SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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X THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
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For the Fiscal Year Ended November 3, 1996
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 13, 1997 there were outstanding 10,235,371 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by non-affiliates of the registrant (based on
the closing price for the common stock on the New York Stock Exchange on January
13, 1997) was $80,121,652.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report:
Annual Report to Shareholders for fiscal year ended November 3, 1996
- Parts I and II (attached as Exhibit 13 hereto).
Proxy Statement Dated January 31, 1997 - Part III.
THE EXHIBIT INDEX IS ON PAGE 18 OF FORM 10-K
PART I
Item 1. BUSINESS
General
The Company, founded in 1920, is a leading manufacturer and marketer of
apparel for men and boys. Beginning in fiscal 1996, a limited amount of women's
products were added to the Company's product lines. 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. (74% of consolidated
revenue for fiscal 1996) manufactures and sells a variety of casual and dress
apparel to retailers throughout the United States. Farah International (19% of
consolidated revenue for fiscal 1996) 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 1996) 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, 1996, Value Slacks had 39 retail stores, all located in the United
States.
Products
The Company manufactures high quality, medium priced, fashion apparel
for men, boys and women. The Company's products include casual slacks, dress
slacks, suit separates (matching pants and sportcoats that may be mixed and
matched to accommodate retail customer size preferences), sportcoats, shorts and
shirts. The Company's products are sold under three primary labels: Savane(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. It is known for its use
of "performance fabrics" that maintain a fresh, neat appearance, and who's
product lines primarily use 100% cotton fiber and blended fabrics (rayon/
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 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 and John Henry labels and private label products using wrinkle
resistant technologies.
In 1995, the Company co-developed a dying process for dying color-fast
bottom weight fabrics for use in its garments. The garments are then treated
with a soft-hand, stain repellent finish. These products provide no-fade,
no-stain features on no-wrinkle cotton slacks. These products were launched
under the Deep Dye Savane label in 1996 and are now the Company's best selling
cotton slacks.
Additional information with respect to the Company's significant labels
is as follows:
Savane - Both dress and casual products are sold under this label. The
Company has positioned the Savane product as a high quality garment using better
fabrics and finer workmanship, and is sold primarily to department stores. The
major product lines included under this label are as follows:
Savane Casual's for Men and Boys - Savane Casuals include
slacks and shorts for men and boys. Slacks are made from 100% cotton
fabrics and are treated with PROCESS 2000. The Company offers several
distinctly different products in this category. Savane Classic Casuals
offer no wrinkle softness together with soil and stain resistant
treatments. Savane Softwash Casuals are manufactured with unique
softening agents for a soft finish. Savane Deep Dye Casuals were
introduced in 1996 and are treated with the Deep Dye process that
provides fade resistant features. Included in the Savane Deep Dye
Casuals are the newly introduced Deep Dye Fancies which are patterned
goods made mostly from 100% cotton. Fancies are upscale casual slacks
having a semi-dress look, that is moderately priced and have the no
wrinkle, easy care features.
Savane Casual's for Women - Savane casuals for women were
introduced by the Company in the third quarter of fiscal 1996. The
women's line includes casual cotton twill slacks in selected basic
colors and offers the same no wrinkle, easy care performance features
as the men's products. These products were introduced with limited
distribution, however, the Company intends to pursue this program by
offering it to more customers and by expanding the line to women's
shirts, and possibly skirts, in 1997.
Savane Shirts - The Company began shipping Savane shirts for
men late in the 1996 fourth quarter. Savane shirts are made of 100%
cotton and treated with PROCESS 2000. Savane shirts are designed to
compliment the Company's line of bottoms. The Company also plans to
expand its shirt business in 1997 by offering a broader line of cotton
fabrics while also adding knits.
Savane Dress Wear - Savane dress wear includes men's slacks,
coats and suit separates. Dress products are made mainly of
polyester/wool and polyester/rayon blend fabrics. A Deep Dye Dress
product is also offered, providing the same fade resistant features as
the casual wear. In the first quarter of 1997, the Company will begin
shipments of a new upscale dress line, Savane Elements(TM). This line
uses high performance Savane fabric finishes on polyester, rayon and
worsted wool. Savane Elements include dress slacks with coordinating
coats, offering a sportswear career apparel.
Farah - Products sold under this label include men's casual and dress
slacks. Dress products are made from blended fabrics, while casual products are
mainly 100% cotton. Some casual slacks with these labels are fabricated using
wrinkle resistant technologies. These products are primarily sold through the
mass merchant distribution channel.
John Henry -- This label is primarily used for higher fashion dress
slacks and suit separates produced from blended fabrics. Certain of the products
in this line use wrinkle resistant technologies. The John Henry line is
currently being sold to Sears. Product distribution of this label should
continue to grow in 1997 as the Company delivers more product to Sears and gains
additional customers in this market segment.
Private Label - The Company primarily produces casual and dress product
for various retailers using their own labels. Products produced include casual
wear, dress, womenswear and boys. Such product is produced to customers'
specifications.
Business Strategy
The Company's business strategy is (1) to maximize sales of its
products by positioning them in clear channels of distribution and adding new
merchandise within each product category, (2) reduce the overall cost of
sourcing products by relying on third party contractors, which allows the
Company to better control inventory levels and match production with customer
demands, and (3) maintain a low cost administrative structure.
Farah U.S.A. has recently experienced significant growth in its
wrinkle-free products as causal wear gained more acceptance in the market.
During fiscal 1994, Savane product sales increase by more than 89% over fiscal
1993. However, as the sales of Savane products increased sales of the Farah
and John Henry labeled products began to decline. One reason for this
decrease was the competition from the Savane products, which were being sold in
the same channels of distribution. Accordingly, management decided to reposition
its products into separate and distinct channels of distribution to maximize
sales in each of the product groups. In June 1996, the Company began shipping
John Henry product to Sears. Product sales of this label include men's
dress slacks, sport coats and suit separates. In the 1996 fourth quarter, the
Company began selling its Farah brand products to a limited number of stores
of a major retailer in the mass merchandising distribution channel. The
Company continues to sell Savane products to the department store channel of
distribution.
Following the repositioning of it products, the Company began focusing
on increasing sales in all three of the product categories. During fiscal
1996, the Company introduced Deep Dye casuals and dress, womenswear, and
shirts, all under the Savane label. In fiscal 1997, the Company will offer a
new line of upscale dress wear, called Savane Elements, together with a new
line of golf wear focused on comfort and performance. To further broaden
the Savane label, the Company also intends to pursue licensing agreements
with selected apparel and apparel related vendors.
Initial sales of the John Henry product to Sears included a limited
line of dress slacks which sold extremely well, indicating wide consumer
acceptance. The line has since been increased to include additional dress
slacks, sports coats and suit separates. Plans for fiscal 1997 include
increasing distribution to additional Sears stores, as well as adding products
to the current line.
The Company intends to broaden distribution of the Farah label, not
only to additional stores within its present mass merchant customer, but also to
other retailers in this same distribution channel. Furthermore, in the first
quarter of 1997, the Company entered into an agreement with its present mass
merchant customer to license the Farah label on a non-exclusive basis. The
license applies to all categories of men's, women's, boys', and girls' apparel,
accessories and shoes. The Company believes this license will assist in
expanding sales of the Company's existing Farah labeled products currently being
sold to this retailer and will also result in licensing fees for sales of other
labeled products sold by this retailer.
In addition to the product realignment, the Company launched a program
to re-examine its costs at all levels. The U.S. production workforce was
dramatically reduced and all U.S. sewing and finishing processes were shifted
offshore to take advantage of lower costs. In October 1995, the Company sold its
coat manufacturing facility in San Jose, Costa Rica, and in June 1996, the
Company sold its largest production facility located in Piedras Negras, Mexico.
Management has shifted its strategy to place less dependence on Company owned
facilities allowing for greater flexibility in production sourcing. Although the
Company still owns production facilities in Mexico and Costa Rica, approximately
two-thirds of current production is supplied by outside contractors. Farah
U.S.A. is currently negotiating to form joint ventures with existing apparel
manufacturers in Mexico. These joint ventures will allow the Company to maintain
control of its unique finishing processes, while minimizing required
investments.
Management also made significant changes in its selling and marketing
strategies during fiscal 1996. The mix of the sales force was changed, reducing
the number of salesmen and replacing them with coordinators, whose purpose is to
ensure that the merchandise and promotional materials are properly displayed and
assist store personnel. A change was also made in the Company's advertising
strategy, targeting specific consumer markets by placing heavier emphasis on
print media. In addition, more marketing dollars were allocated to point of
sales efforts that included store display tables and fixturing, enhancing
product attractiveness to the consumer.
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 by third party contractors, located primarily
in Mexico and Central America, and Farah U.S.A. factories located in Costa Rica
and Mexico. Farah U.S.A.'s products are directed to the men's, boys' and women's
segments of the apparel industry, with approximately 93% of branded sales in
fiscal 1996 in the men's segment. 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 have grown and represent
21% of Farah U.S.A. sales in fiscal 1996.
Sales and Product Distribution. In 1996, Farah U.S.A. completed a
realignment of its product positioning in the marketplace. Savane continues to
have a strong position in department stores, while the John Henry brand was
introduced to Sears. Early in the fourth quarter, shipments of Farah-labeled
product began to the mass merchant channel. By positioning the brands in three
distinct distribution channels, management believes the Company is in a more
favorable position to maximize sales potential.
Farah U.S.A. has six 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.
Farah U.S.A. 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 runs on laptop computers that the Farah U.S.A. sales force
carries with them as they contact retailers. This system maintains timely,
accurate data on style numbers, prices and size charts (size charts describe the
distribution of sizes that a retailer typically sells). The system also provides
up-to-date, easily accessible data on inventories, customer orders and
production backlogs. With the system, the sales force can execute orders more
efficiently and assist the retailer in attaining higher margins by reducing
inventory imbalances.
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.
Manufacturing and Sourcing. The men's apparel industry in the United
States has two primary selling seasons. The Spring selling season extends from
December to April, and the Fall selling season extends from May to November.
Farah U.S.A.'s operations follow this seasonal pattern. The various steps in the
manufacturing cycle are timed so that Farah U.S.A. begins to manufacture
products for a given season two to three months before the retail season
officially begins.
Farah U.S.A. purchases its fabric and trim requirements, such as
pocketing, linings, belts, buttons, zippers and thread, from several domestic
and foreign sources. No single supplier of raw materials is critical to Farah
U.S.A.'s long-term production needs. Although the Company believes that
alternative sources of supply exist, in the event Farah U.S.A. needs to seek
additional or replacement suppliers, short-term disruptions could occur. 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 Mexico or
Costa Rica or at third party contractors. In fiscal 1996, approximately 57% of
Farah U.S.A.'s total production was sewed in its own factories, with the balance
sewed by independent contractors. In June 1996, the Company sold its Piedras
Negras, Mexico manufacturing facility. In conjunction with the sale of this
facility, the Company entered into a long term supply agreement whereby the
buyer of the facility will continue to sew and finish garments for the Company.
Since the sale of the facility, the percentage of Farah U.S.A. production from
outside contractors increased from 33% at the end of fiscal 1995, to 62% at the
end of fiscal 1996. Farah U.S.A. performs 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.
Marketing. Retailers are requiring increased quality of service from
their suppliers and greater flexibility in managing their inventories as
consumer demands change. 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.
In addition, in an effort to enhance retail presentation, Farah U.S.A.
employs merchandise coordinators who visit retail store accounts that carry the
Company's branded product. Merchandise coordinators 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.
Advertising. Farah U.S.A.'s advertising program is comprised of
national media advertising and participation in cooperative advertising programs
with retailers. In fiscal 1996, management shifted its advertising strategy to
more heavily focus on print media and point-of-sale merchandise and less on
national television campaigns. Advertising through several national magazines
and other printed material in 1996 resulted in significant cost reductions that
have allowed increases in customer store display tables and fixturing. The
Company also participates in cooperative advertising programs where the Company
and individual retailers combine their efforts to share the costs of local
television, radio and newspaper advertisements.
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. 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. Levi and certain other competitors have larger financial
and marketing resources and therefore, offer significant competition to the
Savane label.
Farah International
Farah International sells apparel in several countries in Europe,
Australia and Asia. The primary markets for Farah International are the United
Kingdom, Australia and New Zealand. Farah International produces most of its
products in two locations, and third party contractors produce the remainder.
Owned and leased plants in Ireland together with independent outside
contractors, 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 61% of 1996 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.
Subsequent to year end, on January 5, 1997, a fire occurred at the
Company's leased garment manufacturing plant in Galway, Ireland. Certain
inventory and manufacturing equipment were destroyed or damaged; however, the
Company believes that it is fully insured for such losses. It is anticipated
that it will take a minimum of six months to fully restore operations at the
Galway facility. Losses may be incurred related to the prolonged business
interruption of this facility and its related impact on the Company's other
manufacturing facility in Ireland. Accordingly, management is currently
evaluating whether it is economically feasible to continue its operations in
Ireland.
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 1996 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 1996 accounted for approximately 63% of its sales. Distribution channels
in the United Kingdom are significantly different from those in the United
States in that retailers carry more private label brands than branded products.
Farah International's primary distribution channels in the United Kingdom are
large retail outlets and independent menswear stores.
Farah Australia and Farah New Zealand accounted for approximately 36%
of Farah International's sales in fiscal 1996. 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
39 retail outlet stores as of November 3, 1996, 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 55% of the Company's
consolidated revenues during fiscal 1996. In fiscal 1996, Federated Department
Stores, Inc. accounted for $36,260,000 (14.6%) of the Company's consolidated
sales, and Dillard Department Stores, Inc. accounted for $26,571,000 (10.7%) of
consolidated sales.
Trademarks
The Company owns many U.S. and foreign trademark registrations,
including Savane, Savane Elements, 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.
Factors Affecting the Company's Business and Prospects
Statements in this Report that relate to future results or events are
based on the Company's current expectations. There are many factors that affect
the Company's business and the results of its operations that may cause the
actual results of operations in future periods to differ materially from those
currently expected or desired. These factors include general economic and
business conditions in the U.S. and abroad; the level of demand for apparel
products; the intensity of competition and the pricing pressures that may
result; changes in labor and import and export regulations; the ability of the
Company to timely and effectively manage production sourcing; the ability of the
Company to access the credit market to finance capital expenditures; the ability
of the Company to manage its inventory levels to minimize excess inventory;
currency fluctuations; and the success of planned advertising.
Seasonality
The Company's products are primarily marketed for the Spring and Fall
retail selling seasons each year, with interim lines introduced periodically to
complement the two primary selling seasons. Sales volume for the first quarter
is generally the lowest of the year while the fourth quarter is the highest.
Farah U.S.A. closes some of its factories in the first quarter for approximately
two weeks at Christmas time. However, with the Company's introduction of more
year-round basic products, the seasonality has been diminished somewhat.
Regulation
Substantially all of the Company's total production is manufactured
abroad, either in its foreign factories or through arrangements with independent
foreign contractors. As a result, the Company's operations may be adversely
affected by political instability resulting in the disruption of trade from
foreign countries in which the Company's facilities or contractors are located,
the imposition of additional regulations relating to imports or duties, taxes
and other charges on imports, any significant fluctuation of the value of the
dollar against foreign currencies and restrictions on the transfer of funds. In
addition, the Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and certain foreign
countries. These agreements impose quotas on the amount and type of goods which
can be imported into the United States from these countries. However, the
Company closely monitors import quotas and can, in most cases, shift production
to contractors located in other countries with available quotas or to domestic
factories. The Company's apparel products that are imported from its factories
in Mexico and Costa Rica are eligible for certain duty-advantaged programs
historically known as "807 Programs." 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, 1996, the Company had approximately 3,600 employees.
As of that date, Farah U.S.A., Farah International and Value Slacks had
approximately 3,000, 400 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 250 of Farah U.S.A.'s United States employees are members of the
Amalgamated Clothing and Textile Union and approximately 650 of its employees
are members of a union in Mexico. The collective bargaining agreement with the
Company's United States employees expires in February 1997 and is currently
under negotiation. The collective bargaining agreement for the Company's
employees in Mexico expires in December 1997. 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 1996, the Company did not utilize derivative financial instruments.
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 Company's lease on
its corporate headquarters in El Paso, Texas expires in May 1998. Accordingly,
the Company plans to relocate its Corporate offices to another El Paso location.
The new offices will be leased under an operating lease agreement estimated to
begin in the second quarter of fiscal 1997. The Company has also contracted for
the construction of a new distribution warehouse located in Santa Teresa, New
Mexico. Relocation to the new warehouse is planned for the first quarter of
fiscal 1998. <TABLE> <CAPTION>
The following table reflects the general location, use and approximate
size of the Company's significant real properties currently in use or under
construction:
<S> <C> <C>
Approximate Owned/
Location Use Square Footage Leased (1)
-------- --- --------------
-------------
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
Kiltimagh, Ireland Garment manufacturing plant 23,000 Owned
Auckland, New Zealand Office/Warehouse 9,000 Owned
El Paso, Texas Office/Warehouse 1,033,000 Leased (3)
El Paso, Texas Garment manufacturing plant 201,000 Leased
Sydney, Australia Office/Warehouse 29,000 Leased
Suva, Fiji Two garment manufacturing plants 35,000 Leased (4)
Witham, United Kingdom Office/Warehouse 57,000 Leased
Galway, Ireland Garment manufacturing plant 36,000 Leased (5)
Retail locations in the United
States 38 Retail stores 100,000 Leased
El Paso, Texas Corporate offices 43,500 Leased (6)
Santa Teresa, New Mexico Distribution Warehouse 250,000 Leased (7)
</TABLE>
(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. As of the end of fiscal
1996, approximately 65% of the Company's El Paso building was subleased
to a third party.
(4) By a 50% joint venture.
(5) The Galway plant was sold and leased back on a month-to-month lease in
the second quarter of fiscal 1996. Subsequent to year end, on January
5, 1997, a fire occurred at this facility. Management is currently
evaluating the extent of the losses, to determine if it is economically
feasible to continue its operations in Ireland.
(6) Operating lease for new corporate headquarters was entered into in
October 1996. Construction is currently underway to prepare office
space for intended use. Relocation to this facility is planned for
the second quarter of fiscal 1997.
(7) On November 30, 1996, the Company entered into a lease for a facility
to be constructed with an estimated completion date of September 1997.
The lease agreement provides an option to purchase the warehouse for
$6,700,000. Such purchase would be subject to satisfactory Industrial
Revenue Bond financing. Relocation to the new warehouse is planned for
the first quarter of fiscal 1998.
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
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 32 of the Company's Annual Report to Shareholders for the
fiscal year ended November 3, 1996 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 33 of the Company's Annual Report to
Shareholders for the fiscal year ended November 3, 1996 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 34 through 40 of the Company's Annual Report to
Shareholders for the fiscal year ended November 3, 1996 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, 1996 on page 14 through 32 are incorporated herein
by reference:
Quarterly Data (Unaudited) - Supplementary Data for
fiscal years 1996 and 1995
Consolidated Statements of Operations - Years ended November 3, 1996,
November 3, 1995 and November 4, 1994
Consolidated Balance Sheets - November 3, 1996 and November 3, 1995
Consolidated Statements of Shareholders' Equity - Years ended
November 3, 1996, November 3, 1995 and November 4, 1994
Consolidated Statements of Cash Flows - Years ended
November 3, 1996, November 3, 1995 and November 4, 1994
Notes to Consolidated Financial Statements - November 3, 1996,
November 3, 1995 and November 4, 1994
Reports of Independent Public Accountants
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Board of Directors previously requested the Audit Committee of the
Board to seek proposals from other accounting firms with a view toward reducing
the Company's audit and accounting fees. On the basis of the proposals received,
the Board appointed the firm of Coopers & Lybrand L.L.P. On March 13, 1996,
Coopers & Lybrand L.L.P. was informed of the Board's decision. Also on March 13,
1996, Arthur Andersen L.L.P. was notified of their dismissal.
The Board anticipates that this change in accountants will enable the
Company to effect a savings in audit and accounting fees. Arthur Andersen
L.L.P.'s reports on the Company's financial statements for the past two years
have not contained an adverse opinion or a disclaimer of opinion and were not
qualified as to uncertainty, audit scope, or accounting principles. During the
Company's two most recent fiscal years and the period from the end of the
Company's last fiscal year to the date of the Board's dismissal of Arthur
Andersen L.L.P., there have been no disagreements with Arthur Andersen L.L.P. on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Arthur Andersen L.L.P., would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports.
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 5 through 7, and "Performance of
the Common Stock" and "Stock Option and Compensation Committee Report on
Executive Compensation" on pages 14 through 16 of the Company's Proxy Statement
dated January 31, 1997 prepared in connection with its 1997 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 8 through 12 of the Company's
Proxy Statement prepared in connection with its 1997 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 through 4 of the Company's Proxy
Statement prepared in connection with its 1997 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 caption
"Compensation of Directors" on pages 12 and 13, and under the caption "Certain
Transactions" on page 13 of the Company's Proxy Statement prepared in connection
with its 1997 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
Reports of Independent Public Accountants and Selected Financial Data as
included in the Company's Annual Report to Shareholders for fiscal year ended
November 3, 1996 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, 1996, 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, 1996,
November 3, 1995 and November 4, 1994
Consolidated Balance Sheets - November 3, 1996 and November 3, 1995
Consolidated Statements of Shareholders' Equity - Years ended
November 3, 1996, November 3, 1995 and November 4, 1994
Consolidated Statements of Cash Flows - Years ended
November 3, 1996, November 3, 1995 and November 4, 1994
Notes to Consolidated Financial Statements
Reports of Independent Public Accountants
Quarterly Data (unaudited) - Supplementary Data for
fiscal years 1996 and 1995
Selected Financial Data for fiscal years ended 1992 to 1996
(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.
<TABLE>
<CAPTION>
(c) Exhibits.
<S> <C> <C>
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
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 10.4 to
Form 10-K dated November 4, 1994).
* 10.3 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).
* 10.4 Guarantee of Lease by Farah Incorporated (filed as Exhibit 6 to Form 8-K dated May 25, 1988).
* 10.5 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).
* 10.6 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).
* 10.7 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).
* 10.8 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).
* 10.9 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).
* 10.10 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).
* 10.11 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).
* 10.12 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).
* 10.13 Form of Pledge and Security Agreement, dated August 2, 1990 (filed as Exhibit 10.58 to Form
10-K as of October 31, 1990).
* 10.14 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).
* 10.15 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).
* 10.16 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).
* 10.17 Form of Guarantee and Waiver, dated August 2, 1990 (filed as Exhibit 10.64 to Form 10-K as of
October 31, 1990).
* 10.18 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).
* 10.19 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).
* 10.20 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).
* 10.21 Form of Pledge and Security Agreement, dated August 2, 1990 (filed as Exhibit 10.71 to Form
10-K as of October 31, 1990).
* 10.22 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).
* 10.23 10.23 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).
* 10.24 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).
