S.A. operations. Advertising costs were approximately
$4,000,000 higher than in 1994 and as a percent of sales were 3% higher than
1994. The Company committed to TV ad programs early in the season and was unable
to reduce such programs when it became apparent that the Company was not
achieving projected sales volumes. In addition, higher computer systems
implementation costs, combined with the effect of other fixed costs that did not
decrease in relation to the lower sales levels, increased SG&A as a percent of
sales.
The decrease in SG&A as a percent of sales at Farah International
occurred due to the increase in sales without a proportionate increase in costs.
While selling expenses as a percent of sales remained relatively stable, general
and administrative expenses as a percent of sales decreased from 15% in 1994 to
14% in 1995.
<PAGE>
SG&A at Value Slacks as a percent of sales was 52% in 1995 compared to
50% in 1994. The higher percentage in 1995 resulted from higher costs associated
with the closure of seven Puerto Rico stores and certain startup costs
associated with opening new U.S. stores. In addition, advertising, labor and
certain other operating costs as a percent of sales are higher in the U.S. than
in Puerto Rico. Therefore, with the shift towards only U.S. stores, the SG&A
percent is higher.
1994 Selling, General and Administrative Expenses Compared to 1993
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.
Other Income (Expense)
<TABLE>
<CAPTION>
The following table illustrates the changes in interest expense, net of
interest income, over the past three fiscal years (in thousands):
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest expense, net $ 3,726 1,756 1,452
Interest expense, net, as a percent of sales 1.5% 0.7% 0.8%
Average debt $ 47,910 26,689 23,394
Average interest rate 9.7% 9.0% 8.7%
</TABLE>
The increase in net interest expense as a percent of sales in 1995 is
principally due to increased borrowing to fund operating losses, higher
inventory levels and capital expenditures. The decrease in 1994 compared to 1993
was the result of lower borrowings due to funds generated through the sale of
common stock and operating profits. This was partially offset by increased
borrowings to fund higher inventory levels.
Included in other income in 1995 was a gain of $750,000 from the sale of a
factory and related equipment in Costa Rica.
Income Tax Expense (Benefits)
The Company recorded a consolidated income tax benefit at an effective
tax rate of 15.3% in 1995 which is less than the statutory tax rate of 34%. In
1995, tax benefits, net of valuation allowances of approximately $2,468,000,
were recognized. Furthermore, at November 3, 1995, the Company had recorded
$4,202,000 of deferred tax assets on its balance sheet. A substantial portion of
the Company's tax benefits are associated with net operating loss carryforwards
that arose in fiscal 1995 and foreign tax credits. The realization of such
assets is largely dependent upon the Company being able to generate taxable
income in the future. Although the Company reported a substantial loss in 1995,
the Company believes it has taken appropriate actions to reduce costs and
provide an opportunity to generate earnings in the future. Because of these
actions, the Company believes there is sufficient basis for the recording of tax
benefits in 1995.
<PAGE>
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Key statistics demonstrating financial condition of the Company are as
follows:
Thousands of dollars
1995 1994
------------ -----------
<S> <C> <C>
Working capital $ 49,008 67,384
Total debt 59,754 24,228
Long-term debt 12,568 5,170
Shareholders' equity 73,970 85,961
Current ratio 1.6:1 2.2:1
Long-term debt-to-equity .17:1 .06:1
Total debt-to-equity .81:1 .28:1
Days sales in accounts receivable 57 51
Inventory turnover 2.5 2.7
</TABLE>
The change in the Company's liquidity demonstrated by the above
statistics was due to two primary reasons. The first was the utilization of cash
flows to fund the pre-tax loss of $15,276,000. The second was the use of cash
flows to purchase $15,679,000 of property, plant and equipment in conjunction
with the opening of three new manufacturing facilities. To fund these
activities, $26,771,000 of cash was generated from the Company's working capital
credit facilities and $10,349,000 was generated from the issuance of new
long-term debt.
Working capital decreased by $18,376,000 during 1995. Trade receivables
increased by $2,893,000 due to higher sales in the last month of the fiscal year
compared to 1994. Inventories decreased by $2,661,000 for the same reason,
combined with a concerted effort to reduce U.S. inventory levels in response to
a soft retail market. The U.S. inventory decrease was partially offset by higher
retail and international inventories. Accounts payable and accrued expenses
decreased by $5,760,000 as a result of lower raw material purchases late in the
year.