* 10.25 Form of General Security Agreement, dated August 2, 1990 (filed as Exhibit 10.78 to Form 10-K
as of October 31, 1990).
* 10.26 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).
* 10.27 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).
* 10.28 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).
* 10.29 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).
* 10.30 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).
* 10.31 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
as Exhibit 10.118 to Form 10-Q as of August 7, 1992).
* 10.32 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).
* 10.33 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).
* 10.34 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).
* 10.35 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).
* 10.36 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).
* 10.37 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).
* 10.38 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
Georges Marciano Trust and the Paul Marciano Trust, (filed as Exhibit 10.128 to Form 10-Q as
of May 7, 1993).
* 10.39 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).
* 10.40 Amendment No. 9 dated July 16, 1993 to Accounts Financing Agreement dated August 2, 1990
between Congress Financial Corporation (Southwest), (filed as Exhibit 10.129 to Form 10-Q
as of May 7, 1993).
* 10.41 Deferred Compensation Agreement dated December 20, 1993 (filed as Exhibit 10.45 to Form 10-K
as of November 4, 1994).
* 10.42 Form of Deferred Compensation Agreements dated December 16, 1994 (filed as Exhibit 10.46 to
Form 10-K as of November 4, 1994).
* 10.43 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).
* 10.44 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).
* 10.45 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).
* 10.46 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).
* 10.47 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
Exhibit 10.52 to Form 10-Q as of August 4, 1995).
* 10.48 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).
* 10.49 Amended and Restated Employment Agreement dated July 10, 1995 (filed as Exhibit 10.53 to Form
10-K as of November 3, 1995).
* 10.50 Form of Deferred Compensation Agreements dated December 21, 1995 (filed as Exhibit 10.54 to
Form 10-K as of November 3, 1995).
* 10.51 Employment Agreement dated March 1, 1996 (filed as Exhibit 10.55 to Form 10-Q as of May 5,
1996).
* 10.52 Amendment dated December 6, 1995 to the Farah Incorporated 1991 Stock Option and Restricted
Stock Plan dated October 15, 1991 (filed as Exhibit 10.56 to Form 10-Q as of May 5, 1996).
* 10.53 Asset Purchase Agreement Farah Incorporated, Farah U.S.A, Inc. Galey & Lord, Inc. and Galey
& Lord Industries Inc., dated May 20, 1996 (filed as Exhibit 10.57 to Form 10-Q as of May 5,
1996.)
10.54 Form of Deferred Compensation Agreements dated December 19, 1996.
10.55 Letter Amendment dated March 2, 1996 to Employment Agreement dated August 25, 1994.
10.56 Letter Amendment dated March 2, 1996 to Employment Agreement dated August 2, 1994.
10.57 Lease Agreement dated October 4, 1996 between Farah U.S.A., Inc. and Orso Partners, Ltd.
10.58 Lease Agreement dated November 30, 1996 between Farah U.S.A., Inc. and Santa Teresa Limited
Partnership.
*Incorporated herein by reference.
13 Annual Report to Shareholders for Fiscal Year 1996
21 Subsidiaries of Farah Incorporated
23.1 Consent of Independent Accountants (Coopers & Lybrand L.L.P.)
23.2 Consent of Independent Public Accountants (Arthur Andersen LLP)
27 Financial Data Schedule
</TABLE>
<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/ Russell G. Gibson
Russell G. Gibson
Principal Financial Officer
/s/ Polly H. Vaughn
Polly H. Vaughn
Principal Accounting Officer
Dated: January 24, 1997
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 24, 1997.
/s/ Richard C. Allender /s/ Sylvan Landau
Richard C. Allender Sylvan Landau
Principal Executive Officer, Director Director
/s/ Clark L. Bullock /s/ Michael R Mitchell
Clark L. Bullock Michael R. Mitchell
Director Director
/s/ Christopher L. Carameros /s/ Timothy B. Page
Christopher L. Carameros Timothy B. Page
Director Director
/s/ John D. Curtis /s/ Charles J. Smith
John D. Curtis Charles J. Smith
Director Director
<PAGE>
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-K INDEX TO ATTACHED EXHIBITS (All Exhibits listed
are on pages 19 through 98)
<S> <C> <C>
Page
Numbers
Exhibit 10.54 Form of Deferred Compensation Agreements dated December 19, 1996. 19
Exhibit 10.55 Letter Amendment dated March 2, 1996 to Employment Agreement dated August 25, 23
1994.
Exhibit 10.56 Letter Amendment dated March 2, 1996 to Employment Agreement dated August 2, 24
1994.
Exhibit 10.57 Lease Agreement dated October 4, 1996 between Farah U.S.A., Inc. and Orso 25
Partners, Ltd.
Exhibit 10.58 Lease Agreement dated November 30, 1996 between Farah U.S.A., Inc. and Santa 45
Teresa Limited Partnership.
Exhibit 13 Annual Report to Shareholders for Fiscal Year 1996. 63
Exhibit 21 Subsidiaries of Farah Incorporated 95
Exhibit 23.1 Consent of Independent Accountants (Coopers & Lybrand L.L.P.) 96
Exhibit 23.2 Consent of Independent Public Accountants (Arthur Andersen LLP) 97
Exhibit 27 Financial Data Schedule 98
</TABLE>
EXHIBIT 10.54
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, 1997 and continuing through December 31, 1997,
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, 1997 an amount equal to the
Employee's total Deferred Income during 1997 and shall credit that sum to a
separate memorandum account on its books ("______________ 1997 Deferral Account"
or "Deferral Account").
b. In addition, on December 31, 1997 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 1997 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, 1997) 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 1997 on the amounts described in (ii)
above.
c. After December 31, 1997, 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-1997 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 1997, 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 1997:
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 1997; 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 1997
with respect to which he has deferred compensation pursuant to Farah
Incorporated 1993 Unfunded Deferred Compensation Plan ("Plan").
The Stock Option and Compensation Committee of the Board of Directors of
Farah Incorporated (or its authorized representative) shall determine, in its
sole discretion, whether the Employee is entitled to a matching amount pursuant
to the foregoing paragraphs of this Agreement and the Plan (including, but not
limited to, determining whether Employee's termination of employment was
voluntary or involuntary or for cause or not for cause).
e. If Employee terminates his employment with all Farah Entities, Employee
shall receive amounts in lieu of interest in the manner described in the
preceding paragraphs until payment of Employee's entire vested Deferred Account
balance is made. However, notwithstanding the foregoing to the contrary, with
respect to the calendar year in which the last payment is made to Employee
pursuant to paragraph 3 (or the only payment, if a lump sum payment is to be
made) of this Agreement, no amounts in lieu of interest shall 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 9, 1998. 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__________ day of ___________________, 1996.
EMPLOYER
By____________________________________________
EMPLOYEE
By____________________________________________
<PAGE>
ANNEX TO EXHBIT 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, 1997 to 5% January 9, 1998
December 31, 1997
Jackie L. Boatman January 1, 1997 to 5% January 9, 1998
December 31, 1997
Russell G. Gibson January 1, 1997 to 5% January 9, 1998
December 31, 1997
Michael R. Mitchell January 1, 1997 to 7% January 9, 1998
December 31, 1997
Timothy B. Page January 1, 1997 to 5% January 9, 1998
December 31, 1997
<PAGE>
EXHIBIT 10.55
March 2, 1996
Mr. Jackie L. Boatman
Farah Incorporated
88889 Gateway West
El Paso, Texas 79925
Re: Extension of Employment Agreement
Dear Jackie:
Reference is made to that certain Amended and Restated Employment Agreement by
and between Farah Incorporated (the "Company") and yourself dated August 2, 1994
(the "Agreement"). The Company wishes to extend the term of the Agreement.
Therefore, the Company proposes that Section 1(b) of the Agreement be amended to
delete the date "March 1, 1996" and to insert the date "March 1, 1998". All
other terms and provisions of the Agreement will remain unchanged.
If the foregoing terms are acceptable to you, please indicate your acceptance by
signing below.
Very truly yours,
Farah Incorporated
/s/ Richard C. Allender
Richard C. Allender
Chairman of the Board, President and Chief Executive Officer
Agreed and accepted as of the 4th day of March, 1996:
/s/ Jackie L. Boatman
Jackie L. Boatman
<PAGE>
EXHIBIT 10.56
March 2, 1996
Mr. Michael R. Mitchell
Farah Incorporated
88889 Gateway West
El Paso, Texas 79925
Re: Extension of Employment Agreement
Dear Mike:
Reference is made to that certain Amended and Restated Employment Agreement by
and between Farah Incorporated (the "Company") and yourself dated August 25,
1994 (the "Agreement"). The Company wishes to extend the term of the Agreement.
Therefore, the Company proposes that Section 1(b) of the Agreement be amended to
delete the date "March 1, 1996" and to insert the date "March 1, 1998". All
other terms and provisions of the Agreement will remain unchanged.
If the foregoing terms are acceptable to you, please indicate your acceptance by
signing below.
Very truly yours,
Farah Incorporated
/s/ Richard C. Allender
Richard C. Allender
Chairman of the Board, President and Chief Executive Officer
Agreed and accepted as of the 6th day of March, 1996:
/s/ Michael R. Mitchell
Michael R. Mitchell
<PAGE>
EXHIBIT 10.57
LEASE AGREEMENT
The Commons, Building "D"
El Paso, Texas
FARAH U.S.A., INC.
THIS LEASE AGREEMENT ("Lease") is entered as of the 4th day of October,
1996 between Orso Partners, Ltd. A Texas Limited Partnership ("Landlord") and
Farah U.S.A., Inc., a Texas corporation ("Tenant").
ARTICLE 1. PREMISES, TERM, AND USE
1.01 LEASED PREMISES.
A. Upon the terms, provisions and conditions hereof, Landlord hereby
leases to Tenant and Tenant hereby leases from Landlord the premises reflected
on the floor plans set forth in Exhibit "A" hereto in the Building known as the
Commons Building D (the "Building", which term shall also include the related
parking areas, landscaping, and other similar improvements), located on the land
described in Exhibit "B" hereto. Such premises, together with any other space in
the Building leased by Tenant pursuant hereto, are herein called the "Leased
Premises".
B. The Net Rentable Area (defined below) of the initial Leased Premises
is approximately 42,459 square feet, and the Rentable Area for the entire
Building is approximately 52,949 square feet.
C. The term "Net Rentable Area" shall mean (i) in the case of a single
tenancy floor, the area within the inside surface of the outer glass or finished
column walls of the Building to the inside surface of the opposite outer wall,
excluding only the areas within the Building used for elevator mechanical rooms
or shafts, stairs, fire towers, flues, vents, stacks, pipe shafts and vertical
ducts, but including any such areas which are for the specific use of Tenant,
and (ii) in the case of a multi-tenancy floor, the area within the inside
surface of the outer glass or finished column walls enclosing the Leased
Premises to the midpoint of the demising walls separating the Leased Premises
from other areas, but including an allocable portion of the corridors, elevator
foyers, restrooms, mechanical rooms, janitor closets, vending areas, and other
similar facilities for the use of all Building tenants on the particular floor.
1.02 TERM. Subject to the terms, provisions and conditions hereof,
this Lease shall continue in force for a term ("Term") of Ten (10) years,
beginning on the 1st day of March, 1997, and ending on the 28th day of February,
2007.
A. Delays by Landlord. If the Leased Premises are not ready for
occupancy by such commencement date because of the failure of Landlord to
perform Landlord's obligations under this Lease, Landlord shall not be liable
for any claims, damages, or liabilities in connection therewith or by reason
thereof, and the Term shall commence on the date the Leased Premises are ready
for occupancy by Tenant; provided that if the Leased Premises are not ready for
occupancy by July 1, 1997 because of the failure of Landlord to perform
Landlord's obligations under this Lease, then Tenant may as Tenant's sole
remedy, terminate this Lease, and receive, in addition, reimbursement of any
sums spent by Tenant for Tenant Improvements under Exhibit "C" hereto (excluding
Landlord's Contribution). Should the Term commence on a date other than that
specified above, Landlord and Tenant will, at the request of either, execute a
declaration specifying the actual commencement date. In such event, rental under
this Lease shall not commence until the actual commencement date, and the stated
Term shall thereupon commence and the expiration date shall be extended so as to
give effect to the full Term stated above.
B. Delays by Tenant. If the Leased Premises are not ready for occupancy
because of the failure of Tenant to perform Tenant's obligations under this
Lease, the commencement date of the Lease shall be March 1, 1997.
1.03 RENEWAL OPTION. Provided that Tenant is not in default under the
terms of the Lease, Landlord grants Tenant an option (the "Option") to renew the
Lease for a five (5) year term (the "Option Period") commencing March 1, 2007.
To exercise the Option, Tenant must notify Landlord in writing prior to
September 1, 2006, of Tenant's decision to exercise the Option. The terms of
the Lease during the Option Period shall be as set forth herein except for Base
Rental, which shall be calculated as set forth in Section 2.01 hereof.
1.04 USE. The Leased Premises shall be used and occupied by Tenant
solely for the purpose of a business office, and other related purposes, and
for no other purpose, without Landlord's express written consent.
ARTICLE 2. RENTAL
2.01 INITIAL BASE RENTAL. Tenant shall pay a base rental in monthly
installments ("Base Rental") as set forth in this Article 2. Such Base Rental
together with all increases provided for herein shall be due and payable in
advance in twelve (12) equal installments on the first day of each calendar
month during the Term, at Landlord's address as provided herein (or at such
other place as Landlord may hereafter designate) without demand, deduction,
abatement, or setoff (except as otherwise expressly provided for herein). If the
Term commences or ends on other than the first or last day of a calendar month,
then the installment of Base Rental for such months shall be appropriately
prorated. The Base Rental shall be as follows:
A. Year One. For the first year of the Lease, Tenant shall pay a Base
Rental of $35,382.50 per month (being $10.00 per square foot of Net Rentable
Area of the Leased Premises per year).
B. Years Two through Five. For years two through five of the Lease, Tenant
shall pay a Base Rental of $42,459.00 per month (being $12.00 per square foot of
Net Rentable Area of the Leased Premises per year).
C. Years Six through Ten. For years six through ten of the Lease, Tenant
shall pay a Base Rental of $47,766.00 per month (being $13.50 per square foot of
Net Rentable Area of the Leased Premises per year).
D. Renewal Option. The Base Rent for the Option Period shall be adjusted by
one hundred percent (100%) of the increase in the Consumer Price Index for All
Urban Consumers U.S. City Average (All Items, 1982-1984=100) published by the
Bureau of Labor Statistics of the U.S. Department of Labor (herein the CPI) from
January, 2002 to January 1, 2007. Because the CPI is published at a date after
the commencement of the Option Period, the adjustment shall be calculated by
Landlord as soon as it is available, and the Base Rental adjustment shall be
retroactive to the first full month of the Option Period. In the event that
Tenant exercises the Option, Tenant shall continue payment of the Base Rental in
effect during the last month of the Term of the Lease until notified by Landlord
of the new Base Rental. Upon receipt of such notice, Tenant shall commence
payment of the new Base Rental and, in addition, shall pay to Landlord the
difference between the new Base Rental and the Base Rental paid during each
month of the Option Period prior to receipt of the notice. The calculation of
Base Rental for the Option Period shall be done in the following manner:
Multiply the monthly Base Rental in effect during year ten by a fraction, the
numerator of which is the Index number for January, 2007 (the first month of the
Option Period), and the denominator of which is the Index number for January,
2002, as follows:
CPI for January 2007
$47,766 x --------------------------------- = Option Base Rental
CPI for January 2002
In no event shall the adjusted Base Rental for the Option Period be less than
$47,766.00 per month.
2.02 TENANT'S SHARE OF BASIC OPERATING COSTS.
A. Tenant shall also pay, as hereinafter provided, Tenant's Share
(hereafter defined) of any increases in the Basic Operating Costs (hereafter
defined) for the Building over the Initial Basic Operating Costs. The "Initial
Basic Operating Costs" (on a per square foot of Rentable Area per year basis) is
hereby stipulated to be $5.30. Prior to the commencement of each calendar year
during the Term, Landlord shall provide a then current estimate of Basic
Operating Costs for the calendar year, and thereafter Tenant shall pay, as
additional rental, in twelve (12) equal monthly installments at the time and
place provided above, Tenant's Share of the difference between the estimated
Basic Operating Costs and Initial Basic Operating Costs for the calendar year in
question.
B. Within one hundred fifty (150) days or as soon thereafter as possible
after the conclusion of each calendar year of the Term, Landlord shall furnish
to Tenant a statement of actual Basic Operating Costs for such year, and within
ten (10) days thereafter an appropriate cash adjustment shall be made between
Landlord and Tenant to reflect any difference between Landlord's estimate of,
and the actual, Basic Operating Costs.
C. The difference between Basic Operating Costs and the Initial Basic
Operating Costs shall be paid by Tenant in the proportion (herein called
"Tenant's Share") which the Net Rentable Area of the Leased Premises bears to
the total Rentable Area in the Building.
D. "Basic Operating Costs" shall mean the operating expenses of the
Building and all expenditures by Landlord reasonably necessary to maintain the
Building, parking, and related facilities, and such additional facilities in
subsequent years as may be reasonably determined by Landlord to be necessary in
accordance with sound and reasonable practices for facilities of a like kind and
character. All operating expenses shall be determined on an accrual basis in
accordance with generally accepted accounting principles which shall be
consistently applied. Such operating expenses shall include all expenses, costs
and disbursements of every kind and character which Landlord shall pay or become
obligated to pay because of or in connection with the ownership, operation, and
maintenance of the Building (unless otherwise excluded herein), including, but
not limited to, the following:
(1) Wages and salaries of all employees engaged on-site in the Building in
direct operations and maintenance of the Building, employer's social security
taxes, unemployment taxes or insurance, and any other taxes which may be levied
on such wages and salaries, the cost of disability and hospitalization insurance
and pension or retirement benefits of such employees;
(2) All supplies and materials used in the operation and maintenance of the
Building;
(3) Cost of all utilities for the Building, including the cost of water and
power, heating, lighting, air conditioning and ventilating for the Building;
(4) Cost of all maintenance and service agreements for the Building, the
equipment therein and grounds, including janitorial service to the Building
common areas (but excluding the cost of janitorial service provided to the
noncommon lease space of other tenants of the Building, and excluding janitorial
services to the Demised Premises, which shall be performed by Tenant at Tenant's
sole cost and expense), security services, landscape maintenance, alarm service,
window cleaning and elevator maintenance;
(5) Cost of all insurance relating to the Building, including casualty and
liability insurance applicable to the Building and Landlord's personal property
used in connection therewith;
(6) All taxes and assessments and governmental charges, whether federal,
state, county or municipal and whether they be by taxing districts or
authorities presently taxing the Leased Premises or by others, subsequently
created or otherwise, and any other taxes and assessments attributable to the
Building or its operation excluding, however, federal and state taxes on income
and ad valorem taxes on Tenant's personal property and on the value of leasehold
improvements to the extent that the same exceeds standard building allowances;
(7) Cost of repairs and general maintenance (excluding such repairs and
general maintenance paid by insurance proceeds or by Tenant or other third
parties and alterations attributable solely to tenants of the Building other
than Tenant);
(8) Legal expenses attributable to the ownership and operation of the
Building (but excluding legal expenses incurred in connection with: any
refinancing of the Building; any sale of the Building; negotiation of tenant
leases; prosecution of other tenant defaults), accounting expenses and
management fees incurred with respect to the Building.
(9) Costs incurred in compliance with new or revised federal or state laws
or municipal ordinances or codes or regulations promulgated under any of the
same (but excluding expenditures classified as capital expenditures for federal
income tax purposes and excluding the cost of the improvements to be made by
Landlord under Section 3.03 hereof and excluding the cost of any abatement of,
or operation and maintenance program for, asbestos in the Building); and
(10) Amortization of the cost of installation of capital investment items
which are primarily for the purpose of reducing (or avoiding increases in) basic
operating costs or which may be required by governmental authority. All such
costs shall be amortized over the reasonable life of the capital investment
items with the reasonable life and amortization schedule being determined in
accordance with generally accepted accounting principles and in no event to
extend beyond the reasonable life of the Building. In the case of installations
for the purpose of reducing (or avoiding increases in) operating costs, Landlord
shall, upon request, provide Tenant a cost justification therefore.
Basic Operating Costs shall not include (i) expenditures classified as
capital expenditures for federal income tax purposes (except as set forth
herein), (ii) costs for which Landlord is entitled to specific reimbursement by
Tenant, any other tenants of the Building, or any other third party, (iii) costs
of initial construction of the Building, (iv) cost of renovating or modifying
space in the Building for lease to other tenants, (v) leasing commissions and
all non-cash expenses (including depreciation), and (vi) debt service on any
indebtedness secured by the Building.
E. If the Building is not fully occupied during any year, an adjustment
shall be made in computing the Basic Operating Costs for such year so that the
Basic Operating Costs shall be computed as though ninety-five percent (95%) of
the Building had been occupied during such year.
2.03 AUDIT. Tenant, at its expense, shall have the right, upon giving
reasonable notice, to audit Landlord's books and records relating to any Basic
Operating Costs or increased or additional rental payable hereunder, for any
periods within two (2) years prior to such audit; or at Landlord's sole
discretion, Landlord will provide an audit or report prepared by a certified
public accountant, which audit or report for purposes of this Lease shall be
conclusive.
ARTICLE 3. LANDLORD'S SERVICES
3.01 SERVICES TO BE FURNISHED BY LANDLORD.
A. Landlord shall furnish (with respect to matters within Landlord's
control) and Landlord shall use its best efforts to furnish (with respect to
matters not within Landlord's control) Tenant, at Landlord's expense, subject to
the Building Rules and Regulations (hereafter defined) and Tenant's performance
of its obligations hereunder, the following services:
(1) Air conditioning and heating, in season, during Normal Building
Operating Hours (hereafter defined), at such temperatures and in such amounts as
are considered by Landlord to be standard;
(2) Hot and cold water at those points of supply provided for lavatory and
drinking purposes only;
(3) Janitorial service in and about the Building (but excluding the Leased
Premises, which shall be the sole responsibility of Tenant) five (5) days per
week and periodic window washing;
(4) Elevators for access to and egress from the Leased Premises and the
Building twenty-four (24) hours a day, seven (7) days a week;
(5) Electricity and proper facilities to furnish sufficient electrical
power during Normal Building Operating Hours for normal office machines
(including without limitation personal computers) and other standard office
equipment, including lighting of low electrical consumption, but not including
electricity required for electronic data processing equipment, special lighting
in excess of building standard, or any other item of electrical equipment which
singly consumes more than 0.5 kilowatts per hour at rate capacity or requires a
voltage other than 120 volts single phase except electrical consumption that is
separately metered. Should such electrical service for the Leased Premises for
normal office machines and other equipment including lighting of low electrical
consumption be separately metered, Tenant shall pay for electric current
supplied or used in the Leased Premises at the rate as established by the
company providing electricity to the Leased Premises. Electric current shall be
measured by meter. Tenant will be billed monthly for such current. Landlord
acknowledges that Tenant intends to install computer equipment on the 2nd floor
of the Leased Premises, and that such equipment will require cooling on a 24
hour basis. Arrangements shall be made to provide such cooling facilities as a
part of the Tenant Improvements, and the cost of the additional electricity
usage shall be separately paid by Tenant.
(6) Replacement of fluorescent lamps in Building Standard light fixtures
installed by Landlord and incandescent bulb replacement in all public areas.
B."Normal Building Operating Hours" shall be from 6:00 a.m. to 8:00 p.m.
Monday through Friday, and 7:00 a.m. to 2:00 p.m. Saturday, exclusive of
holidays.
C. Failure by Landlord to any extent to furnish such services or any
cessation thereof shall not render Landlord liable in any respect for damages to
either person or property, nor be construed as an eviction of Tenant, nor work
an abatement of rent, nor relieve Tenant from fulfillment of any covenant or
agreement hereof. Should any of such services be interrupted, Landlord shall use
reasonable diligence to restore same promptly, but except as provided herein,
Tenant shall have no claim for rebate of rent or damages or eviction on account
thereof.
D. Tenant shall pay to Landlord, monthly, as billed, such charges as may be
separately metered or as Landlord may compute for any electric services utilized
by Tenant for computers, data processing equipment or other similar electrical
equipment; extra lighting; electrical service in excess of that stated herein;
or other electrical service not standard for the Building.
3.02 ACCESS BY TENANT PRIOR TO COMMENCEMENT OF TERM. Landlord shall permit
Tenant and its employees, agents, suppliers, contractors and workmen to enter
the Leased Premises prior to the commencement of the Term to enable Tenant to do
such things as may be reasonably required by Tenant to make the Leased Premises
ready for Tenant's occupancy, provided that such parties will not interfere with
or delay the performance of any activities by Landlord or other occupants of the
Building. Any such entry into the Leased Premises shall be at Tenant's risk and
Landlord shall not be liable in any way for personal injury, death, or property
damage which may be suffered in or about the Leased Premises or the Building by
Tenant or its employees, agents, contractors, suppliers or workmen.
3.03 IMPROVEMENTS TO BE MADE BY LANDLORD. Landlord shall make those
improvements to the Leased Premises referred to in Exhibit "C" hereto, under the
terms and conditions therein set forth. When used herein, "Building Standard"
items shall mean those items considered by Landlord to be Standard for the
Building.
3.04 IMPROVEMENTS TO BE MADE BY TENANT. Tenant shall make those
improvements to the Leased Premises referred to in Exhibit "C hereto, under the
terms and conditions therein set forth.
3.05 REPAIR AND MAINTENANCE BY LANDLORD. Landlord shall not be required to
make any improvements or repairs of any kind or character to the Leased
Premises, except as provided in Section 3.03 and such repairs as may be required
to the Building corridors, lobbies, structural members of the Building, the roof
of the Building and equipment used to provide the services referred to herein,
and such additional maintenance to such corridors, lobbies or structural members
as may be necessary because of damage by persons other than Tenant, its agents,
employees, invitees or visitors. The obligation of Landlord to so maintain and
repair the Leased Premises shall be limited to Building Standard items. Tenant
will promptly give Landlord written notice of any damage to the Leased Premises.
This Section shall not apply in the case of damage or destruction by fire or
other casualty or damage resulting from an eminent domain taking.
ARTICLE 4. TENANT'S COVENANTS
4.01 PAYMENTS BY TENANT. Tenant agrees to timely pay all rents and sums
provided to be paid to Landlord hereunder at the times and in the manner herein
provided and to occupy at all times the Leased Premises. If Tenant should fail
to pay Landlord when due any installment of rental or any sum to be paid
hereunder by the 10th day of each such month in which such installment or
payment is due, Tenant will pay Landlord, on demand, a late charge of ten
percent (10%) thereof, each and every month such installment is past due, in
order to reimburse Landlord for additional expenses in an amount not readily
ascertainable and which has not been elsewhere provided for between the parties
hereto. Late charges shall not be construed as liquidated damages or limiting
Landlord's remedies in any manner.
4.02 CERTAIN TAXES. Tenant shall pay all ad valorem taxes on all personal
property of Tenant located within the Leased Premises and on all improvements
installed in the Leased Premises that are in excess of those installed by
Landlord from time to time as Building Standard.
4.03 REPAIRS BY TENANT. Tenant shall, at its cost, repair or replace any
damage to the Building, or any part thereof, caused by Tenant or Tenant's
agents, employees, invitees or visitors (except to the extent the waiver of
subrogation provisions in 5.14.C. are applicable).
4.04 CARE OF THE LEASED PREMISES. Tenant shall maintain the Leased Premises
in a clean, attractive condition, and not commit or allow any waste or damage to
be committed on or to any portion of the Leased Premises, and at the expiration
or termination of this Lease shall deliver up the Leased Premises to Landlord in
as good condition as at date of possession by Tenant, ordinary wear and tear
excepted (except to the extent the waiver of subrogation provisions in 5.14.C.
are applicable).
4.05 ASSIGNMENT OR SUBLEASE. Except as provided herein, Tenant shall not
assign this Lease or sublet the Leased Premises or any part thereof or any
interest therein, or sublet the Leased Premises in whole or in part, without the
prior written consent of Landlord which Landlord shall not unreasonably
withhold. Landlord agrees not to unreasonably withhold consent to an assignment
of Tenant's rights under the Lease to Tenant's present or future lender, or to
an assignment or a sublease to a tenant reasonably acceptable to Landlord,
provided that it is expressly agreed that as a condition of such consent,
Landlord may require current financial statements from the proposed sublessee or
assignee. Consent to one or more assignments or sublettings shall not operate as
a waiver of Landlord's rights as to any subsequent assignments or sublettings.
Notwithstanding any assignment or subletting, Tenant shall at all time remain
fully responsible and liable for the payment of rental herein specified and for
the compliance with all of its other obligations under this Lease. In connection
with any such assignment or sublease, Tenant shall pay Landlord its reasonable
legal and administrative costs incurred in approving such assignment or
subletting. Any attempted assignment, sublease, or other action by Tenant in
violation of this Section shall be void and shall constitute an Event of
Default.
4.06 ALTERATIONS, ADDITIONS, IMPROVEMENTS. Except for the improvements
described on Exhibit "C" hereto, Tenant will make no material alteration,
change, improvement, repair, replacement or addition to the Leased Premises
without the prior written consent of Landlord. Tenant may remove its trade
fixtures, office supplies and movable office furniture and equipment provided
such removal is made prior to the termination or expiration of the Term; Tenant
is not then in default in the timely performance of any obligation or covenant
under this Lease; and Tenant promptly repairs all damage caused by such removal.
All other property at the Leased Premises (including but not limited to
wall-to-wall carpeting, drywall, partitions, paneling or other wall covering)
and any other article attached or affixed to the floor, wall, or ceiling of the
Leased Premises shall become the property of Landlord and shall be surrendered
with the Leased Premises as part thereof at the termination of this Lease,
without payment or compensation thereof.
4.07 COMPLIANCE WITH LAWS AND USAGE; LIENS. Tenant, at its cost, shall
comply with all Federal, State, Municipal and other laws and ordinances, and the
Building Rules and Regulations applicable to the Leased Premises and the
business conducted therein by Tenant (provided that Tenant shall not be
obligated to pay the cost of work to be performed by Landlord under Section
3.03); will not engage in any activity which would cause Landlord's fire and
extended coverage insurance to be canceled or the rate therefore to be increased
(or, at Landlord's option, will pay any such increase); will not commit any act
which is a nuisance or annoyance to Landlord or to other tenants or which might,
in the reasonable judgment of Landlord, appreciably damage Landlord's goodwill
or reputation, or tend to injure or depreciate the Building; and will not commit
or permit waste in the Leased Premises or Building. Tenant has no authority to
encumber the Building or Leased Premises with any lien, and Tenant shall not
suffer or permit any such lien to exist. Should any such lien hereafter be
filed, Tenant shall promptly discharge the same at its sole cost.
4.08 ACCESS BY LANDLORD. Tenant shall permit Landlord or its agents or
representatives to enter into and upon any part of the Leased Premises at all
reasonable hours and upon reasonable notice to inspect same; to clean; to make
repairs, alterations or additions thereto, as Landlord may deem necessary or
desirable; to show the Leased Premises to prospective purchasers or tenants; or
for any other purpose deemed reasonable by Landlord, provided that Landlord
shall not unreasonably interfere with Tenant's operations.
4.09 LANDLORD'S MORTGAGEE. Tenant agrees with Landlord and with the mortgagee
of any first mortgage or the beneficiary of any first deed of trust now or
hereafter constituting a lien on the Building or the Leased Premises
("Landlord's Mortgagee") that any Landlord's Mortgagee shall have the right at
any time to elect, by notice in writing given to Tenant, to make this Lease
superior to the lien of such mortgage or deed of trust and upon the giving of
such notice to Tenant, this Lease shall be deemed prior and superior to the
mortgage or deed of trust in respect to which such notice is given; and at
Landlord's Mortgagee's request Tenant shall execute a recordable memorandum of
this Lease establishing this Lease as superior to such lien; or Landlord's
Mortgagee may, by like notice, make this Lease subordinate to such mortgage or
deed of trust. If Landlord's Mortgagee shall elect to make this Lease
subordinate to such mortgage or deed of trust, the same shall be self-operative
and no further instrument of subordination need be required by any mortgagee. In
confirmation of such subordination, however, Tenant shall execute promptly any
reasonable instrument that Landlord may request. In the event of the enforcement
by Landlord's Mortgagee of the remedies provided for by law or by such mortgage
or deed of trust, Tenant will, upon request of any person or party succeeding to
the interest of Landlord as a result of such enforcement, automatically become
the Tenant of such successor in interest without change in terms or other
provisions of such Lease, provided, however, that such successor in interest
shall not be bound by any payments in the nature of security for the performance
by Tenant of its obligations under this Lease, or any amendment or modification
of this Lease made without the written consent of such trustee or such
beneficiary or such successor in interest. Upon request by such successor in
interest, Tenant shall execute and deliver reasonable instruments confirming the
attornment provided for herein. In consideration for the above, Landlord agrees
to provide Tenant at Tenant's request with a non-disturbance agreement signed by
Landlord's present or future Lender.
4.10 ESTOPPEL CERTIFICATE. At Landlord's request, Tenant will promptly
execute an estoppel certificate addressed to Landlord's Mortgagee certifying as
to such notice provisions and other matters as Landlord's Mortgagee may
reasonably request. At Landlord's request and from time to time, Tenant will
execute a certificate stating the commencement and expiration dates of the Term,
the rental then payable hereunder, that there are no defaults on the part of
Landlord or claims against Landlord hereunder (or if there are any, stating the
same with particularity), and such other information pertaining to this Lease as
Landlord may reasonably request.
ARTICLE 5. MUTUAL COVENANTS.
5.01 CONDEMNATION AND LOSS OR DAMAGE. If the Leased Premises, the
Building, or any part thereof shall be taken or condemned for any public
purpose (or conveyed in lieu or in settlement thereof to such an extent as
to render the remainder of the Building or Leased Premises, in the reasonable
opinion of Landlord, not suitable for occupancy, this Lease shall, at the option
of either party, forthwith cease and terminate, and all proceeds from any
taking or condemnation of the Building and the Leased Premises shall belong to
and be paid to Landlord. If this Lease is not so terminated, Landlord shall
repair any damage resulting from such taking, to the extent and in the manner
provided herein, and rental hereunder shall be abated to the extent the Leased
Premises are rendered untenantable during the period of repair, and
thereafter be adjusted on a proportionate basis considering the areas of the
Leased Premises taken and remaining.
5.02 FIRE OR OTHER CASUALTY: CERTAIN REPAIRS.
A. In the event of a fire or other casualty in the Leased Premises, Tenant
shall immediately give notice thereof to Landlord. If the Leased Premises shall
be partially destroyed by fire or other casualty so as to render the Leased
Premises untenantable in whole or in part, the rental provided for herein shall
abate as to the portion of the Leased Premises rendered untenantable until such
time as the Leased Premises are made tenantable as determined by Landlord and
Landlord agrees to commence and prosecute such repair work promptly and with
reasonable diligence, or if such destruction results in the Leased Premises
being untenantable in substantial part for a period reasonably estimated by
Landlord to be four (4) months or longer after Landlord's insurance settlement,
or in the event of total or substantial damage or destruction of the Building
where Landlord decides not to rebuild, then all rent owed up to the date of such
damage or destruction shall be paid by Tenant. Landlord shall give Tenant
written notice of its decision, estimates or elections under this Section within
sixty (60) days after any such damage or destruction.
B. Should Landlord elect to effect any repairs, Landlord shall only be
obligated to restore or rebuild the Leased Premises to a Building Standard
condition, and then only to the extent that insurance proceeds are available to
Landlord therefore.
5.03 LIEN FOR RENT. To secure the payment of rent and all other sums due
hereunder and the performance of all covenants required hereunder to be
performed by Tenant, and except to the extent prohibited by Tenant's existing or
future lenders, Tenant grants to Landlord a lien and security interest on all
property of Tenant which now or hereafter may be placed in or upon the Leased
Premises, and upon all proceeds of any insurance which may accrue to Tenant by
reason of damage or destruction of any such property, which lien and security
interest shall be in addition to Landlord's lien provided by law. Upon request,
the parties shall take such further reasonable action as may be required to
perfect such security interest.
5.04 HOLDING OVER. If Tenant should remain in possession of the Leased
Premises after the termination or expiration of the Term without the execution
by Landlord and Tenant of a new lease, then Tenant shall be deemed to be
occupying the Leased Premises as a tenant-at-sufferance, subject to all the
covenants and obligations of this Lease and at a daily rental of twice the per
day rental in effect immediately prior to such expiration or termination,
computed on the basis of a thirty (30) day month, but such holding over shall
not extend the Term.
5.05 ASSIGNMENT BY LANDLORD. Landlord shall have the right to transfer and
assign, in whole or in part, all of its rights and obligations hereunder and in
the Building and property referred to herein, and upon any such transfer or
assignment, no further liability or obligation shall thereafter accrue against
Landlord hereunder.
5.06 LIMITATION TO LANDLORD'S LIABILITY. Tenant specifically agrees to
look solely to Landlord's interest in the Building for the recovery of any
judgment from Landlord, it being agreed that Landlord shall never be personally
liable for any such judgment. The provisions contained in the foregoing sentence
shall not limit any right that Tenant might otherwise have to obtain injunctive
relief against Landlord, or any other action not involving the liability of
Landlord to respond in monetary damages from assets other than Landlord's
interest in the Building.
5.07 CONTROL OF COMMON AREAS AND PARKING FACILITIES BY LANDLORD.
All automobile parking areas, driveways, entrances and exits thereto, and
other facilities furnished by Landlord, including all parking areas, truck
way or ways, loading areas, pedestrian walkways, ramps, landscaped areas,
stairways and other areas and improvements provided by Landlord for the general
use, in common, of tenants, their officers, agents, employees, invitees,
licensees, visitors and customers shall be at all times subject to the exclusive
and reasonable control and management of Landlord, and Landlord shall have
the right from time to time to establish, modify and enforce reasonable rules
and regulations (herein called the "Building Rules and Regulations") with
respect to all facilities and areas mentioned in this Section; the initial
Building Rules and Regulations are set out in Exhibit "D" hereto and are of
equal dignity herewith.
5.08 DEFAULT BY TENANT.
A. Each of the following occurrences relative to Tenant shall constitute an
"Event of Default":
(1) Failure or refusal by Tenant to make the timely payment of any rent or
other sums payable under this Lease when and as the same shall become due and
payable, provided Landlord has given Tenant ten (10) days' written notice of the
same and thereafter the failure or refusal by Tenant to timely make any payment
due hereunder shall be an Event of Default without further notice; or
(2) Abandonment or vacating of the Leased Premises or any significant
portion thereof; or
(3) The filing or execution or occurrence of a petition in bankruptcy or
other insolvency proceeding by or against Tenant or any guarantor of Tenant; or
petition or answer seeking relief under any provision of the Bankruptcy Act; or
an assignment for the benefit of creditors or composition; or a petition or
other proceeding by or against Tenant for the appointment of a trustee, receiver
or liquidator of Tenant or any of Tenant's property; or a proceeding by any
governmental authority for the dissolution or liquidation of Tenant or any
guarantor of Tenant; or
(4) Failure by Tenant in the performance or compliance with any of the
agreements, terms, covenants or conditions provided in this Lease, other than
those referred to in (1) or (2) above, for a period of thirty (30) days after
written notice from Landlord to Tenant specifying the items in default; or
(5) A reorganization, merger, or sale of all or substantially all of the
assets of Tenant, unless as a result of such transaction, the entity succeeding
to the assets of Tenant: (a) expressly assumes the obligations under this Lease
in a document in form and substance reasonably acceptable to Landlord; and (b)
has a net worth of not less than that of Tenant;
(6) The occurrence of any other event herein provided to be an Event of
Default.
B. This Lease and the Term and estate hereby made are subject to the
limitation that if and whenever any Event of Default shall occur, Landlord may,
at its option and without further written notice to Tenant, in addition to all
other remedies given hereunder or by law or equity, do any one or more of the
following:
(1) Terminate this Lease, in which event Tenant shall immediately surrender
possession of the Leased Premises to Landlord;
(2) Enter upon and take possession of the Leased Premises and expel or
remove Tenant and any other occupant therefrom with or without having terminated
the Lease;
(3) Alter locks and other security devices at the Leased Premises.
C. Exercise by Landlord of any one or more remedies shall not constitute an
acceptance of surrender of the Leased Premises by Tenant, whether by agreement
or by operation of law, it being understood that such surrender can be effected
only by the written agreement of Landlord and Tenant.
D. If Landlord terminates this Lease by reason of an Event of Default as
defined in Section 5.08.A.(l)(2)(3) or (5), Tenant shall pay to Landlord the sum
of all rent and other indebtedness accrued to the date of such termination,
plus, as damages, an amount equal to the then present value of all rentals then
payable under this Lease for the remainder of the Term.
E. If Landlord repossesses the Leased Premises without terminating the
Lease, then Tenant shall pay to Landlord all rent and other indebtedness accrued
to the date of such repossession, plus rent and other sums required to be paid
by Tenant during the remainder of the Term, diminished by any net sums
thereafter received by Landlord through reletting the Leased Premises during
said period (after deducting expenses incurred by Landlord as provided below);
reentry by Landlord will not affect the obligations of Tenant for the unexpired
Term. Tenant shall not be entitled to any excess of any rent obtained by
reletting over the rent herein reserved. Actions to collect amounts due from
Tenant may be brought on one or more occasions, without the necessity of
Landlord's waiting until expiration of the Term.
F. In case of an Event of Default, to the extent the same are not deducted,
Tenant shall also pay to Landlord: broker's fees incurred by Landlord in
connection with reletting the whole or any part of the Leased Premises; the cost
of removing and storing Tenant's or any other occupant's property; the cost of
repairing, altering, remodeling or otherwise putting the Leased Premises into
condition acceptable to a new tenant or tenants; and all reasonable expenses
incurred by Landlord in enforcing Landlord's remedies, including reasonable
attorneys' fees and court costs.
G. Upon termination or repossession of the Leased Premises for an Event of
Default, Landlord shall not be obligated to relet or attempt to relet the Leased
Premises, or any portion thereof, or to collect rental after reletting, but
Landlord shall have the option to relet or attempt to relet. In the event of
reletting, Landlord may relet the whole or any portion of the Leased Premises
for any period, to any tenant, and for any use and purpose.
H. If Tenant should fail to make any payment, perform any obligation, or
cure any default hereunder, Landlord, without obligation to do so and without
thereby waiving such failure or default, may make such payment, perform such
obligation, and/or remedy such other default for the account of Tenant (and
enter the Leased Premises for such purpose), and Tenant shall pay upon demand
all costs, expenses and disbursements (including reasonable attorneys' fees)
incurred by Landlord in taking such remedial action.
5.09 DEFAULT BY LANDLORD. Should Landlord fail to promptly perform any
maintenance or repairs required by the provisions of this Lease to be performed
by Landlord, Tenant may by written notice request that Landlord make such
repairs or perform such maintenance and upon Landlord's failure or refusal to do
so within thirty (30) days (plus an additional reasonable period as may be
required by Landlord to cure such default, if Landlord shall diligently pursue
the cure of such default until same shall be cured) after issuance of such
notice (and in any event, in case of an emergency irrespective of whether Tenant
shall have requested or obtained Landlord's prior consent), Tenant shall have
the right (but shall not be obligated) to perform such maintenance or make such
repairs; thereupon, Landlord will pay (or reimburse Tenant for) the reasonable
cost of such maintenance or repairs. For these purposes, an "emergency" shall be
deemed to exist if, in the good faith judgment of Tenant, prompt repairs are
needed in order to prevent death, bodily injury or property damage. In any case
in which Tenant shall exercise its aforesaid right to make emergency repairs
which were the responsibility of the Landlord, the Tenant shall not make repairs
more extensive than are reasonably necessary to abate the emergency. In the
event of any other default by Landlord, Tenant's exclusive remedy shall be an
action for damages, but prior to pursuing any such action Tenant will give
Landlord written notice specifying such default with particularity, and Landlord
shall have thirty (30) days (plus an additional reasonable period as may be
required by Landlord to cure such default, if Landlord shall diligently pursue
the cure of such default until same shall be cured) in which to cure any such
default. Unless and until Landlord fails to so cure any default after such
notice, Tenant shall not have any remedy or causes of action by reason thereof.
5.10 NON-WAIVER. Neither acceptance of rent by Landlord nor failure to
complain of any action, non-action or default of Tenant shall constitute a
waiver of any of Landlord's rights hereunder. Waiver by Landlord of any right
for any default of Tenant shall not constitute a waiver of any right for either
a subsequent default of the same obligation or any other default.
5.11 ENVIRONMENT. During the term of the occupancy of the Leased Premises
and in the use of the Leased Premises and of the site on which the Leased
Premises are located, Tenant shall, with respect to the use and occupancy of the
Leased Premises and the performance of any improvements, comply with all
applicable Federal and State environmental protection laws and local ordinances
including, but not limited to, Federal hazardous waste laws such as the
Comprehensive Response, Compensation and Liability Act of 1980 and the Resource
Conservation and Recovery Act, solid waste laws and the Federal and State Clean
Air Acts and Clean Water Acts. In the use of the Leased Premises and of the site
on which the Leased Premises are located by Tenant, Tenant shall pay all costs
of complying with the above described laws.