The Company's primary Credit Agreement, which expires in July 1997,
provides up to $50,000,000 of credit. Farah U.S.A., Value Slacks and Farah U.K.
are parties to the Credit Agreement. Availability under the Credit 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 3, 1995, usage
under the Credit Agreement was $44,774,000 and available credit was $5,226,000.
The maximum credit available to Farah U.K. is $5,000,000 and the maximum credit
that may be used related to inventory is $25,000,000. In months where
receivables are the lowest and inventories are the highest, availability of
credit under the Credit Agreement is the lowest. Typically, the lowest months
for 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. As of November 3, 1995,
the Company was in compliance with all of these covenants. The Credit 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.
<PAGE>
The Company also has a $7,757,000 lease which was used to acquire
laundry, finishing, sewing and cutting equipment in Mexico, Costa Rica and the
United States. The lease is secured by assets leased, as well as certain other
fixed assets. The lease calls for quarterly principal reductions for five years
and bears interest at LIBOR plus 3 3/16%. The lease contains certain quarterly
and yearly financial covenants; particularly, an earnings before interest and
taxes (EBIT) covenant calling for minimum EBIT in 1996 of $200,000 in the first
quarter, $1,100,000 in the second quarter, $1,900,000 in the third quarter and
$2,000,000 in the fourth quarter. The lease also requires the Company to
maintain certain levels of liquidity. As of November 3, 1995, the Company was in
compliance with all covenants. Both the primary Credit Agreement and the lease
contain provisions which allow a default under either agreement to cause a
default of both agreements.
In fiscal 1996, major liquidity requirements will be the financing of
anticipated growth and capital expenditures. The Company believes that its
borrowing availability from its Credit Agreement and its cash from operations
will be adequate for fiscal 1996 anticipated liquidity requirements. In the
event that liquidity shortfalls occur due to the continuing impact of softness
at retail, unforeseen sales shortfalls or other reasons, it may be necessary for
the Company to seek alternative sources of financing. This may be in the form of
additional debt, equity or a combination thereof. The Company expects to meet
its long-term liquidity requirements through its previously discussed Credit
Agreement or renewals thereof and through cash from operations.
Capital expenditures for fiscal years 1995, 1994 and 1993 were
$15,679,000, $12,065,000 and $6,800,000, respectively. As of November 3, 1995,
material commitments for capital expenditures were approximately $551,000 and
are expected to be financed primarily by leases and the Credit Agreement
discussed above. The Company expects that capital expenditures in fiscal 1996
will not exceed $6,500,000 and will be primarily for factory machinery and
information equipment and related software.
Most of Farah U.S.A.'s major fabric suppliers provide 60-day terms,
subject to certain limits. During fiscal 1995, the maximum outstanding balance
at any month-end under these credit terms was $12,257,000.
Inflation did not materially impact the Company in fiscal 1995, 1994 or
1993.
Exhibit 21
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
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%
Farah Clothing Company, Inc. Delaware 100%
SUBSIDIARIES OF FARAH U.S.A., INC.:
Farah Manufacturing Company, Inc. Texas 100%
Farah Manufacturing Company of
New Mexico, Inc. New Mexico 100%
FTX, 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%
Value Slacks, S.A. de C.V. Mexico 100%
Servicios Magnificos, S.A. de C.V. Mexico 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>
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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
January 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-03-1995
<PERIOD-END> NOV-03-1995
<CASH> 3,657
<SECURITIES> 0
<RECEIVABLES> 40,544
<ALLOWANCES> 720
<INVENTORY> 72,763
<CURRENT-ASSETS> 127,911
<PP&E> 62,588
<DEPRECIATION> 29,225
<TOTAL-ASSETS> 173,827
<CURRENT-LIABILITIES> 78,903
<BONDS> 1,663
0
0
<COMMON> 46,024
<OTHER-SE> 27,946
<TOTAL-LIABILITY-AND-EQUITY> 173,827
<SALES> 240,797
<TOTAL-REVENUES> 240,797
<CGS> 185,822
<TOTAL-COSTS> 253,824
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,627
<INCOME-PRETAX> (15,276)
<INCOME-TAX> (2,335)
<INCOME-CONTINUING> (12,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,941)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
</TABLE>