5.12 INDEPENDENT OBLIGATIONS. The obligation of Tenant to pay all rent and
other sums hereunder provided to be paid by Tenant and the obligation of Tenant
to perform Tenant's other covenants and duties hereunder constitute independent,
unconditional obligations to be performed at all times provided for hereunder,
save and except only when an abatement thereof or reduction therein is herein
expressly provided for and not otherwise. Tenant waives and relinquishes all
rights which Tenant might have to claim any nature of lien against or withhold,
or deduct from or offset against any rent and other sums provided hereunder to
be paid Landlord by Tenant.
5.13 TIME OF ESSENCE. In all instances where any act is required at a
particular indicated time or within an indicated period, it is understood and
stipulated that time is of the essence.
5.14 REMEDIES CUMULATIVE. Landlord may restrain or enjoin any breach or
threatened breach of any covenant, duty or obligation of Tenant herein contained
without the necessity of proving the inadequacy of any legal remedy or
irreparable harm. The remedies of Landlord hereunder shall be deemed cumulative
and no remedy of Landlord, whether exercised by Landlord or not, shall be deemed
to be in exclusion of any other.
5.15 INSURANCE, SUBROGATION, LIABILITY, INDEMNITY, AND WAIVER.
A. Landlord shall maintain fire and extended coverage insurance on the
portion of the Building constructed by Landlord, including Building Standard
leasehold improvements. Such insurance shall be maintained with an insurance
company authorized to do business in Texas, in an amount not less than
acceptable under reasonable commercial standards, and payments for losses
thereunder shall be made solely to Landlord. Tenant shall maintain at its
expense, fire and extended coverage insurance on all of its personal property,
including removable trade fixtures, located in the Leased Premises and on its
non-building standard leasehold improvements and all additions and improvements
made by Tenant and not required to be insured by Landlord above.
B. Landlord and Tenant shall each, at their respective expense, maintain a
policy or policies of Commercial General Liability insurance, including
contractual liabilities, with the premiums thereon fully paid, issued by and
binding upon a solvent insurance company authorized to do business in the State
of Texas, such insurance to afford minimum protection (which may be affected by
primary and/or excess coverage) with bodily injury limits of not less than
$1,000,000 for each occurrence and $1,000,000 in the aggregate per location and
property damage liability of not less than $500,000 for each occurrence and
$500,000 in the aggregate per location. Tenant shall procure an endorsement on
its policy requiring at least thirty (30) days prior written notice to be given
to Landlord before any cancellation or reduction of insurance under such policy.
C. Anything herein to the contrary notwithstanding each party hereto hereby
releases and waives all claims, rights of recovery and causes of action that
either party or any party claiming by, through or under such party by
subrogation or otherwise may now or hereafter have against the other party or
any of the other party's directors, officers, employees or agents for any loss
or damage that may occur to the Building, the Leased Premises, Tenant's
improvements or any of the contents of any of the foregoing by reason of fire or
other casualty, or any other cause including negligence of the parties hereto or
their directors, officers, employees, or agents, that could have been insured
against under the terms of (i) the standard fire and extended coverage insurance
policies with vandalism and malicious mischief endorsement and sprinkler leakage
endorsement (where applicable) or (2) any other loss covered by insurance of the
respective parties except gross negligence or willful misconduct; provided,
however, that this waiver shall be ineffective against any insurer of Landlord
or Tenant to the extent that such waiver is prohibited by the laws and insurance
regulations of the State of Texas or would invalidate any insurance coverage of
Landlord or Tenant. The waiver set forth in this Section shall not apply to any
deductibles on policies nor to any coinsurance penalty. Landlord and Tenant
shall use their best efforts provide each other evidence that the foregoing
waiver of subrogation provisions have been accepted by their respective
insurers.
D. Except for the claims, rights of recovery and causes of action that
Landlord has released and waived, Tenant hereby releases, indemnifies, defends,
and holds harmless Landlord and Landlord's agents, directors, officers,
employees, invitees and contractors, for all claims, losses, costs, damages or
expenses (including, but not limited to, attorneys' fees) resulting or arising
from any and all injuries or death of any person or damage to any property
occurring during the Term, caused or alleged to have been caused by any act,
omission, or neglect of Tenant or Tenant's directors, officers, employees,
agents, invitees or guests, or any parties contracting with Tenant relating to
the Leased Premises.
E. Tenant agrees that Landlord shall not be responsible or liable to
Tenant, its employees, agents, customers or invitees, for bodily injury (fatal
or non-fatal) or property damage occasioned by the acts or omissions of any
other tenant or such tenant's employees, agents, contractors, customers or
invitees within the Building, or for any loss or damage to any property or
persons occasioned by theft, fire, act of God, public enemy, injunction, riot,
strike, insurrection, war, court order, requisition or order of governmental
body or authority, or any other cause beyond the control of Landlord, or for any
inconvenience or loss to Tenant in connection with any of the repair,
maintenance, damage, destruction, restoration or replacement referred to in this
Lease. This section shall not relieve Landlord from its obligation to perform
improvements, repairs, or maintenance as set forth in this Lease.
5.16 VENUE, GOVERNING LAW. This Lease shall be governed by the laws of the
State of Texas. All monetary and other obligations of Landlord and Tenant are
performable exclusively in El Paso County, Texas.
5.17 NOTICE. Any notice which may or shall be given under the terms of this
Lease shall be in writing and shall be either delivered by hand or sent by
United States registered or Certified Mail, postage prepaid, if for Landlord to
the address provided herein; or if for Tenant, to the Leased Premises. Such
addresses may be changed from time to time by either party by giving notice as
provided above. Notice shall be deemed given when delivered (if delivered by
hand) or when postmarked (if sent by mail).
5.18 ENTIRE AGREEMENT, BINDING EFFECT, AND SEVERABILITY. This Lease and any
written addenda and all exhibits hereto (which are expressly incorporated herein
by this reference) shall constitute the entire agreement between Landlord and
Tenant; no prior written or prior or contemporaneous oral promises or
representations shall be binding. This Lease shall not be amended, changed or
extended except by written instrument signed by both parties hereto. The
provisions of this Lease shall be binding upon and inure to the benefit of the
heirs, executors, administrators, successors and assigns of the parties, but
this provision shall in no way alter the restrictions on assignment and
subletting applicable to Tenant hereunder. If any provision of this Lease or the
application thereof to any person or circumstance shall at any time or to any
extent be held invalid or unenforceable, and the basis of the bargain between
the parties hereto is not destroyed or rendered ineffective thereby, the
remainder of this Lease or the application of such provisions to persons or
circumstances other than those as to which it is held invalid or unenforceable
shall not be affected thereby.
5.19 RIGHT OF REENTRY. Upon the expiration or termination of the Term for
whatever cause, Landlord shall have the right to immediately reenter and
reassume possession of the Leased Premises and remove Tenant's property
therefrom, and Tenant expressly acknowledges such right.
5.20 NUMBER AND GENDER; CAPTIONS; REFERENCES. Pronouns, where used herein,
of whatever gender, shall include natural persons, corporations, and
associations of every kind and character, and the singular shall include the
plural and vice versa where and as often as may be appropriate. Article and
section headings under this Lease are for convenience of reference and shall not
affect the construction or interpretation of this Lease. Whenever the terms
"hereof," "herein", or words of similar import are used in this Lease, they
shall be construed as referring to this Lease in its entirety rather than to a
particular section or provision, unless the context specifically indicates to
the contrary. Any reference to a particular "Article" or "Section" shall be
construed as referring to the indicated article or section of this Lease.
5.21 SECURITY DEPOSIT. Concurrently with the execution hereof, Tenant has
paid to Landlord the amount of One Hundred Thousand and no/00 DOLLARS
($100,000.00)to be held as a deposit to secure performance of Tenant's
obligations hereunder. If Tenant is not in default on the first anniversary of
this Lease, Landlord shall release the sum of $50,000.00 to Tenant. Upon the
occurrence of any Event of Default, or upon the failure by Tenant to timely pay
any sum it is obligated to pay hereunder, Landlord may, from time to time,
without prejudice to any other remedy, and without prior notice to Tenant, apply
all or part of the amount deposited to the curing of such Event of Default or
the payment of such sum. Should Landlord so apply such deposit, Tenant shall
immediately upon receipt of notice thereof deposit with Landlord a sufficient
amount to bring Tenant's total deposit to the level stated in the first sentence
of this Section. Upon termination or expiration of this Lease, the security
deposit shall be returned to Tenant, to the extent the same is not then applied
to curing of any Event of Default or to the payment of any sum owed by Tenant
hereunder. Landlord may keep such security deposit in its bank account and
commingle same with its other funds. Such interest as Landlord is able to obtain
on the Security Deposit shall be paid periodically by Landlord to El Paso
Country Day School or other charitable organization selected by Landlord, as a
donation on Tenant's behalf. The amount so deposited shall not be considered as
an advance payment of rental hereunder, or as a measure of Landlord's damages in
the event of any failure to perform on the part of Tenant.
5.22 COMMISSIONS. Landlord and Tenant each represent and warrant to the
other that they have not committed to pay a commission to any agent or third
party as a result of this Lease.
5.23 QUIET ENJOYMENT. Tenant, on paying all sums herein called for and
performing and observing all of its covenants and agreements hereunder, shall
and may peaceably and quietly have, hold, occupy, use, and enjoy the Leased
Premises during the Term subject to the provisions of this Lease and applicable
governmental laws, rules, and regulations; and Landlord agrees to warrant and
forever defend Tenant's right to such occupancy against the claims of any and
all persons whomsoever lawfully claiming the same or any part thereof, subject
only to the provisions of this Lease and all applicable governmental laws,
rules, and regulations.
5.24 SIGNS. Except for the signs already submitted to and approved by
Landlord, no signs, symbols, or identifying marks shall be placed upon the
Building or in the halls, elevators, staircases, entrances, parking areas or
upon the doors or walls without prior written approval of Landlord. Landlord
agrees to provide and install, at Tenant's cost, all letters or numerals on
doors in the Leased Premises. All such letters and numerals shall be in the
Building Standard graphics, and no others shall be used or permitted on the
Leased Premises.
5.25 LEASE GUARANTY. The Lease shall be unconditionally guaranteed by FARAH
INCORPORATED, a Delaware corporation, pursuant to a separate Lease Guaranty in
form and substance acceptable to Landlord.
EXECUTED in multiple counterparts, each of which shall have the force
and effect of an original on the date first above written.
LANDLORD: ORSO PARTNERS, LTD.
a Texas limited partnership
By: ONALAR COMPANY, L.C., General Partner
By: /s/Louis M. Alpern
Louis M. Alpern M.D., Manager
300 East Main, Suite 1200
El Paso, Texas 79901
TENANT: FARAH U.S.A., INC.
By: /s/Timothy B. Page
Timothy B. Page
Executive Vice President
and Chief Operating Officer
P.O. Box 9519
El Paso, Texas 79985
<PAGE>
ANNEX TO EXHIBIT 10.57
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment to Lease Agreement is made by and between ORSO
PARTNERS, LTD. a Texas Limited partnership (herein the "Landlord") and FARAH
U.S.A., INC., a Texas corporation (herein the "Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into that certain lease agreement
dated as October 4, 1996 (the "Lease"), which Lease pertains to certain Premises
known as Commons Building D, El Paso, Texas, (the "Premises");
WHEREAS, since execution of the Lease, Landlord and Tenant have agreed
to increase the size of the Leased Premises leased to tenant from 42,459 square
feet to 43,537 square feet, and to extend the commencement date of the Lease,
and desire hereby to evidence their agreement and understanding.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged and confessed, Landlord and Tenant hereby agree
as follows, to-wit:
1. CAPITALIZED TERMS. The capitalized terms as used herein have the same meaning
assigned to such terms in the Lease, unless the text of this Amendment states
otherwise.
2. LEASED PREMISES. Article 1.01, Sections A. and B. are hereby amended to read
as follows:
"1.01 LEASED PREMISES.
A. Upon the terms, provisions and conditions hereof, Landlord hereby leases
to Tenant and Tenant hereby leases from Landlord the premises reflected on the
floor plans set forth in Exhibit "A" hereto in the Building known as the Commons
Building D (the "Building", which term shall also include the related parking
areas, landscaping, and other similar improvements), located on the land
described in Exhibit "B" hereto. Such premises, together with any other space in
the Building leased by Tenant pursuant hereto, are herein called the "Leased
Premises".
B. The Net Rentable Area (defined below) of the initial Leased Premises is
approximately 43,537 square feet, and the Rentable Area for the entire Building
is approximately 52,024 square feet."
3. TERM. Article 1.02 and Article 1.03 are hereby amended to read as follows:
"1.02 TERM. Subject to the terms, provisions and conditions hereof, this
Lease shall continue in force for a term ("Term") of Ten (10) years, beginning
on the 1st Day of May, 1997, and ending on the 30th day of June, 2007.
A. Delays by Landlord. If the Leased Premises are not ready for occupancy
by such commencement date because of the failure of Landlord to perform
Landlord's obligations under this Lease, Landlord shall not be liable for any
claims, damages, or liabilities in connection therewith or by reason thereof,
and the Term shall commence on the date the Leased Premises are ready for
occupancy by Tenant; provided that if the leased Premises are not ready for
occupancy by July 1, 1997 because of the failure of landlord to perform
Landlord's obligations under this Lease, then Tenant may as Tenant's sole
remedy, terminate this Lease, and receive, in addition, reimbursement of any
sums spent by Tenant for Tenant Improvements under Exhibit "C" hereto (excluding
Landlord's Contribution). Should the Term commence on a date other than that
specified above, Landlord and Tenant will, at the request of either, execute a
declaration specifying the actual commencement date. In such event, rental under
this Lease shall not commence until the actual commencement date, and the stated
Term shall thereupon commence and the expiration date shall be extended so as to
give effect to the full Term stated above.
B. Delays by Tenant. If the Leased Premises are not ready for occupancy
because of the failure of Tenant to perform Tenant's obligations under this
Lease, the commencement date of the Lease shall be May 1, 1997.
C. Occupancy by Tenant for Improvements. Tenant shall be entitled to occupy
the Premises on the date that Tenant commences construction of the Tenant
Improvements, for the exclusive purpose of performing such Tenant Improvements,
such possession to be at all times subject to all of the terms and conditions of
this Lease. Tenant shall pay Landlord a monthly rental during such construction
period equal to $15,000.00 per month, for the months of March and April, 1997,
payable in advance on the first day of each such month.
1.03 RENEWAL OPTION. Provided that Tenant is not in default under the terms
of the Lease, Landlord grants Tenant an option (the "Option") to renew the Lease
for a five (5) year term (the "Option Period") commencing July 1, 2007. To
exercise the Option, Tenant must notify Landlord in writing prior to September
1, 2006, of Tenant's decision to exercise the Option. The terms of the lease
during the Option Period shall be as set forth herein except for Base Rental,
which shall be calculated as set forth in Section 2.01 hereof."
4. RENT. Article 2.01 is hereby amended to read as follows:
"2.01 INITIAL BASE RENTAL. Tenant shall pay a base rental in monthly
installments ("Base Rental") as set forth in this Article 2. Such Base Rental
together with all increases provided for herein shall be due and payable in
advance in twelve (12) equal installments on the first day of each calendar
month during the Term, at Landlord's address as provided herein (or at such
other place as Landlord may hereafter designate) without demand, deduction,
abatement, or setoff (except as otherwise expressly provided for herein). If the
Term commences or ends on other than the first or last day of a calendar month,
then the installment of Base Rental for such months shall be appropriately
prorated. The Base Rental shall be as follows:
A. Year One. For the first year of the Lease, Tenant shall pay a Base
Rental of $36,130.83 per month (being $10.00 per square foot of Net Rentable
Area of the Leased Premises per year).
B. Years Two through Five. For years two through five of the lease, Tenant
shall pay a Base Rental of $43,537 per month (being $12.00 per square foot of
Net Rentable Area of the Leased Premises per year).
C. Years Six through Ten. For years six through ten of the Lease, Tenant
shall pay a Base Rental of $48,979.13 per month (being $13.50 per square foot of
Net Rentable Area of the Leased Premises per year).
D. Renewal Option. The Base Rent for the Option Period shall be adjusted by
one hundred percent (100%) of the increase in the Consumer Price Index for All
Urban Consumers U.S. City Average (All Items, 1982-1984=100) published by the
Bureau of Labor Statistics for the U.S. Department of Labor (herein the "CPI")
from January, 2002 to January 1, 2007. Because the CPI is published at a date
after the commencement of the Option Period, the adjustment shall be calculated
by Landlord as soon as it is available, and the Base Rental adjustment shall be
retroactive to the first full month of the Option Period. In the event that
Tenant exercises the Option, Tenant shall continue payment of the Base Rental in
effect during the last month of the Term of the Lease until notified by
Landlord. Upon receipt of such notice, Tenant shall commence payment of the new
Base Rental and, in addition, shall pay to Landlord the difference between the
new Base Rental and the Base Rental paid during each month of the Option Period
prior to receipt of the notice. The calculation of Base Rental for the Option
Period shall be done in the following manner:
Multiply the month Base Rental in effect during year ten by a fraction, the
numerator of which is the Index number for January, 2007 (the first month of the
Option Period), and the denominator of which is the Index number for January,
2002, as follows:
CPI for January 2007
$48,979.13 x CPI for January 2002 = Option Base Rental
In no event shall the adjusted Base Rental for the Option Period be
less than $48,979.13 per month."
5. RATIFICATION. Except as modified hereby, the terms and conditions of the
Lease are hereby ratified and confirmed by Landlord and Tenant.
Executed to be effective as of October 4, 1996, regardless of when
actually signed.
LANDLORD: ORSO PARTNERS, LTD.
By: ONALAR COMPANY, L.C., General Partner
By: /s/ Louis M. Alpern
Name: Louis M. Alpern
Title: Manager
TENANT: FARAH U.S.A., INC.
By: /s/ Timothy B. Page
Name: Timothy B. Page
Title: Executive Vice President
and Chief Operating Officer
<PAGE>
EXHIBIT 10.58
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
Between Santa Teresa Limited Partnership
and
Farah U.S.A., Inc.
1. Basic provisions ("Basic Provisions") 1.1 Parties: This Lease
("Lease"),dated for reference purposes only, November 30th, 1996, is made by and
between Santa Teresa Limited Partnership, or its Nominee or Trustee ("Lessor")
and Farah U.S.A., Inc.("Lessee"), (collectively the "Parties," or individually a
"Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of Runway Road, Santa Teresa, New Mexico 88008
located in the County of Dona Ana, State of New Mexico, and generally described
as (describe briefly the nature of the property) see Exhibit A, attached hereto
("Premises"). (See Paragraph 2 for further provisions.)
1.3 Term: 15 years and 0 months ("Original Term") commencing (See Addendum,
Paragraph 1). ("Commencement Date") and ending 15 years thereafter ("Expiration
Date"). (See Paragraph 3 for further provisions.)
1.4 Early Possession: N/A ("Early Possession Date"). (See Paragraphs 3.2
and 3.3 for further provisions.)
1.5 Base Rent: $59,375 per month ("Base Rent"), payable on the 1st day of
each month commencing on the Commencement Date (See Addendum, Paragraph 2). (See
Paragraph 4 for further provisions.) There are provisions in this Lease for the
Base Rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $59,375.00 as Base Rent for the period
of first full month of the Original Term following the Commencement Date.
1.7 Security Deposit: $59,375.00 ("Security Deposit"), (See Paragraph 5 for
further provisions.)
1.8 Permitted Use: Warehousing and distribution of garments and related
products, together with related office and light manufacturing (See Paragraph 6
for further provisions.)
1.9 Insuring Party: Lessee is the "Insuring Party" unless otherwise stated
herein. (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this Transaction and are
consented to by the Parties: James A. Keller represents Lessor exclusively
("Lessor's Broker"); (See Paragraph 15 for further provisions.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by Farah Incorporated ("Guarantor"). (See Paragraph 37 for further
provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 1 through 8 and Exhibits A and B all of which constitute a part of
this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee will make such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and ( c) that neither Lessor, nor any of Lessor's agents,
has made any oral or written representations or warranties with respect to the
said matters other than as set forth in this Lease.
2.5 Lessee Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. Term.
3.1 Term. The Commencement Date. Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the period of such early possession. All other terms of this Lease, however,
(including but not limited to the obligations to pay Real Property Taxes and
Insurance premiums and to maintain the Premises) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver possession
of the Premises to Lessee as agreed herein by the Early Possession Date, if one
is specified in Paragraph 1.4, or, if no Early Possession Date is specified by
the Commencement Date, Lessor shall not be subject to any liability therefor nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within then (10) days
thereafter, cancel this Lease, in which event the Parties shall be discharged
from all obligations hereunder; provided, however, that if such written notice
by Lessee is not received by Lessor within said ten (10) day period, Lessees
right to cancel this Lease shall terminate and be of no further force or effect,
except as may be otherwise provided, and regardless of when the term actually
commences, if possession is not tendered to Lessee when required by this Lease
and Lessee does not terminate this Lease as aforesaid, the period free of the
obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed
shall run from the date of delivery of possession and continue for a period
equal to what Lessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4 Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time to be received by Lessor
in lawful money of the United States without offset or deduction on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated base upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Base
Provisions. Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein),that portion of the Security Deposit not used
or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no
part of the Security Deposit shall be considered to be held in trust, to bear
interest or other increment for its use, or to be prepayment for any moneys to
be paid by Lessee under this Lease.
6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose Lessee shall not use or permit the use of the
Premises in a manner that creates waste or a nuisance, or that disturbs owners
and/or occupants of, or causes damage to neighboring premises or properties.
Lessor hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to
withhold such consent, Lessor shall within five (5) business days give a written
notification of same, which notice shall include an explanation of Lessor's
reasonable objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Required Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical, material, or
waste whose presence nature, quantity and or intensity of existence, use,
manufacture disposal, transportation, spill, release or effect, either by itself
or in combination with other materials expected to be on the Premises, is either
(i) potentially injurious to the public health, safety or welfare, the
environment or the Premises; (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products by products or fractions thereof Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessees sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "Reportable Use" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation or disposal of a Hazardous Substance that requires a permit from
or with respect to which a report, notice registration or business plan is
required to be filed with any governmental authority. Reportable Use shall also
include Lessee's being responsible for the presence in, on or about the Premises
of a Hazardous Substance with respect to which any Applicable Law requires that
a notice be given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but in compliance with all Applicable Law, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of Lessee's business permitted on the Premises, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk of contamination or damage or expose Lessor to any
liability therefor, in addition, Lessor may (but without any obligation to do
so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modification to the
Premises (such as concrete encasements) and/or the deposit of and additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to inform Lessor. If Lessee knows or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on under or about the Premises, other than as
previously consented to by Lessor. Lessee shall immediately give written notice
of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence spill, release, discharge of, or exposure to
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorneys and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance with Law. Expect as otherwise provided in this
Lease, Lessee, shall at Lessee's sole cost and expense, fully, diligently and in
a timely manner, comply with all "Applicable Law," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufactures, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request provide, Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 Inspection; Compliance. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3 (a)) shall have the right to enter the Premises any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited, to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance: Repairs; Utility Installations; Trade Fixtures and
Alterations.
7.1 Lessee's Obligations (a) Subject to the provisions of Paragraphs 2.2
(Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance
with covenants, etc.).
7.2 (Lessor's obligations to repair), 8 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, structural and non-structural (whether or not such portion of the
Premises requiring repairs, or the means of repairing the same, are reasonably
or readily accessible to Lessee, and whether or not the need for such repairs
occurs as a result of Lessee's use, any prior use, the elements or the age of
such portion of the Premises), including, without limiting the generality of the
foregoing, all equipment or facilities serving the Premises, such as plumbing,
heating air conditioning, ventilating, electrical, lighting facilities, boilers,
fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or
other automatic fire extinguishing system, including fire alarm and/or smoke
detection systems and equipment, fire hydrants, fixtures, wall (interior and
exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass,
skylights, landscaping, driveways, parking lots, fences, retaining walls, signs,
sidewalks and parkways located in, on, about, or adjacent to the Premises.
Lessee shall not cause or permit any Hazardous Substance to be spilled or
released in, on, under or about the Premises (including through the plumbing or
sanitary sewer system) and shall promptly, at Lessee's expense, take all
investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises, the elements
surrounding same, or neighboring properties, that was caused or materially
contribute to by Lessee, or pertaining to or involving any Hazardous Substance
and/or storage tank brought onto the Premises by or for Lessee or under its
control. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. If Lessee occupies the Premises for seven (7) years or
more, Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every seven
(7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
contracts, with copies to Lessor, in customary form and substance for, and with
contractors specializing and experienced in, the inspection, maintenance and
service of the following equipment and improvements, if any, located on the
Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler,
fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and
drain maintenance and (vi) asphalt and parking lot maintenance.
7.2 Lessor's Obligations. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation. In any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the Lessee
under Paragraph 7.1 hereof.. It is the intention of the Parties that the terms
of this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises. Lessee and Lessor expressly waive the benefit of any
statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations. (a) Definitions;
Consent Required. The term "Utility Installations" is used in this Lease to
refer to all carpeting, window coverings, air lines, power panels, electrical
distribution, security, fire protection systems, communication systems, lighting
fixtures, heating, ventilating, and air conditioning equipment, plumbing, and
fencing in, or about the Premises. The term "Trade Fixtures" shall mean Lessee's
machinery and equipment that can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification of the improvements
on the Premises from that which are provided by Lessor under the terms of this
Lease, other than Utility Installations or Trade Fixtures, whether by addition
or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined
as Alterations and/or Utility Installations made by Lessee that are not yet
owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any
Alterations or Utility Installations in, on, under or about the Premises without
Lessor's prior written consent, Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof), as long as
they are not visible from the outside, do not involve puncturing, relocating or
removing the roof or any existing walls, and the cumulative cost thereof during
the term of this Lease as extended does not exceed $25,000.
(b) Consent. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with proposed detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities, (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon, and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and in compliance with all Applicable Law.
Lessee shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor. Lessor may (buy without obligation to do so)
condition its consent to any requested Alteration and Utility Installation that
costs $10,000 or more upon Lessee's providing Lessor with a lien and completion
bond in an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation and/or upon Lessee's posting an additional
Security Deposit with Lessor under Paragraph 36 hereof.
(c) Indemnification. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-half
times the amount of such contested lien claim or demand, indemnifying Lessor
against liability for the same, as required by law for the holding of the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorney's fees an costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject
to Lessor's right to require their removal or become the owner thereof as
hereinafter provided in this Paragraph 7.4, all Alterations and Utility
Additions made to the Premises by Lessee shall be the property of and owned by
Lessee, but considered a part of the Premises. Lessor may, at any time and at
its option, elect in writing to Lessee to be the owner of all or any specified
part of the Lessee Owned Alterations and Utility Installations. Unless otherwise
instructed per subparagraph 7.4 (b) hereof, all Lessee Owned Alterations and
Utility Installations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon and be surrendered by
Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, with all
of the improvements, parts and surfaces thereof clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice or by
Lessee performing all of its obligations under this Lease. Except as otherwise
agreed or specified in writing by Lessor, the Premises, as surrendered, shall
include the Utility Installations. The obligation of Lessee shall include the
repair of any damage occasioned by the installation, maintenance or removal
of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or
Utility Installations, as well as the removal of any storage tank installed by
or for Lessee, and the removal, replacement, or mediation of any soil,
material or ground water contaminated by Lessee, all as may then be required
by Applicable Law and/or good service practice. Lessee's Trade Fixtures
shall remain the property of Lessee and shall be removed by Lessee subject to
its obligation to repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment For Insurance. Regardless of whether the Lessor or Lessee is
the insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of an invoice for any amount due.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee and Lessor (as an additional insured) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of this
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less that $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessor of Premises" Endorsement and contain
the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or
fumes from a hostile fire. The policy shall not contain any Intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease as an "insured contract" for the
performance of Lessee's indemnity obligations under this Lease. The limits of
said insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) Carried by Lessor. In the event Lessor is the insuring Party, Lessor
shall also maintain liability insurance described in Paragraph 8.2(a) above, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to the holders of any mortgages, deeds of trust
or ground leases on the Premises ("Lender(s)"), insuring loss or damages to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by Lenders, but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age of
the improvements involved, such latter amount is less than full replacement
cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and
Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than
by Lessor. If the coverage is available and commercially appropriate, such
policy or policies shall insure against all risks of direct physical loss or
damage (except the perils of flood and/or earthquake unless required by a
Lender), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Premises required to be demolished or removed by reason of the enforcement
of any building, zoning, safely or land use laws as the result of a covered
cause of loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an insured Loss, as defined
in Paragraph 9.1( c ).
(b) Rental Value. The Insuring Party shall, in addition, obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and Lender(s), insuring the loss of the full rental
and other charges payable by Lessee to Lessor under this Lease for one (1) year
(including all real estate taxes, insurance costs, and any schedule rental
increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for on full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) Paragraph ( c) omitted in Agreement.
(d) Tenant's Improvements. If the Lessor is the insuring Party, the Lessor
shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by Lessee under this Paragraph 8.3 shall Insure Lessee Owned Alterations
and Utility Installation
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain Insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deducible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B +, V, or such other rating as may be required by a Lender having a lien
on the Premises, as set forth in the most current issue of "Best's Insurance
Guide." Lessee shall not do or permit to be done anything which shall invalidate
the Insurance policies referred to in this Paragraph 8. If Lessee is the
Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of
policies of such Insurance or certificates evidencing the existence and amounts
of such Insurance with the insureds and loss payable clauses as required by this
Lease. No such policy shall be cancelable or subject to modification except
after thirty (30) days prior written notice to Lessor. Lessee shall at least
thirty (30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be carried by the
Insuring Party under this paragraph 8, the other Party may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor ("Waiving Party") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" Shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
installations, the repair cost of which damage or destruction is less than 50%
of the then Replacement Cost of the Premises Immediately prior to such damage or
destruction, excluding from such calculation the value of the land Lessee Owned
Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises Immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "Insured Loss" shall mean damage or destruction to improvements on the
Premises, other than Lessee Owned alterations and Utility Installations, which
was caused by an event required to be covered by the Insurance described in
Paragraph 8.3(a). Irrespective of any deductible amounts or coverage limits
involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or discovery
of a condition involving the presence of, or a contamination by, a Hazardous
Substance as defined in Paragraph 6.2 (a) in, on, or under the Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an
insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the insuring Party
Promptly contribute the shortage in proceeds (except as to the deductible which
is Lessee's responsibility) as and when required to complete said repairs. In
the event, however, the shortage in proceeds was due to the fact that, by reason
of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If lessor
receives said funds or adequate assurance thereof within said (10) days period,
the party responsible for making the repairs shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within then (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any-funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is
not an insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease. Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within then (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of damage
described in Paragraph 9.2 (Partial Damage-insured), whether or not Lessor or
Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes,
insurance premiums, and other charges, if any, payable by Lessee hereunder for
the period during which such damage, its repair or the restoration continues
(not to exceed the period for which rental value insurance is required under
Paragraph 8.3 (b)), shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired. Except for abatement of Base Rent,
Real Property Taxes, insurance premiums, and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and Lessee shall have no claim against Lessor for any damage suffered by
reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair of restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice of Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in full
force and effect. "commence" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease.
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible , there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6 (a) for a period of not to exceed twelve (12) months.
9.8 Termination-Advance Payments. Upon termination of this pursuant to this
Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent
and any other advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's Security Deposit as has not been,
or is not then required to be, used by Lessor under the terms of this Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes.
10.1 (a) Payment of Taxes. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1 (b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish with satisfactory evidence that such taxes have
been paid. If any such taxes to be paid by Lessee shall cover any period of time
prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fax fiscal year this Lease is in effect, and
Lessor shall reimburse Lessee for any overpayment after such proration. If
Lessee shall fail to pay any Real Property Taxes required by this Lease to be
paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall
reimburse Lessor therefor upon demand.
(b) Advance Payment. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option , to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due.
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of Breach by Lessee in the performance of the obligations
of Lessee under the Lease, then any balance of funds paid to Lessor under the
provisions of this Paragraph may, subject to proration as provided in Paragraph
10.1 (a), at the option of Lessor, be treated as an additional Security
Deposit under Paragraph 5.
10.2 Definition of "Real Property Taxes." As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, tire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties. (See Addendum, Paragraph 4).
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available Lessor's reasonable determinations thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations. Utility
Installations. Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real of Lessor in any of Lessee's
said personal property shall be assessed with Lessor's real property. Lessee
shall pay Lessor the taxes attributable to Lessee within ten (10) days after
receipt of a written statement setting forth the taxes applicable to Lessee's
property or at Lessor's option, as provided in Paragraph 10.1. (b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes, thereon if any such services are not
separately metered to Lessee. Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign, except to
an Affiliate of Lessee, transfer, mortgage or otherwise transfer or encumber
(collectively, "assignment") or sublet except to an Affiliate of Lessee all or
any part of Lessee's interest in this Lease or in the Premises without Lessor's
prior written consent given under and subject to the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent.
(c) The involvement of Lessee or its assets in any transaction, or series
of transactions (by way of merger, sale, acquisition, financing, refinancing,
transfer, leveraged buy-out or otherwise), whether or not formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five percent (25%) of such Net Worth of
Lessee as it was represented to Lessor at the time of the execution by Lessor of
this Lease or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or transactions
constituting such reduction, at whichever time said Net Worth of Lessee was or
is greater, shall be considered an assignment of this Lease by Lessee to which
Lessor may reasonably withhold its consent. "Net Worth of Lessee" for purposes
of this Lease shall be the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease except
to an Affiliate of Lessee, without Lessor's specific prior written consent
shall, at Lessor's option, be a Default curable after notice per Paragraph 13 1
( c ) , or a noncurable Breach without the necessity of any notice and grace
period. If Lessor elects to treat such unconsented to assignment or subletting
as a noncurable Breach. Lessor shall have the right to either: (i) terminate
this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"),
increase the monthly Base Rent to fair market rental value or one hundred ten
percent (110%) of the Base Rent then in effect, whichever is greater. Pending
determination of the new fair market rental value, if disputed by Lessee, Lessee
shall pay the amount set forth in Lessor's Notice, with any overpayment credited
against the next installment(s) of Base Rent coming due, and any underpayment
for the period retroactively to the effective date of the adjustment being due
and payable immediately upon the determination thereof. Future , in the event of
such Breach and market value adjustment. (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment to
the then fair market value (without the Lease being considered an encumbrance or
any deduction for depreciation or obsolescence, and considering the Premises at
its highest and best use and in good condition), or one hundred then percent
(110%) of the price previously in effect, whichever is greater, (ii) any
index-oriented rental or price adjustment formulas, contained in this Lease
shall be adjusted to require that the base index be determined with reference to
the index applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
in the same ratio as the new market rental bears to the Base Rent in effect
immediately prior to the market value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall
be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall not:
(i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease (ii) release Lessee of
any obligations hereunder, or (iii) after the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for performance
of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations from
any person other than Lessee pending approval or disapproval of an assignment
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of any rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for the Default or Breach by Lessee of
any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event or any Default or Breach of Lessee's obligations under
this Lease. Lessor may proceed directly against Lessee, any Guarantors or any
one else responsible for the performance of the lessee's obligations under this
Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of or sublessee under, this Lease shall, by reason of
accepting of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such obligations as are contrary to or inconsistent with provisions
of an assignment or sublease to which Lessor has specifically consented in
writing.
(g) The occurrence of a transaction described in Paragraph 12.1 ( c) shall
give Lessor the right (but not the obligation) to require that the Security
Deposit be increased to an amount equal to six (6) items the then monthly Base
Rent, and Lessor may the actual receipt by Lessor of the amount required to
establish such Security Deposit a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease to adjusted to what is then the market value and or
adjustment structure for property similar to the Premises as then constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest
in all rentals and income arising from any sublease of all or a portion of the
Premises heretofore or hereafter made by Lessee, and Lessor may collect such
rent and income and apply same toward Lessee's obligations under this Lease,
provided, however, that until a Breach (as defined in Paragraph 13.1) shall
occur in the performance of Lessee's obligations under this Lease, Lessee may,
except as otherwise provided in this Lease, receive, collect and enjoy the rents
accruing under such sublease. Lessor shall not, by reason of this or any other
assignment of such sublease to Lessor, nor by reason of the collections of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt to a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or until the Breach has been cured, against Lessor, for any such
rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease:
provided, however, Lessor shall not be liable for any prepaid rents of security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee 13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined). $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparations and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "Default" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease, A "Breach"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same, or
the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent or any other monetary payment required
to be made by Lessee hereunder, whether to Lessor or to a third party, as and
when due, the failure by Lessee to provide Lessor with reasonable evidence of
insurance or surety bond required under this Lease, or the failure of Lessee to
fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of ten (10) days following
written notice thereof by or on behalf or Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 6.1 (b), (iii) the recission of an unauthorized assignment of
subletting per Paragraph 12.1 (b), (iv) a Tenancy Statement per Paragraphs 16 or
37. (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions of
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or(C)above, where such Default continues for
a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by lessee
of any general arrangement of assignment for the benefit of creditors: (ii)
Lessee's becoming a "debtor" as defined in 11 U.S.C. S 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days): (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.
(f) The discovery by Lessor that any financial statement given to Lessor by
Lessee or any Guarantor of Lessee's obligations hereunder was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the vent of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent which
would have earned after termination until the time of award exceeds the amount
of such rental loss that the Lessee proves could have been reasonably avoided;
(iii) the worth at the time of award of the amount by which the unpaid rent for
the balance of the term after the time of award exceeds the amount of such
rental loss that the Lessee proves could be reasonably avoided; and (iv) any
other amount necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform its obligations under this Lease or
which in the ordinary course of things would be likely to result therefrom,
including but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of the leasing commission
paid by Lessor applicable to the unexpired term of this Lease. The worth at the
time of award of the amount referred to in provision (iii) of the prior sentence
shall be computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus on percent (1%). Efforts
by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease
shall not waive Lessor's right to recover damages under this Paragraph. If
termination of this Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such proceeding the unpaid
rent and damages as are recoverable therein, or Lessor may reserve there in the
right to recover all or any part thereof in a separate suite for such rent
and/or damages. If a notice and grace period required under subparagraphs
13.1(b),(C), or (d) was not previously given, a notice to pay rent or quit or to
perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by subparagraphs
13.1(b),(C), (d). In such case, the applicable grace period under subparagraphs
13.1(b),(C), (d) and under the unlawful detainer statute shall constitute both
an unlawful detainer and Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provision of this Lease as to matters occurring or accruing during the
term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event Of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1 , any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms if any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor' option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5 a reasonable time
shall in no event be less than thirty (30) days after receipt by Lessor, and by
the holders of any ground lease, mortgage of deed of trust covering the Premises
whose name and address shall have been furnished Lessee in writing for such
purpose, of written notice specifying wherein such obligation of Lessor has not
been performed; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days after such notice are reasonably required
for its performance, then Lessor shall not be in breach of this Lease if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession whichever first occurs if more than ten percent (10%) of the
floor area of the Premises, or more than twenty-five percent (25%) of the land
area not occupied by any building is taken by condemnation. Lessee may at
Lessee's option to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking for in the absence of such
notice within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession If Lessee does not terminate this Lease in accordance with the
foregoing this Lease shall remain in full force and effect as to the Premises
remaining except that the Base Rent shall be reduced in the same proportion as
the as the rentable floor area of the Premises taken bears to the total rentable
floor area of the building located on the Premises. No reduction of Base Rent
shall occur if the only portion of the Premises taken is land on which there is
no building. Any award for the taking of all or any part of the Premises under
the power of eminent domain or any payment made under threat of the exercise of
such power shall be the property of Lessor whether such award shall be made as
compensation for diminution in value of the leasehold for the taking of the fee
or as severance damages; provided, however, that Lessee shall be entitled to any
compensation separately Lessee for Lessee's relocation expenses and or loss of
Lessee's Trade Fixtures in the event that this Lease is not terminated by reason
of such condemnation. Lessor shall to the extend of its net severance damages
received over and above the legal and other expenses incurred by Lessor in the
condemnation matter repair any damage to the Premises caused by such
condemnation except to the extent that Lessee has been reimbursed therefor by
the condemning authority Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such repair.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease. Lessor has a separate commission agreement with the Brokers.
15.2 (Paragraph 15.2 omitted in this Agreement).
15.3 (Paragraph 15.3 omitted in this Agreement).
15.4 (Paragraph 15.4 omitted in this Agreement).
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the Brokers
if any named in Paragraph 1.10) in connection with the negotiation of this Lease
and or the consummation of the transaction contemplated hereby and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee In connection with said transaction. Lessee
and Lessor do each hereby agree to indemnify protect defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker finder or other similar party by reason of
any dealings or actions of the Indemnifying Party including any costs, expenses,
attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships including any dual agencies indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute acknowledge
and deliver to the Requesting Party a statement in writing in form similar to
the then most current "Tenancy Statement" form published by the American
Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the
owners at the time in question of the fee title to the Premises, or, if this is
a sublease, of the Lessee's interest in the prior lease. In the event of
transfer of Lessor's title or interest in the Premises or in this Lease. Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15 upon such transfer or assignment and delivery
of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all
liability with respect to the obligations and/or covenants under this Lease
thereafter to be performed by the Lessor. Subject to the foregoing , the
obligations and/or covenants in this Lease to be performed by the Lessor shall
be binding only upon the Lessor as hereinabove defined.(See Addendum, Paragraph
5).
18. Severability. The invalidity or any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12o. per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4
20. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that it
has made and is relying solely upon its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this Lease
and as to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible be cumulative with other remedies at law
or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed
or performed by Lessee are bother covenants and conditions.
29. Binding Effect; Choice of Law. This lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease mortgage, deed of trust, or other
hypothecation or security device (collectively "Security Device") now or
hereafter placed by Lessor upon the real property of which the Premises are a
part to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof Lessee agrees
that the Lenders holding any such Security Device shall have no duty, liability
or obligation to perform any of the obligations of Lessor under this Lease, but
that in the event of Lessor's default with respect to any such obligation.
Lessee will give any Lender whose name and address have been furnished Lessee in
writing for such purpose notice of Lessor's default and allow such Lender thirty
(30) days following receipt of such notice for the cure of said default before
invoking any remedies Lessee may have by reason thereof. If any Lender shall
elect to have this Lease and or any Option granted hereby superior to the lien
of its Security Device and shall give written notice thereof to Lessee, this
Lease and such Options shall be deemed prior to such Security Device
notwithstanding the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provision of Paragraph 30.3
Lessee agrees to attorn to a Lender or any other party who acquires ownership of
the Premises by reason of a foreclosure of a Security Device, and that in the
event of such foreclosure, such new owner shall not; (i) be liable for any act
of omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership. (ii) be subject to any offsets or defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this lease. Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises. Lessee and Lessor shall execute such
further writing as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fee. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) or Broker in any such proceeding, action, or appeal
thereon, shall be entitled to reasonable attorney's fees. Such fees may be
awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term "Prevailing
Party" shall include, without limitation, a party or Broker who substantially
obtains or defeats the relief sought, as the case may be whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time. In the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or the building of which they
are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease. Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations.
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein.
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of Lessee
business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects, attorneys, engineers, or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice of storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2 (e) (applicable to assignment or subletting). Lessor may as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act. Assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exist, nor shall such consent be deemed a waiver
of any then existing Default or Breach, except as may be otherwise specifically
stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, Including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, ( c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease.
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. Options. (See Addendum, Paragraph 6).
39.1 Definition. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease hat Lessee has on other property of
Lessor: (b) the right of first refusal to lease the Premises or the right of
first after the lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first to lease other property of Lessor; ( c)
the right to purchase the Premises, or the right of first refusal to purchase
the Premises, or the right of first offer to purchase the Premises, or the right
to purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options. If any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any Multiple Options to
extend or renew this Lease, a later Option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 13.1, whether or not the Defaults
are cured, during the twelve (12) month period immediately preceding the
exercise of the Option.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's inability to exercise an Option
because of the provisions of Paragraph 39.4 (a).
(c) All rights of Lessee under the provisions of an Option shall terminate
and be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option. If , after such exercise and during the term of this
Lease. (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notice of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are part of a group of building
controlled by Lessor, Lessee agrees that it all abide by, keep and observe all
reasonable rules and regulations which regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the grounds,
the parking and unloading of vehicles and the preservation of good order, as
well as for the convenience of other occupants or tenants of such other
buildings and their invitees, and that Lessee will pay its fair share of common
expenses incurred in connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easement, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suite for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duty authorized to execute and
deliver this behalf. If Lessee is a corporation, trust or partnership. Lessee
shall, within thirty (30) days after request by Lessor, deliver to Lessor
evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
of handwritten provisions.
46. Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder. Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein. If
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS
OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR
THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES: THE PARTIES
SHALL RELY SOLEY UPON THE ADVICE OF THEIR OWN COUNSEL, AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER
THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Santa Teresa, New Mexico Executed at El Paso, Texas
on December 5, 1996 on November 30, 1996
by LESSOR: Santa Teresa Limited by LESSEE: FARAH U.S.A., INC.
Partnership
BY: /s/ Paul J. Martini BY: /s/ Timothy B. Page
Title: Partner Title: Executive Vice President
and Chief Operating Officer
<PAGE>
ANNEX TO EXHIBIT 10.58
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL LEASE
Between Santa Teresa Limited Partnership
and
Farah U.S.A., Inc.
THIS ADDENDUM is made and entered into pursuant to Section 1.12 of the
Standard Industrial/Commercial Single-Tenant Lease-Net dated the date hereof
(the "Lease") between Santa Teresa Limited Partnership or its nominee or trustee
(the "Lessor") and Farah U.S.A., Inc. (the "Lessee"). This Addendum shall
constitute a part of, and be incorporated within, the Lease for all purposes.
1. Build to Suit Provisions.
(a) The Lease is a build to suit lease, with the Lessor constructing
improvements (as more particularly described in the hereinafter defined Work
Letter, the "Improvements") on the real property described on Exhibit A to the
Lease (the "Real Estate") and on the terms specified herein and in the Work
Letter attached as Exhibit B to the Lease (the "Work Letter").
(b) Notwithstanding the Commencement Date as specified in Section 1.3
of the Lease, upon the execution of the Lease by both parties hereto (the
"Execution Date"), it shall be binding upon each for all purposes. Upon the
Execution Date, the Lessor shall commence the process of construction of the
Improvements as provided in the Work Letter.
(c) The Commencement Date of the Lease shall be the earlier of the date
on which (i) a Certificate of Occupancy ("Certificate of Occupancy") is issued
by the appropriate governmental authority for the Improvements to be constructed
on the Real Estate; (ii) the Lessee takes possession of not less than fifty
percent (50%) of the Premises for purposes of production or operation, but
excluding specifically possession for purposes of installation or storage of any
trade fixtures or other personal property or for performing the Tenant's Work
(as defined in the Work Letter); (iii) the Premises would have been Ready for
Occupancy but for Tenant Delays (each as defined in the Work Letter); or (iv)
the Improvements are Ready for Occupancy, and shall continue in full force and
effect for the period of time specified as the Original Term (as it may be
extended in accordance with the Lease) or until the Lease is terminated as
otherwise provided therein.
2. Base Rent Paid Upon Execution; Proration of Rent.
Lessee understands that the Base Rent described in Section 1.6 of the
Lease ("Prepaid Rent") which Base Rent is for the first full month of the
Original Term following the Commencement Date, shall be paid to Lessor upon the
Execution Date. If the Original Term commences (or ends) on a date other than
the first (or last) day of a month, the Lessee shall pay on the Commencement
Date or first day of the last month a pro rata portion of Base Rent, prorated on
a per diem basis with respect to the portion of the month within the Original
Term.
3. Base Rent Adjustment.
Base Rent payable pursuant to Section 1.5 of the Lease shall be subject
to adjustment as provided in Section 6.2(b) below.
Base Rent payable pursuant to Section 1.5 of the Lease shall be subject
to adjustment, such that (i) commencing with the payment of Base Rent due on the
61st month during the Original Term and continuing through and including the
payment of Base Rent due on the 120th month during the Original Term, Base Rent
shall be payable monthly in the amount of $65,313 and (ii) commencing with the
payment of Base Rent due on the 121st month during the Original Term and
continuing through and including the final payment of Base Rent due during the
Original Term, Base Rent shall be payable monthly in the amount of $71,844.
4. Certain Sewage Assessments; Indemnity; Sewer System Escrow Account.
Notwithstanding Section 10.2 of the Lease, the term "Real Property
Taxes" shall expressly exclude any (i) governmental assessments for improvements
or additions to the sanitary sewer system applicable to the Premises that are
not in existence as of the date hereof and (ii) extraordinary assessments made
in connection with such sanitary sewer system, provided, however, that for this
purpose, the term "assessments" and the term "extraordinary assessments" shall
not include sewage rate increases generally applicable to the Premises during
the term of the Lease, and Lessee agrees to pay all such sewage rate increases
generally applicable to the Premises. Lessor agrees to indemnify and hold Lessee
harmless from the cost of any (i) governmental assessments for improvements or
additions to the sewer system applicable to the Premises that are not in
existence as of the date hereof and (ii) extraordinary assessments made in
connection with such sanitary sewer system. Lessor further agrees that in the
event Lessor should default in the payment of such assessments and/or
extraordinary assessments upon thirty (30) days prior written notice to Lessor
and to any mortgagee of the Premises whose name and address Lessor has furnished
to Lessee, Lessee shall have the right to offset against Base Rent an amount
equal to the amount of any such assessment or extraordinary assessment actually
paid by Lessee to any governmental authority.
In addition to the foregoing, Lessor further agrees that if Lessee
shall exercise its Purchase Option as described in Section 6.2(a) below, and if
on the Closing Date of the sale and purchase of the Premises, all of the pipes,
equipment and related improvements (the "Sewer System") required for the
operation of the sanitary sewer system serving the Premises have not been
installed and are operational, then Lessee shall be entitled to retain from the
Purchase Price for the Premises an amount equal to the estimated cost to
complete the Sewer System and to deposit such amount in an interest bearing
account (the "Sewer System Escrow Account") established by Lessor and Lessee at
Texas Commerce Bank National Association in El Paso, Texas. The parties shall
attempt to agree upon the estimated cost to complete the Sewer System. If the
parties are unable to agree upon the estimated cost of the Sewer System, then
prior to Closing each of the parties shall select an engineer licensed in the
State of New Mexico. The two engineers shall select and employ on their behalf a
third engineer (the "Final Engineer") who shall be licensed in State of New
Mexico. The Final Engineer shall estimate the cost to complete the Sewer System.
Lessor agrees that Lessee may deposit in the Sewer System Escrow Account from
the Purchase Price an amount equal to the Final Engineer's estimated cost to
complete the Sewer System.
Upon completion of the Sewer System, which completion the parties agree
shall be conclusively presumed to have occurred upon Lessee's receipt of written
notice from the County of Dona Ana, New Mexico, that all permits or licenses
required by applicable law for the operation of the sewer system have been
issued, the Sewer System Escrow Account, and all interest earnings thereon,
shall be released and paid by the escrow agent to Lessor. Upon request Lessee
agrees to execute and deliver to Lessor and/or the escrow agent written
instructions authorizing and directing the escrow agent to release the Sewer
System Escrow Account to Lessor. The parties agree to equally bear (i) all costs
and fees associated with or incurred by the three engineers utilized by the
parties, and (ii) the cost of establishing the Sewer System Escrow Account,
including, without limitation, the fees of the escrow agent, and to execute and
deliver all such documents as the engineers and/or escrow agent may reasonably
request.
5. Lessor Assignment.
It is understood and agreed that the Lessor may assign all or any part
of its interest in the Lease to any person whatsoever at any time and from time
to time during the term of the Lease without consent of or notice to the Lessee;
provided that the Lessor agrees to provide reasonable notice to the Lessee
following any such assignment.
6. Options.
6.1 Lease Options.
(a) The Lessee shall have the option (each a "Lease Option") to extend
the Original Term of the Lease by five years (the "First Renewal Term"), and, in
the event a Lease Option is exercised for the First Renewal Term, to extend the
term of the Lease for an additional five year period (the "Second Renewal Term")
beyond the expiration of the First Renewal Term. A Lease Option shall be
exercisable by the Lessee by providing the Lessor with written notice of the
Lessee's exercise of the Lease Option on or before the 120th day preceding the
last day of the Original Term or the First Renewal Term, as the case may be.
Once provided to the Lessor in accordance herewith, an exercise of a Lease
Option shall be irrevocable.
(b) Each Renewal Term shall be on the same terms and provisions as
provided in the Lease; provided that (i) during the First Renewal Term, each
monthly payment of Base Rent shall be in the amount of $79,028, and (ii) during
the Second Renewal Term, each monthly payment of Base Rent shall be in the
amount of $86,931.
6.2 Purchase Option.
(a) In consideration of Lessee's payment of Prepaid Rent on the
Execution Date pursuant to Section 1.6 of the Lease, and its other covenants and
agreements in the Lease, subject to the terms and conditions specified herein
and provided no Event of Default has occurred and is continuing, Lessor hereby
grants to Lessee the option (the "Purchase Option") to purchase the Premises,
including, without limitation, the Real Estate and Improvements, for an amount
(the "Purchase Price") equal to Lessor's cost of the Real Estate and the Cost of
Construction of the Improvements (as defined below), not to exceed the sum of
$6,755,000, less:
(i) the unapplied balance, if any, of the Security Deposit retained by
Lessor on the Closing Date;
(ii) an amount equal to the aggregate amount of principal reduction which
occurs during the period commencing on the Commencement Date and ending on the
Closing Date which amount shall be calculated on the basis of the actual amount
of principal amortized and paid by Lessor under the terms of Lessor's purchase
money, construction and permanent financing of the Real Estate and/or the Cost
of the Improvements, excluding optional prepayments of principal, if any, and
any penalty or premium in connection with such prepayments, paid by Lessor under
the terms of such financing; and
(iii) if the Closing Date occurs on or before thirty (30) days after the
Commencement Date, the pro rata unearned portion of the Prepaid Rent paid on the
Execution Date pursuant to Section 1.6 of the Lease.
As used herein, the term "Cost of Construction of the Improvements"
shall include all of the costs set forth in the Construction Budget (the
"Construction Budget"), dated October 22, 1996, attached hereto as Exhibit C,
which are based on the Construction Specifications (the "Construction
Specifications") attached hereto as Exhibit D, including, without limitation,
hard costs, soft costs and general and administrative items. To the extent that
any of the hard costs, soft costs and general and administrative costs prove to
be less than as projected in the Construction Budget for any reason then the
Cost of Construction of the Improvements shall be reduced to reflect the actual
cost amounts incurred. To the extent that any of the hard costs, soft costs and
general and administrative costs prove to be more than as projected in the
Construction Budget, the Cost of Construction of the Improvements shall not
increase unless the increased costs result from or arise out of a request from
Lessee to change the Construction Specifications. Lessee agrees that any changes
to the Construction Specifications must be submitted by Lessee to Lessor in
writing and approved by Lessor. Unless Lessee specifically requests Lessor to
increase the size of the building site, Lessor agrees that the cost of Real
Estate shall not increase. In no event shall general overhead and administrative
costs set forth in the Construction Budget exceed the sum of $250,000.00. Lessor
warrants and represents to Lessee that there will be no offsite utility
improvement costs included in the Cost of Construction of the Improvements.
(b) To the extent that the Cost of Construction of the Improvements is
less than the sum of $6,755,000, Lessor agrees to use its best faith efforts to
recalculate the Base Rent due hereunder in an equitable manner to reflect the
actual Cost of Construction of the Improvements.
(c) Subject to the terms of Section 6.2(d)(i) below governing the
Closing Date, to exercise the Purchase Option, the Lessee must provide the
Lessor with written notice of its exercise at any time within eleven (11) months
from the Commencement Date (the "Notice"). Failure to exercise the Purchase
Option other than as, when and in complete conformity with the terms specified
herein shall render the Purchase Option null, void and of no force and effect.
Without limiting the foregoing, it is expressly understood and agreed that
failure of the Lessee to provide the Notice when required hereunder will cause
the Purchase Option to terminate without any further act or deed of either
party.
(d) Within 30 days following delivery by the Lessee of the Notice, the
Lessor and the Lessee shall execute and deliver a contract of sale or other
similar document pertaining to the purchase of the Premises by the Lessee (the
"Contract"), in form and substance reasonably satisfactory to each party and
their respective counsel. Each party agrees to use its best good faith efforts
in the negotiation and preparation of the Contract, and it is agreed that the
Contract shall be usual and customary in commercial/industrial real estate
transactions in New Mexico; provided that, in any event, the Contract shall
provide that:
(i) the closing date (the "Closing" or the "Closing Date") of the purchase
of the Real Estate and Improvements shall be specified by Lessee in the Notice
provided, however, in no event shall the Closing occur more than 120 days
following the date of delivery of the Notice to Lessor or more than one (1) year
from the Commencement Date;
(ii) at the Closing, the Lessor shall deliver, or cause to be delivered, to
the Lessee at the Lessor's sole cost, each of the following items:
(A) a warranty deed, duly executed and acknowledged by the Lessor, in form
and substance reasonably satisfactory to the Lessee, conveying good, marketable
fee simple title in the Premises, free and clear of any and all liens and
encumbrances except the lien for current taxes not yet due and payable, subject
only to easements, reservations, patents, and other matters appearing of record
on the date of the Lease, the terms of the Lease, and any other reasonable and
specified permitted exceptions;
(B) if the Lessor is not a "foreign person" as defined in the Federal
Foreign Investment in Real Property Tax Act of 1980 and the Tax Reform Act of
1984, as amended, a certificate so stating in a form complying with such laws;
(C) an owner's policy of title insurance with respect to the Premises
issued by a title company licensed to do business in the State of New Mexico and
reasonably acceptable to the Lessee; and
(D) such other documents reasonably required by the Lessee for the better
conveyance and sale of the Premises.
(iii) at the Closing, the Lessee shall pay the Purchase Price for the
Premises in immediately available funds, and deliver such other documents
reasonably required by the Lessor for the better conveyance and sale of the
Premises; and
(iv) general real estate taxes for the then current year relating to the
Premises shall be prorated as of the date of Closing and shall be adjusted in
cash at the Closing. If the Closing shall occur before the tax rate is fixed for
the then current year, the apportionment of taxes shall be upon the basis of the
tax rate for the next preceding year applied to the latest assessed valuation.
(e) In the event that the Lessee states in the Notice that all or a
portion of the Purchase Price is to be funded through the issuance and sale by
the County of Dona Ana, New Mexico, of industrial development revenue bonds or
similar securities (the "Bonds") under the provisions of Sections 4-59-1 to
4-59-16 New Mexico Statutes Annotated, 1978 Compilation, as amended (the "Act"),
the Lessor agrees, at the sole cost and expense of the Lessee, to reasonably
cooperate with the Lessee and the County in the obtaining of the financing from
the County under the Act, including without limitation permitting legal title to
the Premises to be conveyed to the County as contemplated by the Act.
(f) Except as provided in (d) above, neither the Purchase Option nor
the rights of the Lessee under the Contract may be assigned by the Lessee to any
person, and any such attempt shall render, unless the Lessor otherwise elects in
its sole discretion, the Purchase Option and/or the rights of the Lessee under
the Contract null, void and of no force and effect.
7. Mutual Termination of the Lease.
(a) It is the desire of the Lessor and the Lessee that the Lessee shall
be able to exercise the Purchase Option pursuant to Section 6.2(a) above and
finance the payment of the Purchase Price through the issuance and sale of the
Bonds under the Act. In the event that the County fails to issue the Bonds
within a period of time sufficient to allow the Closing to occur by the time
specified in Section 6.2(d)(i) above on terms and conditions satisfactory to the
Lessor and the Lessee, then, by written instrument executed by the Lessor and
the Lessee, the parties may elect to terminate the Lease, whereupon it shall
terminate and no longer be binding on either the Lessor or the Lessee, except as
may be expressly provided therein.
(b) The determination of each of the Lessor and the Lessee to terminate
the Lease under this Section 7 shall be exercised by each of them in their
respective sole and absolute discretion, without any requirement, express or
implied, of reasonableness or good faith being applicable thereto.
8. Acquisition of Real Estate.
The Lessee understands that, as of the date of the Lease, the Lessor is
not the owner of the Real Estate described on Exhibit A which is to constitute
part of the Premises leased to the Lessee under the Lease. Notwithstanding any
provision hereof to the contrary, the Lease shall terminate and be of no further
force or effect in the event that the Lessor has not acquired fee simple title
to the Real Estate by December 31, 1996.
9. Approval by Farah Board of Directors.
Notwithstanding any provision hereof to the contrary, the Lease shall
terminate and be of no further force or effect in the event that all of the
terms of the Lease are not unconditionally approved by (i) Lessee's Board of
Directors on before December 4, 1996, and (ii) Lessee's lenders on or before
December 15, 1996. Lessee agrees to notify Lessor in writing on or before 5:00
p.m. on December 4, 1996, if approval has been obtained by Lessee's Board of
Directors, and to notify Lessor in writing on or before 5:00 p.m. on December
15, 1996, if approval has been obtained by Lessee's lenders.
10. Collateral Assignment of Lease.
Notwithstanding any provision hereof to the contrary, to secure the
payment of indebtedness due by Lessee, Lessee shall have the right, without
Lessor's consent or approval, to assign and transfer its right, title and
interest in, to and under the Lease, provided, however, no such assignment shall
require Lessor to amend or modify the terms of the Lease. Lessee agrees to
notify Lessor of the name and address of any assignee under any such collateral
assignment.
11. Subordination of Landlord's Lien.
Notwithstanding any provision hereof to the contrary, upon request
Lessor agrees to execute and deliver to Lessee, or to Lessee's lenders, an
agreement, in form and substance reasonably acceptable to Lessor and Lessee,
subordinating any constitutional, statutory or contractual landlord's lien in
favor of Lessor upon or against any of Lessee's personal property, including,
without limitation, inventory, accounts, fixtures and equipment, which is at any
time is located in or upon the Premises.
12. Alteration of Electrical/Mechanical Systems.
Notwithstanding any provision hereof to the contrary, Lessee shall have
the right, without Lessor's consent or approval, at Lessee's sole cost and
expense, to rewire, move, add, and/or modify all or any portion of the
electrical and/or mechanical systems located within the Premises to meet
Lessee's electrical and mechanical requirements upon the following conditions:
(i) Lessee agrees to furnish Lessor with a complete copy of its plans
detailing all of the proposed alterations, additions or modifications to the
existing electrical and/or mechanical systems not less than thirty (30) days
prior to the commencement of any work. Lessor shall have a period of seven (7)
days from the date of Lessor's receipt of Lessee's plans to review the plans,
and, if Lessor objects to such plans, to notify Lessee of Lessor's objections.
Lessor's objections shall be stated in writing with reasonable detail. If Lessee
is unable or unwilling to cure Lessor's objections prior to the commencement of
work, then Lessee may nevertheless proceed with improvements contemplated by the
plans but Lessee agrees that Lessor shall have the right, at its option, to
require Lessee, at its cost and expense, upon the expiration or termination of
the Lease to restore the electrical and/or mechanical systems to their condition
and configuration existing on the Commencement Date of the Lease. In such event,
prior to the commencement of work Lessee agrees to execute and deliver to
Lessor, in form and substance reasonably acceptable to Lessor, Lessee's
agreement to restore the electrical and mechanical systems as herein provided.
(ii) Lessee shall comply with all applicable laws, codes or regulations in
connection with the any work performed by Lessee, its agents or employees,
within the Premises.
13. Prepaid Rent Escrow Account. Notwithstanding the provisions of Sections
1.6 of the Lease, the parties agree that the Prepaid Rent paid by Lessee on the
Execution Date shall be deposited by Lessee in an interest bearing account (the
"Prepaid Rent Escrow Account") established by Lessor at Texas Commerce Bank
National Association in El Paso, Texas.
The parties further agree that in the event the Lease is terminated in
accordance with the terms hereof prior to Lessor's commencement of construction
of the Improvements, then the Prepaid Rent Escrow Account, and all interest
earnings thereon, shall be released and paid by the escrow agent to Lessee, and
Lessor agrees to execute and deliver to Lessee and/or the escrow agent upon
request written instructions authorizing and directing the escrow agent to
release the Prepaid Rent Escrow Account to Lessee.
If the Lease is not terminated in accordance with the terms hereof
prior to the commencement of the construction of Improvements, then the parties
agree that on such date the Prepaid Rent Escrow Account, and all interest
earnings thereon, shall be released and paid by the escrow agent to Lessor to be
held, used, applied or retained by Lessor pursuant to the terms of the Lease.
Lessee agrees to execute and deliver to Lessor and/or the escrow agent upon
request written instructions authorizing and directing the escrow agent to
release the Prepaid Rent Escrow Account to Lessor. The parties agree to equally
bear the cost of establishing the Prepaid Rent Escrow Account, including,
without limitation, the fees of the escrow agent, and to execute and deliver all
such documents as the escrow agent may reasonably request in connection
therewith.
14. Security Deposit Escrow Account. Notwithstanding the provisions of
Sections 1.7 and 5 of the Lease, the parties agree that the Security Deposit to
be paid by Lessee on the Execution Date shall be deposited by Lessee in an
interest bearing account (the "Security Deposit Escrow Account") established by
Lessor at Texas Commerce Bank National Association in El Paso, Texas.
The parties further agree that in the event the Lease is terminated in
accordance with the terms hereof prior to the Commencement Date, then the
Security Deposit Escrow Account, and all interest earnings thereon, shall be
released and paid by the escrow agent to Lessee, and Lessor agrees to execute
and deliver to Lessee and/or the escrow agent upon request written instructions
authorizing and directing the escrow agent to release the Security Deposit
Escrow Account to Lessee.
If the Lease is not terminated in accordance with the terms hereof
prior to the Commencement Date, then the parties agree that on the Commencement
Date (i) the Security Deposit shall be released and paid by the escrow agent to
Lessor to be held, used, applied or retained by Lessor pursuant to the terms of
Section 5 of the Lease, and (ii) all interest earnings thereon shall be released
and paid by the escrow agent to Lessee. Lessee agrees to execute and deliver to
Lessor and/or the escrow agent upon request written instructions authorizing and
directing the escrow agent to release the Security Deposit to Lessor. The
parties agree to equally bear the cost of establishing the Security Deposit
Escrow Account, including, without limitation, the fees of the escrow agent, and
to execute and deliver all such documents as the escrow agent may reasonably
request in connection therewith.
EXECUTED AND DELIVERED as of November 30, 1996.
SANTA TERESA LIMITED PARTNERSHIP
By: AIR PARK, INC., General Partner
By: /s/ Paul J. Martini
Name: Paul J. Martini
Its: Partner
FARAH U.S.A., INC.
By: Timothy B. Page
Name: Timothy B. Page
Its: Executive Vice President
Chief Operating Officer
FARAH INCORPORATED
By: Timothy B. Page
Name: Timothy B. Page
Its: Executive Vice President
Chief Operating Officer
<PAGE>
EXHIBIT 13 - ANNUAL REPORT
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended November 3, 1996, November 3, 1995 and November 4, 1994 (Thousands
of dollars except per share data)
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
-------------------- ---------------- ------------------
Net sales $ 247,598 240,797 242,775
Cost of sales 183,540 185,822 172,300
-------------------- ---------------- ------------------
Gross profit 64,058 54,975 70,475
Selling, general and administrative expenses 62,189 68,002 58,294
---------------- ---------------- ------------------
Operating income (loss) 1,869 (13,027) 12,181
Other income (expense):
Interest expense (4,065) (4,627) (2,479)
Interest income 834 901 723
Foreign currency transaction gains 374 512 449
Gain (loss) on sale of assets 10,041 756 (6)
Other, net 684 209 237
-------------------- ---------------- ------------------
7,868 (2,249) (1,076)
-------------------- ---------------- ------------------
Income (loss) before income taxes 9,737 (15,276) 11,105
Income tax provision (benefit) 2,981 (2,335) 300
-------------------- ---------------- ------------------
Net income (loss) $ 6,756 (12,941) 10,805
==================== ================ ==================
Net income (loss) per share $ .66 (1.28) 1.16
==================== ================ ==================
Weighted average shares of common stock
(all periods) and common stock equivalents
(income periods only) outstanding 10,195,133 10,122,308 9,321,761
==================== ================ ==================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
November 3, 1996 and November 3, 1995 (Thousands of dollars except share data)
<CAPTION>
<S> <C> <C>
1996 1995
-------------- -----------
ASSETS
Current assets:
Cash $ 3,777 3,657
Trade receivables, net of allowance
of $662 in 1996 and $720 in 1995 41,671 39,824
Inventories:
Raw materials 11,404 13,391
Work in process 15,251 14,429
Finished goods 35,378 44,943
-------------- -----------
Total inventories 62,033 72,763
Other current assets 10,857 11,667
-------------- -----------
Total current assets 118,338 127,911
Note receivable 5,260 5,600
Property, plant and equipment, net 25,370 33,363
Other non-current assets 4,895 6,953
-------------- -----------
$ 153,863 173,827
============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 20,744 44,779
Current installments of long-term debt 1,288 2,407
Trade payables 24,038 17,644
Accrued compensation 3,101 3,900
Other current liabilities 10,636 10,173
-------------- -----------
Total current liabilities 59,807 78,903
Long-term debt, excluding current installments 4,706 12,568
Other non-current liabilities 3,992 3,136
Commitments and contingencies
Deferred gain on sale of building 3,218 5,250
Shareholders' equity:
Common stock, no par value, $.01 stated
value, 20,000,000 shares authorized; issued
10,209,246 in 1996 and 10,181,601 in 1995 46,024 46,024
Additional paid-in capital 29,894 29,425
Cumulative foreign currency
translation adjustment (742) (1,295)
Minimum pension liability adjustment (1,243) (1,635)
Retained earnings 8,316 1,560
-------------- -----------
82,249 74,079
Less: Treasury stock, 36,275 shares, at cost 109 109
-------------- -----------
Total shareholders' equity 82,140 73,970
-------------- -----------
$ 153,863 173,827
============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Part I of Consolidated Statements of Shareholders' Equity Table FARAH
INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
<CAPTION>
Years ended November 3, 1996, November 3, 1995 and November 4, 1994 (Thousands
of dollars except share data)
<S> <C> <C> <C> <C>
Cumulative
Foreign
Common Stock Additional Currency
--------------------------------- Paid-in Translation
Shares Amount Capital Adjustment
--------------- --------------- --------------- ---------------
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)
Net income - - - -
Foreign currency translation adjustment - - - 553
Minimum pension liability adjustment - - - -
Exercise of stock options and other 27,645 - 469 -
--------------- --------------- --------------- ---------------
Balance, November 3, 1996 10,209,246 $ 46,024 $ 29,894 $ (742)
=============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Part II of Consolidated Statements of Shareholders' Equity Table FARAH
INCORPORATED AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity
<CAPTION>
Years ended November 3, 1996, November 3, 1995 and November 4, 1994 (Thousands
of dollars except share data)
<S> <C> <C> <C> <C>
Minimum
Pension Treasury Stock
Liability Retained ------------------------------
Adjustment Earnings Shares Amount
---------------- -------------- ------------- --------------
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
Net income - 6,756 - -
Foreign currency translation adjustment - - - -
Minimum pension liability adjustment 392 - - -
Exercise of stock options and other - - - -
---------------- -------------- ------------- --------------
Balance, November 3, 1996 $ (1,243) $ 8,316 36,275 $ 109
================ ============== ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Years ended November 3, 1996, November 3, 1995 and November 4, 1994 (Thousands
of dollars)
<S> <C> <C> <C>
1996 1995 1994
----------------- ----------- -----------
Cash flows from (used in) operating activities:
Net income (loss) $ 6,756 (12,941) 10,805
Adjustments to reconcile net income (loss)
to net cash from (used in)
operating activities:
Depreciation and amortization 5,434 4,020 2,966
Amortization of deferred gain on building sale (2,032) (2,032) (2,032)
Amortization of deferred gain on subsidiary sale (2,538) - -
Deferred income taxes 1,654 (1,934) (2,322)
Gain on sale of assets (10,041) (756) 6
Decrease (increase) in:
Trade receivables, net (1,847) (2,893) (4,473)
Inventories 10,730 2,661 (21,030)
Other current assets 1,931 (1,016) (1,840)
Increase (decrease) in:
Trade payables 6,394 (4,662) 1,982
Other (990) (1,098) 5,158
----------------- ----------- -----------
Net cash from (used in) operating activities 15,451 (20,651) (10,780)
----------------- ----------- -----------
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment (4,397) (11,756) (8,822)
Proceeds from disposition of property, plant
and equipment 22,689 1,785 36
----------------- ----------- -----------
Net cash from (used in) investing activities 18,292 (9,971) (8,786)
----------------- ----------- -----------
Cash flows from (used in) financing activities:
Net increase (decrease) in short-term debt (24,035) 26,771 (7,791)
Proceeds from issuance of long-term debt 4 6,426 1,058
Repayment of long-term debt (9,371) (1,284) (3,650)
Proceeds from sale of common stock 19 934 29,352
Other (793) (711) (453)
----------------- ----------- -----------
Net cash from (used in) financing activities (34,176) 32,136 18,516
----------------- ----------- -----------
Foreign currency translation adjustment 553 (229) 1,415
----------------- ----------- -----------
Net increase in cash 120 1,285 365
Cash, beginning of year 3,657 2,372 2,007
----------------- ----------- -----------
Cash, end of year $ 3,777 3,657 2,372
================= =========== ===========
Supplemental cash flow disclosures:
Interest paid $ 4,449 4,116 2,416
Income taxes paid 1,019 1,625 457
Assets acquired through direct financing
loans or capital leases 726 3,923 3,243
Exchange of debentures - - 1,673
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 3, 1996, November 3, 1995 and November 4, 1994
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, coats, shirts and women's slacks. 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 1996
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.
CASH EQUIVALENTS
Cash equivalents include demand deposits and short-term investments
with original maturities of three months or less. The Company had no cash
equivalents at November 3, 1996 and November 3, 1995.
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, 1996 and November 3, 1995, intangible assets were
$1,427,000 and $1,508,000, respectively, and consisted primarily of goodwill,
trademarks and other intangible assets. Intangible assets are carried at cost
less accumulated amortization. Most intangible assets are amortized on a
straight-line basis over their estimated useful lives ranging from 2 to 30
years. Amortization expense approximated $353,000 in 1996, $283,000 in 1995 and
$260,000 in 1994.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed in the year incurred.
Advertising expense approximated $10,629,000 in 1996, $17,003,000 in 1995 and
$13,000,000 in 1994.
FOREIGN CURRENCIES
Foreign entities whose functional currency is the U.S. dollar translate
monetary assets and liabilities at year-end exchange rates and non-monetary
items are translated at historical rates. Income and expense accounts are
translated at the average rates in effect during the year, except for
depreciation which is translated at historical rates. Gains and losses from
changes in exchange rates are recognized in consolidated income in the year of
occurrence. Foreign entities whose functional currency is the local currency
translate net assets at year-end rates and income and expense accounts at
average exchange rates. Adjustments resulting from these translations are
reflected in the Shareholders' equity section titled "Cumulative foreign
currency translation adjustment."
INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amount of assets and liabilities recognized for financial reporting
and tax purposes and are measured by applying currently enacted tax laws. Future
tax benefits, such as net operating loss carryforwards, are recognized to the
extent that realization of such benefits is more likely than not.
INCOME (LOSS) PER SHARE
Income per share in 1996 and 1994 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.
2. Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, plant and equipment is comprised of the following:
<S> <C> <C> <C>
Thousands of dollars
Estimated usefu --------------------------
lives (years) 1996 1995
------------------- ------------- -----------
Factory machinery and equipment 9-12 $ 28,213 34,463
Buildings 20-50 5,479 6,001
Building improvements 3-20 4,373 5,720
Other fixtures and equipment 3-20 16,100 14,386
Land 770 770
Construction in progress 937 1,248
------------- ------------
Total property, plant and 55,872 62,588
equipment
Less accumulated depreciation 30,502 29,225
------------- ------------
Net property, plant and equipment $ 25,370 33,363
============= ============
</TABLE>
In June 1996, the Company sold its facility located in Piedras Negras,
Mexico for a purchase price of approximately $22,200,000 in cash. Proceeds from
the sale, net of expenses, were used to retire a long-term capital lease
obligation of approximately $7,200,000 plus other long-term obligations. The
balance of the proceeds of approximately $13,800,000 was applied to the
Company's Credit Agreement. The transaction resulted in a deferred gain of
approximately $4,046,000 of which approximately $2,538,000 was recognized in
1996.
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.
The transaction resulted in a gain of approximately $986,000 of which
approximately $750,000 was recognized in 1995 and $236,000 in 1996.
Depreciation expense approximated $5,081,000 in 1996, $3,737,000 in 1995
and $2,706,000 in 1994.
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. The Company elected to adopt this pronouncement for
its fiscal year that began November 4, 1995. The adoption of this statement did
not 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, 1998, 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 collateralized 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 collateralized by substantially all of the assets of the related affiliates.
The interest rate is prime (8 1/4% at November 3, 1996) 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, 1996, usage under the Credit Agreement was
$23,045,000 (including letters of credit of $2,610,000) and the excess credit
line available was $26,955,000. 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, 1996, the Company was in compliance with the minimum working capital and
minimum tangible net worth covenants. The Company's Farah U.S.A. capital
expenditures, however, exceeded the covenant limit by approximately $285,000.
The Company's lender waived this covenant for fiscal 1996. 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.
<TABLE>
<CAPTION>
The following table reflects short-term debt balances and interest
rates in 1996, 1995 and 1994:
<S> <C> <C> <C>
Thousands of dollars
------------------------------------
1996 1995 1994
----------- ---------- ----------
Average outstanding balance $ 31,473 36,842 23,268
Maximum month-end
balance outstanding $ 41,816 47,338 39,995
Weighted average interest rate:
During year 9.4% 9.7% 9.0%
Year-end 9.2% 9.8% 8.7%
</TABLE>
LONG-TERM DEBT
In 1996, the Company sold its Piedras Negras, Mexico facility. Proceeds
from the sale were used to retire the Company's largest capital lease
obligation, collateralized by property, plant and equipment, as well as other
small capital lease obligations related to equipment at the facility. Capital
lease obligations retired in June 1996 approximated $7,700,000.
<TABLE>
<CAPTION>
Long-term debt at year-end is as follows:
<S> <C> <C>
Thousands of dollars
-------------------------
1996 1995
------------ ----------
Capital lease, collateralized by property, plant and equipment, 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
Collateralized 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 1,165 1,317
Various notes, collateralized by property, plant and equipment, bearing interest
at rates ranging from 7.25% to 12.50%,due in
monthly installments through 2005 554 548
Various obligations under other capital leases 2,612 3,690
------------ ----------
Total long-term debt 5,994 14,975
Less current installments 1,288 2,407
------------ ----------
Net long-term debt $ 4,706 12,568
============ ==========
</TABLE>
<TABLE>
Installments of long-term debt and capital lease obligations mature as follows:
<CAPTION>
<S> <C> <C>
Thousands of dollars
---------------------------------
Long-term Capital Lease
Debt Obligations
-------------- ----------------
1997 $ 274 1,239
1998 254 1,131
1999 251 423
2000 200 117
2001 182 -
2002 and beyond 2,221 -
-------------- ----------------
3,382 2,910
Less interest portion - 298
============== ================
$ 3,382 2,612
============== ================
</TABLE>
The Company believes that its borrowing availability from its Credit
Agreement, its ability to access other capital markets, if necessary, and its
projected cash from operations will be sufficient to meet anticipated liquidity
requirements for fiscal 1997.
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.
5. Employee and Director Stock Options and Awards
The Company has several stock-based compensation plans, which are
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its stock-based compensation plans. In 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of its stock-based compensation plans. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided not
to elect these provisions. However, pro forma disclosures as if the Company
adopted these cost recognition provisions in 1995 are required for fiscal years
beginning after December 15, 1995. The Company has elected to provide these
disclosures for its fiscal year which began on November 4, 1995.
STOCK OPTION PLAN
The current stock option plan is the Farah Incorporated 1991 Stock
Option and Restricted Stock Plan (the "1991 Plan"). Under the 1991 Plan, the
Company is authorized to issue up to 1,225,000 shares of common stock pursuant
to stock options (or, as described below, as shares of restricted stock). The
Company is authorized under the 1991 Plan to grant stock options as incentive
stock options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended) and/or as options that are not intended to qualify as
incentive stock options.
The 1991 Plan provides that the exercise price of any stock option
shall be determined by the Stock Option and Compensation Committee in its
discretion. All options granted have an exercise price equal to the per share
fair market value as of the date of the grant. All stock options granted in 1995
have a term of ten years and vest at the rate of fifty percent (50%) per year on
each anniversary of the date of grant, commencing on the first anniversary of
the date of grant. The options granted in 1996 have a term of approximately ten
years, are 50% vested on the date of grant, and fully vest on the first
anniversary of the date of grant.
The Company granted 489,000 options in 1996 and 7,000 options in 1995.
In accordance with APB 25, the Company has not recognized any compensation cost
for the stock options granted in 1995 and 1996.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLANS
The Company adopted two non-employee director stock option plans, the
Farah Incorporated 1988 Stock Option Plan for Non-Employee Directors and the
Farah Incorporated 1996 Non-Employee Directors Stock Option Plan (collectively,
the "Director Stock Option Plans"). Under the Director Stock Option Plans, the
Company is authorized to issue up to 150,000 and 300,000 shares, respectively,
of common stock pursuant to stock options (or, as described below, as shares of
restricted stock) to selected directors. The Company is authorized under the
Director Stock Option Plans to grant only non-qualified stock options. The
Director Stock Option Plans provide that the exercise price of any stock option
shall be the fair market value as of the date the option is granted.
The Company granted options for 31,000 and 9,000 shares under the
Director Stock Option Plans in 1996 and 1995, respectively. Generally, stock
options granted to directors on March 12, 1996 and March 14, 1995 have a term of
ten years and are fully vested as of the date of grant. Stock options granted on
September 30, 1996 have a term of five years and vest at the rate of 50% per
year on each anniversary of the date of grant, commencing on the first
anniversary of the date of grant. In accordance with APB 25, the Company has not
recognized any compensation cost for the stock options granted in 1996 and 1995.
<TABLE>
<CAPTION>
A summary of the status of the Company's stock options as of November
3, 1996, November 3, 1995 and November 4, 1994 and the changes during the years
ended on those dates is presented below:
<S> <C> <C> <C> <C> <C>
1996 Stock Options 1995 Stock Options 1994 Stock Options
----------------------------- ---------------------------- --------------------------
Number of Weighted Number of Weighted Number of Weighted
Shares of Average Shares of Average Shares of Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
--------------- ------------- -------------- ------------- ------------- -------------
Outstanding at beginning
of year 455,637 $ 10.87 478,985 $ 10.68 $ 570,437 6.62
Granted 520,000 5.94 16,000 8.53 192,500 16.77
Exercised (3,500) 5.48 (25,514) 5.81 (283,952) 6.66
Forfeited (17,924) 11.08 (10,834) 11.02 -
Expired (4,500) 6.96 (3,000) 9.81 -
--------------- ------------- ------------
Outstanding at end of year 949,713 8.21 455,637 10.87 478,985 10.68
=============== ============= ============
Exercisable at end of year 678,463 9.07 448,637 10.91 345,735 9.60
Weighted-average fair
market value of
options granted
during the year $ 2.66 $ 3.78 N/A
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995: dividend yield of 0%
for both years; expected volatility of 51.3% for both years; risk-free interest
rates are different for each grant and range from 5.43% to 7.76%; and the
expected lives of options are different for each grant and range from 2.6 years
to 4.8 years.
<TABLE>
<CAPTION>
The following table provides a summary of options outstanding and
exercisable at November 3, 1996:
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
--------------- -- --------------- -- -------------- -------------- -- --------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contract Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
- -------------------- --------------- --------------- -------------- -------------- --------------
$4.00 to $6.00 366,500 8.92 $5.48 203,750 $5.38
$6.375 to $8.625 396,713 7.00 6.79 288,213 6.84
up to $21.375 186,500 7.35 16.56 186,500 16.56
--------------- --------------
$4.00 to $21.375 949,713 7.81 8.21 678,463 9.08
=============== ==============
</TABLE>
RESTRICTED STOCK
Restricted stock may be granted pursuant to the 1991 Plan.
The Company may grant, as restricted common stock, all or a portion of
the 1,225,000 shares of common stock reserved under the 1991 Plan. During 1996
and 1995 there were no shares of restricted stock granted.
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 1991 Plan. The awards vest over varying periods ending in 1998, of which
37,665 shares vested in 1996, 62,666 shares vested in 1995 and 46,169 shares
vested in 1994. The Company recognizes the expense related to these awards over
the period of service called for by the vesting provision of the awards.
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net income (loss)
and net income (loss) per common share for 1996 and 1995 would approximate the
pro forma amounts below (in thousands except per share data):
<TABLE>
<S> <C> <C> <C> <C>
As Reported Pro Forma As Reported Pro Forma
November 3, November 3, November 3, November 3,
1996 1996 1995 1995
-------------- --------------- --------------- ----------------
Net income (loss) $ 6,756 5,945 (12,941) (12,973)
Net income (loss)
per common share $ .66 .58 (1.28) (1.28)
</TABLE>
Pro forma charges to expense for options granted in 1996 and 1995 are
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Thousands of dollars
------------- - ------------ --- --------------- -- -------------
1996 Annual 1995 Charge
Charge Annual Allocable to Total Charge
Charge Future Years
------------- ------------ --------------- -------------
1995 Stock options $ 15 43 2 $ 60
1996 Stock options 918 - 464 1,382
------------- ------------ --------------- -------------
Total $ 933 43 466 $ 1,442
============ ============ =============== =============
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.
6. Income Taxes
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at November 3, 1996 and November 3, 1995 are
as follows: <TABLE>
<S> <C> <C>
Thousands of dollars
--------------------------
1996 1995
----------- ------------
DEFERRED TAX ASSETS:
U.S. federal NOL carryforwards $ 2,062 4,477
Foreign NOL carryforwards 771 871
Deferred gain 1,871 1,785
Foreign tax credit carryforwards 451 1,897
Other accrued expenses 3,563 3,644
Other prepaid assets 235 276
----------- ------------
Total deferred tax assets 8,953 12,950
----------- ------------
DEFERRED TAX LIABILITIES:
Tax in excess of financial statement
depreciation and amortization 1,980 1,682
Other accrued expenses 600 490
----------- ------------
Total deferred tax liabilities 2,580 2,172
----------- ------------
Net deferred tax asset 6,373 10,778
Valuation allowance (3,825) (6,576)
----------- ------------
Deferred income tax asset, net 2,548 4,202
Less current portion (2,548) (1,747)
----------- ------------
Long-term deferred income tax asset, net $ - 2,455
=========== ============
</TABLE>
As of November 3, 1996, the decrease in the Company's deferred tax
assets was primarily due to partial utilization of the Company's domestic net
operating loss from 1995 and to the expiration of foreign tax credits which had
been fully reserved. The Company is undergoing a federal examination of its
United States tax returns for fiscal years 1994 and 1995, and as of November 3,
1996, it is uncertain what the outcome of the audit will be and what impact it
will have on the Company's domestic net operating loss and foreign tax credit
carryforwards.
Realization of the deferred tax asset after considering reversing
taxable differences is dependent upon the Company generating future taxable
income from operations in the respective taxing jurisdiction. Management does
not believe it is more likely than not the Company will generate sufficient
taxable income during the carryforward periods for certain portions of the
deferred tax assets and, accordingly, has provided a valuation allowance of
$3,825,000 and $6,576,000 at November 3, 1996 and 1995, respectively.
The net change in the valuation allowance for deferred tax assets at
November 3, 1996 was a decrease of $2,751,000 due primarily to the expiration of
foreign tax credit carryforwards, which had been fully reserved, combined with
an increase in deferred tax liabilities and a change in estimate of realization
of deferred tax assets.
Income (loss) before taxes and incomes taxes in 1996, 1995 and 1994 are shown
below:
<TABLE>
<S> <C> <C> <C>
Thousands of dollars
--------------- -- ------------- -- --------------
1996 1995 1994
--------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES:
Domestic operations $ 6,277 (16,728) 9,415
Foreign operations 3,460 1,452 1,690
--------------- ------------- --------------
Total Consolidated $ 9,737 (15,276) 11,105
=============== ============= ==============
INCOME TAX PROVISION:
Domestic operations
Current $ 450 (1,087) 2,194
Deferred 1,654 (1,934) (2,322)
--------------- ------------- --------------
Total Domestic 2,104 (3,021) (128)
Foreign operations
Current 877 686 428
Deferred - - -
--------------- ------------- --------------
Total Foreign 877 686 428
--------------- ------------- --------------
Total Consolidated $ 2,981 (2,335) 300
=============== ============= ==============
</TABLE>
The effective tax rate differs from the U.S. statutory rate of 34% as
summarized below:
<TABLE>
<S> <C> <C> <C>
Thousands of dollars
--------------- -- ------------- -- --------------
1996 1995 1994
--------------- ------------- --------------
Expected income taxes at U.S. statutory rate $ 3,311 (5,194) 3,776
Non-deductible expenses 212 87 21
Permanent differences on assets sold 172 - -
Effect of differing tax rates in foreign
countries (91) 46 160
Unrecognized deferred tax benefits - 2,633 -
U.S. taxes on dividends from foreign countries - 93 143
Recognition of previously unrecognized
deferred tax benefits (761) - (4,257)
Other 138 - 457
--------------- ------------- --------------
Income taxes, as reported $ 2,981 (2,335) 300
=============== ============= ==============
</TABLE>
At November 3, 1996, the Company's foreign subsidiaries have deferred
tax assets of $771,000 from net operating loss carryforwards that are available
indefinitely to offset future foreign taxable income. In addition at November 3,
1996, the Company has $451,000 in foreign tax credit carryforwards to offset
future foreign income repatriated and taxed in the U.S. These credits are due to
expire 1998 through 2000 if not used.The Company's domestic NOL of approximately
$6,100,000 expires in 2010.
Certain of the Company's foreign subsidiaries had undistributed
accumulated earnings of approximately $25,076,000 for U.S. tax purposes at
November 3, 1996. 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 associated
with these undistributed earnings is approximately $8,526,000 at November 3,
1996. If foreign earnings are repatriated, the U.S. tax on such earnings can be
offset, to a limited extent, with the foreign tax credits.
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 1996, 1995 and 1994, the Company's
contribution to the plan was approximately $306,000, $444,000 and $413,000,
respectively.
Under the defined benefit plan, the basic monthly pension payable to a
participant upon normal retirement equals the product of the participant's
monthly benefit rate times the number of years of credited service. Assets of
the defined benefit plan are invested primarily in U.S. government obligations,
corporate bonds and equity securities.
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, 1996, November 3, 1995 and November 4, 1994, included the following
components: <TABLE> <S> <C> <C> <C>
Thousands of dollars
--------------------------------------------
1996 1995 1994
------------ ------------ -------------
Service cost-benefits earned during the period $ 64 47 50
Interest cost on projected benefit obligation 576 577 528
Actual return on plan assets (786) (1,514) (286)
Net amortization and deferral 263 1,165 (35)
------------ ------------ -------------
Net periodic pension cost $ 117 275 257
============ ============ =============
</TABLE>
The following table sets forth the funded status at November 3, 1996 and
November 3, 1995, of the defined benefit plan:
<TABLE>
<S> <C> <C>
Thousands of dollars
----------------------------
1996 1995
------------- -------------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation $ (7,601) (7,801)
Nonvested benefit obligation (174) (150)
------------- -------------
Accumulated benefit obligation $ (7,775) (7,951)
============= =============
Projected benefit obligation $ (7,775) (7,951)
Plan assets at market value 7,437 6,888
------------- -------------
Projected benefit obligation in excess of plan assets (338) (1,063)
Unrecognized transition liability being recognized over
average future service of plan participants 401 468
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 1,243 1,635
Adjustment required to recognize minimum liability (1,644) (2,103)
------------- -------------
Accrued pension expense $ (338) (1,063)
============= =============
</TABLE>
In determining the benefit obligations and service cost of the
Company's defined benefit plan, weighted average discount rates of 7.75% and
7.5% were used in 1996 and 1995, respectively. The expected long-term rate of
return on plan assets was 9.5% in both years.
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, collateralized
by a second mortgage on the property. The balance of the note receivable at
November 3, 1996 and November 3, 1995, was $5,600,000 and $5,910,000,
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
$3,218,000 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 1997 to 2016. The following is a summary by year of the noncancelable
portion of future minimum lease payments under operating leases:
Thousands
of dollars
--------------
1997 $ 8,608
1998 6,409
1999 3,099
2000 2,370
2001 1,520
Later years 12,816
-------------
Lease payments* $ 34,822
=============
*Minimum payments have not been reduced by minimum sublease rental
income of $2,132,000 due in the future under noncancelable subleases.
The Company has subleased approximately two-thirds 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
------------
1997 $ 1,284
1998 848
------------
Total $ 2,132
============
Rental expense for all operating leases for 1996, 1995 and 1994 was
$8,162,000, $8,659,000 and $7,623,000, respectively (net of sublease income of
approximately $1,061,000 in 1996, $1,015,000 in 1995 and $881,000 in 1994).
At November 3, 1996, the Company had commitments for capital
expenditures of approximately $1,600,000.
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 cash and trade accounts receivable. The
Company restricts investment of cash to financial institutions of high credit
standing. In addition, 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's customers are
not concentrated in any specific geographic region but are concentrated in the
retail industry. In 1996 and 1995, one U.S. customer accounted for $36,260,000
(14.6%) and $30,191,000 (12.5%), respectively, of the Company's consolidated
sales. In addition, in 1996 another U.S. customer accounted for $26,571,000
(10.7%) of consolidated sales. In 1994, no one customer accounted for more than
10% of consolidated sales.
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, results of operations or cash flows.
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 trade receivables, the carrying amounts reported in the Consolidated Balance
Sheets approximate fair value because of the short-term maturity of these
instruments. The carrying values of the borrowings under the Credit Agreement
and the note receivable approximate fair value, as interest rates for these
instruments approximate current market rates. The carrying amount and fair value
of the Company's convertible debentures was $1,663,000 and $1,247,000,
respectively, at November 3, 1996. At November 3, 1995, the carrying amount was
$1,663,000 and the fair value was $1,039,000. The fair value of the convertible
debentures was based upon quoted market prices at November 3, 1996 and November
3, 1995.
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, boys' and
women's apparel in the United States and certain foreign countries, principally
in Europe and the South Pacific. The following table presents information
regarding geographic segments for 1996, 1995 and 1994. 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.
<PAGE>
<TABLE>
<S> <C> <C> <C>
Thousands of dollars
-------------------------------------------
1996 1995 1994
------------ ------------- ------------
NET SALES:
United States to unaffiliated customers $ 199,574 193,274 206,732
Transfers between areas - 266 547
------------ ------------- ------------
Total United States 199,574 193,540 207,279
Europe 30,677 32,033 24,119
South Pacific 17,347 15,490 11,924
Adjustments and eliminations - (266) (547)
------------ ------------- ------------
Total $ 247,598 240,797 242,775
============ ============= ============
OPERATING PROFIT (LOSS):
United States $ 1,981 (12,489) 12,535
Europe 3 385 754
South Pacific 2,626 1,549 1,418
Adjustments and eliminations - - (67)
------------ ------------- ------------
Total 4,610 (10,555) 14,640
Net gain (loss) on sale of assets 10,041 755 (6)
General corporate expenses (1,683) (1,751) (1,773)
Interest expense, net (3,231) (3,725) (1,756)
------------ ------------- ------------
Income (loss) before income taxes $ 9,737 (15,276) 11,105
============ ============= ============
IDENTIFIABLE ASSETS:
United States $ 123,520 146,172 132,238
Europe 16,552 17,326 16,342
Far East and the South Pacific 17,645 14,357 13,011
Adjustments and eliminations (3,854) (4,028) (3,540)
------------ ------------- ------------
Total $ 153,863 173,827 158,051
============ ============= ============
</TABLE>
Approximately 66% and 28% of all product sold in the United States in
1996 was assembled in Mexico and Costa Rica, respectively, in the Company's
owned facilities or by contractors. Included in the Company's consolidated
balance sheet at November 3, 1996 were net assets located in Mexico and Costa
Rica totaling approximately $1,305,000 and $6,948,000, respectively.
11. Related Party Transaction
In 1996, the Company entered into a joint venture agreement to form
Global Sourcing Services, Inc., a Cayman Islands corporation ("Global
Sourcing"). Global Sourcing is owned 50% by the Company and the other 50% is
owned by an unrelated corporation controlled by individuals involved in the
manufacturing of apparel in Mexico. The purpose of the joint venture is to
provide production sourcing in Mexico for Farah U.S.A. Global Sourcing is
currently negotiating a contract with a corporation in Mexico controlled by the
other joint venture partner. Christopher L. Carameros, a member of the Company's
Board of Directors, has a 10% profits interest in the Mexican corporation with
whom Global Sourcing intends to contract. During fiscal 1996, the Company paid
this Mexican corporation $154,000 for other production sourcing. In December
1996, the Company guaranteed approximately $1.3 million of indebtedness of the
Mexican corporation and Global Sourcing, the proceeds of which were used to
acquire equipment to be used in providing production sourcing.
12. Subsequent Events
On January 5, 1997, a fire occurred at the Company's leased garment
manufacturing plant in Galway, Ireland. Certain inventory and manufacturing
equipment were destroyed or damaged; however, the Company believes that it is
fully insured for such losses. It is anticipated that it will take a minimum of
six months to fully restore operations at the Galway facility. Losses may be
incurred related to the prolonged business interruption of this facility and its
related impact on the Company's other manufacturing facility in Ireland.
Accordingly, management is currently evaluating whether it is economically
feasible to continue its operations in Ireland. The Company is uncertain to what
extent these losses are covered by insurance. Farah Ireland supplies
approximately 45% of the products sold by the Company's Farah U.K. subsidiary
whose annual sales approximated $30 million in fiscal year 1996. The Company has
moved quickly to begin replacing the loss of inventory and production during the
interruption period with outside contractors, however some loss of sales and
related profit margins at Farah U.K. are expected. While the exact amount of the
losses are not determinable at this time, the Company believes that the pre-tax
write-off to be recorded in the 1997 first quarter is not expected to exceed
$2.5 million.
On November 30, 1996, the Company entered into a lease agreement with
Santa Teresa Limited Partnership for a new distribution warehouse. The
construction of the new facility has an estimated completion date of September
1997. The lease agreement provides an option to purchase the warehouse for
$6,700,000 if Industrial Revenue Bond financing can be obtained. Relocation to
the new warehouse is planned to be completed in the first quarter of fiscal
1998. New shelving, product handling and other equipment for the warehouse is
estimated to cost approximately $4,000,000, most of which will be incurred in
fiscal 1997. <PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated balance sheet of Farah
Incorporated (a Texas corporation) and subsidiaries as of November 3, 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Farah Incorporated
and subsidiaries as of November 3, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
El Paso, Texas
December 18, 1996
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated balance sheet of Farah
Incorporated (a Texas corporation) and subsidiaries as of November 3, 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years ended November 3, 1995 and November 4, 1994.
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 the results of their operations and
their cash flows for each of the years ended November 3, 1995 and November 4,
1994 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
December 15, 1995
<PAGE>
<TABLE>
<CAPTION>
Quarterly unaudited information for fiscal 1996 compared to fiscal 1995
is as follows:
<S> <C> <C> <C> <C>
Thousands of dollars except share data
------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- ---------------- --------------- ----------------
1996
Net sales $ 51,510 64,058 55,973 76,057
Gross profit 13,797 16,134 14,562 19,565
Net income (loss) (989) (176) 6,887 1,034
Net income (loss) per share (.10) (.02) .67 .10
Weighted average shares
of common stock and
common stock equivalents
outstanding 10,149,070 10,161,647 10,235,374 10,234,442
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
</TABLE>
In the third quarter of fiscal 1996, the Company sold its Piedras Negras,
Mexico facility, which resulted in an after-tax gain of approximately
$6,900,000.
COMMON STOCK
There were 10,235,371 shares of the Company's common stock, no par
value, outstanding as of January 13, 1997, owned of record by approximately
2,200 shareholders. Trading volume during fiscal 1996 averaged approximately
31,700 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>
<S> <C> <C> <C> <C>
1996 1995
--------------------------- ----------------------------
High Low High Low
------------- ------------ ------------ ------------
1st Quarter $ 7 1/ 8 4 1/ 2 9 6 5/ 8
2nd Quarter 6 3/ 8 4 1/ 2 8 5/ 8 6 7/ 8
3rd Quarter 9 5 3/ 4 8 3/ 8 6
4th Quarter 7 7/ 8 5 7/ 8 8 1/ 8 6 1/ 4
</TABLE>
The closing sales price of the Company's common stock on the New York
Stock Exchange as of January 13, 1997, was $7.875.
As of November 3, 1996, 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 27 holders.
The Company has not paid any dividends on its common stock since 1986.
The Company's Credit Agreement prohibits the payment of dividends by the
Company.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
<S> <C> <C> <C> <C> <C>
Thousands of dollars, except share and per share data
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- -------------- ------------- ------------ --------------
Summary of Operations:
Net sales $ 247,598 240,797 242,775 180,114 151,990
Cost of sales 183,540 185,822 172,300 127,020 113,509
Selling, general and
administrative expenses 62,189 68,002 58,294 47,372 41,915
Factory conversion expenses - - - 4,000 -
Operating income (loss) 1,869 (13,027) 12,181 1,722 (3,434)
Other income (expense):
Foreign currency transaction
gains (losses) 374 512 449 (151) 1,460
Gain (loss) on sale of asset 10,041 756 (6) 320 9
Provision for Generra bankruptcy - - (6,146)
- -
Other, net 684 209 237 (3) (149)
Interest expense, net (3,231) (3,726) (1,756) (1,452) (960)
Income (loss) before income taxes 9,737 (15,276) 11,105 436 (9,220)
Income tax provision (benefit) 2,981 (2,335) 300 304 369
Net income (loss) 6,756 (12,941) 10,805 132 (9,589)
Per Share Information:
Net income (loss) $ .66 (1.28) 1.16 0.02 (1.52)
Book value per share based on shares
outstanding at balance sheet dates $ 8.07 7.29 8.53 5.45 5.37
Shares outstanding 10,172,971 10,145,326 10,080,341 7,971,625 7,266,642
Financial Position at Year-End:
Current assets $ 118,338 127,911 123,919 95,325 71,808
Property, plant and equipment, net 25,370 33,363 22,872 13,220 10,376
Other assets, non-current 10,155 12,553 11,260 10,346 10,953
Total assets 153,863 173,827 158,051 118,891 93,137
Current liabilities 59,807 78,903 56,535 61,346 34,983
Long-term debt 4,706 12,568 5,170 1,179 4,452
Other liabilities 3,992 3,136 3,103 3,627 3,346
Deferred gain on sale of building 3,218 5,250 7,282 9,314 11,346
Shareholders' equity 82,140 73,970 85,961 43,425 39,010
Total liabilities and shareholders' equity 153,863 173,827 158,051 118,891 93,137
Current ratio 2.0 to 1 1.6 to 1 2.2 to 1 1.5 to 1 2.1 to 1
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Results of Operations
The following table sets forth certain financial data expressed as a
percentage of net sales, for the years indicated:
<S> <C> <C> <C>
Fiscal Year Ended
------------ -- ------------ -- -------------
1996 1995 1994
------------ ------------ -------------
Net sales:
Farah U.S.A. 73.8% 73.5% 78.8%
Farah International 19.4% 19.7% 14.9%
Value Slacks 6.8% 6.8% 6.3%
------------ ------------ -------------
Total net sales 100.0% 100.0% 100.0%
Cost of sales 74.1% 77.2% 71.0%
------------ ------------ -------------
Gross profit 25.9% 22.8% 29.0%
Selling, general and
administrative expenses 25.1% 28.2% 24.0%
------------ ------------ -------------
Operating income (loss) .8% (5.4%) 5.0%
Other income (expense), net 3.1% (0.9%) (0.4%)
------------ ------------ -------------
Income (loss) before income
taxes 3.9% (6.3%) 4.6%
Income tax expense (benefit) 1.2% (0.9%) 0.1%
------------ ------------ -------------
Net income (loss) 2.7% (5.4%) 4.5%
============ ============ =============
</TABLE>
1996 Sales Compared to 1995
Consolidated sales increased by $6,801,000 or 2.8% in fiscal 1996
compared to fiscal 1995. Sales increased in all of the Company's business
groups, Farah U.S.A., Farah International and Value Slacks.
Sales at Farah U.S.A. increased by $5,716,000 or 3.2%, from
$177,035,000 in fiscal 1995 to $182,751,000 in fiscal 1996. Units sales were up
4.7%, while the average price per unit decreased 1.4%. The following table
reflects comparative sales by product line:
<TABLE>
<S> <C> <C>
Thousands of dollars
------------------------------
1996 1995
------------- -------------
Savane $ 118,154 107,560
Farah and
Farah Clothing Co. 18,520 27,145
John Henry 8,224 11,477
Private Label 37,853 30,853
------------- -------------
$ 182,751 177,035
============= =============
</TABLE>
The Company's largest label, Savane, experienced increased sales of
approximately 10% for the year. The increase in sales is a result of the
introduction of new lines and increases in existing product sales. During fiscal
1996, the Company introduced Deep Dye casuals and dress, womenswear, and Savane
shirts. Sales of casual Savane men's product, which represented more than 67% of
the total Savane business, were comparable in fiscal 1995 and fiscal 1996. The
men's dress Savane product sales, however, increased by more than 90% and
represented the major portion of the growth within the Savane label. For fiscal
1996, sales of dress Savane products represented 22% of the total Savane
business, up from 13% in fiscal 1995. The introduction of the new Deep Dye
dress, combined with improved sales of existing dress products, contributed to
the overall increase in dress wear. The Company expects continued improvements
in the Savane dress category in 1997, as a result of the introduction of a new
upscale dress line called Savane Elements. This line will include dress slacks
with coordinating coats, offering a sportswear or dress concept. Initial
shipments of this product will be made in January 1997.
Also contributing to growth in the Savane label were the introduction
of a limited line of women's casual wear and men's shirts that began selling in
July and October of 1996, respectively. The Company intends to pursue these new
programs by offering them to more customers and expanding the lines in 1997.
Sales of Farah, including Farah Clothing Company, and John Henry
products declined in 1996 compared to 1995 by 32% and 28%, respectively. In the
recent past, sales of these products declined as more and more Savane products
were being sold. In response, the Company decided to reposition these labels
into separate and distinct distribution channels in order to fully maximize
their sales potential. That process was completed in the third and fourth
quarter of 1996; however, up to that time sales continued to decline as
customers phased out of their Farah and John Henry programs. During the third
quarter of 1996, the Company began shipping the John Henry brand to Sears under
a new sales plan, and since that time, John Henry sales have improved by more
than 50% compared to the same period last year. While there can be no
assurances, the Company believes that sales of John Henry product will continue
to grow throughout 1997 as the Company delivers more product to Sears and gains
additional customers in this marketing segment. To complete the product
repositioning, the Company began selling its Farah brand to a limited number of
stores of a major retailer in the mass merchandising distribution channel in the
1996 fourth quarter. While no assurances can be provided, the Company believes
that it will continue to expand its Farah branded sales volume with this major
retailer in 1997 as the Company delivers more product to additional stores.
Sales of private label product increased approximately 23% in fiscal
1996 compared to 1995, and represented 21% of Farah U.S.A.'s sales in 1996. The
private label business has continued to grow as a result of retailers expanding
their lines to include more private label products and the introduction by the
Company of new programs, including expansion into womenswear, boys and dress.
The Company intends to cautiously pursue growth in private label sales while it
focuses heavily on improving its profit margins.
Farah International, comprised primarily of sales in the United Kingdom
and Australia, recorded sales growth of 1.1% from $47,523,000 in fiscal 1995 to
$48,024,000 in fiscal 1996. Unit sales and the average price both increased by
.5%. Sales at Farah Australia increased by 13.5% as a result of increased sales
of Savane no wrinkle product and private label product. Sales at Farah U.K.
decreased by 3.2%, mainly as a result of the strengthening of the U.S. Dollar
compared to the British Pound Sterling. Sales were comparable in fiscal 1995 and
fiscal 1996 at Farah U.K., excluding the effects of the currency fluctuations.
Value Slacks, the Company's retail store division, reported increased
sales of 3.6%, with sales increasing from $16,239,000 in fiscal 1995 to
$16,823,000 in fiscal 1996. The average sales price increased by 13.4% during
the year as the mix of sales of first quality product improved. Unit sales,
however were down by 8.7%, as competition in the retail outlet market increased.
There were a total of 39 stores in operation at the end of fiscal 1996 compared
to 38 stores at the end of fiscal 1995. During fiscal 1996, three new stores
were opened, while two of the Company's less profitable locations were closed as
retail leases expired. Same store sales were down approximately 3% in fiscal
1996 compared to fiscal 1995. Late in the fourth quarter, management implemented
a new marketing strategy to more properly align the Company's retail store
merchandise and displays with current market trends and to improve future
operations. These changes include offering a greater mix of first quality
product in a broader range of sizes and colors, and less closeouts or off-priced
goods to certain stores, a redesign of store layouts and the introduction of
electronic order processing to reduce warehouse inventory levels. Management
believes that these changes will help to better position the Company in the
retail environment.
1995 Sales Compared to 1994
Sales decreased $1,978,000 or .8%, from $242,775,000 in fiscal 1994 to
$240,797,000 in fiscal 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
recorded sales growth of 32%. Sales at Farah International increased from
$36,043,000 in fiscal 1994 to $47,523,000 in fiscal 1995. Value Slacks also
reported an increase in sales from $15,326,000 in fiscal 1994 to $16,239,000 in
fiscal 1995, a 6.0% increase.
Sales at Farah U.S.A. as a percent of consolidated sales decreased from
79% in fiscal 1994 to 73% in fiscal 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:
Thousands of dollars
----------------------------
1995 1994
------------ ------------
Savane $ 107,560 114,395
Farah and
Farah Clothing Co. 27,145 47,239
John Henry 11,477 14,381
Private Label 30,853 15,391
------------ ------------
$ 177,035 191,406
============ ============
The sales reduction was primarily in the Company's branded product and
principally the result of: (1) increased market penetration in the no wrinkle
casual pant market by the Company's competitors; (2) the soft retail market that
intensified through fiscal 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 fiscal 1995 was 5% lower than in fiscal 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 fiscal 1995 and 15% in fiscal 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
fiscal 1995 and 6% in fiscal 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 fiscal
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.
1996 Gross Profit Compared to 1995
Gross profit increased by $9,083,000 in fiscal 1996 over fiscal 1995.
The Company's gross profit as a percentage of consolidated sales increased from
22.8% in fiscal 1995 to 25.9% in fiscal 1996. Gross profit as a percent of sales
increased at Farah U.S.A. from 17.6% in 1995 to 22.0% in 1996, and also
increased at Farah International from 33.0% in 1995 to 33.9% in 1996. At Value
Slacks, margins declined to 45.5% in 1996 from 50.5% in 1995.
Gross profit margins improved considerably at Farah U.S.A. as a result
of a cost containment program initiated in the latter part of 1995. A strict,
disciplined production plan was put into place that focused on increasing
factory efficiencies, reducing overhead, and improving first quality production
percentages, factory deliveries and work in process turns. There were
significant reductions in the production work force, particularly in the U.S. as
the Company shifted more production activities to offshore factories and
contractors. In addition, there was a shift in production product mix in Mexico
that had the effect of reducing overall U.S. import duties. Having migrated
through the transitional startup costs of the new laundry, finishing and cutting
facilities experienced in 1995, the Company improved product quality and reduced
the number of irregulars and second quality products in 1996. In addition, the
Company experienced lower costs as a result of further devaluation of the
Mexican Peso, although to a lesser extent when compared to 1995. As discussed
later, the Company sold its Piedras Negras, Mexico facility in June 1996 and
entered into a long term supply agreement which has also helped to reduce unit
costs. Finally, the Company recorded fewer reserves for inventory markdowns in
1996 as the Company significantly reduced its inventory levels.
At Farah International, gross profit margins were comparable for the
first half of the year, showing some improvement late in the second half.
Increased sales of higher margin product at Farah Australia combined with
efforts to obtain a proper balance of owned production and contract production
have resulted in this slight improvement in margins.
Gross profit margins at Value Slacks were down compared to the prior
year, as a result of higher promotional sales, combined with a lower mix of
irregulars and closeout goods. In addition, during the fiscal 1996 second and
third quarters, margins were negatively impacted by below normal sales prices on
merchandise sold through a "satellite sales" program in order to dispose of
excess inventories.
1995 Gross Profit Compared to 1994
Gross profit as a percent of sales was 22.8% in fiscal 1995 compared to
29.0% in fiscal 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, contributing
to the 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.
1996 Selling, General and Administrative Expenses Compared to 1995
Selling, General and Administrative expenses ("SG&A") as a percent of
sales decreased from 28.2% in fiscal 1995 to 25.1% in fiscal 1996. The majority
of this decrease is attributable to lower national and co-op advertising
expenses at Farah U.S.A, where SG&A as a percent of sales decreased from 25.3%
in 1995 to 20.9% in fiscal 1996. Management shifted its advertising strategy to
more heavily focus on print media and point of sale merchandise and less on
national television campaigns. Advertising through several national magazines
and other printed material in 1996 resulted in significant cost reductions that
have allowed increases in customer store display tables and fixturing. The
Company also changed the mix of its sales force by reducing the number of
salesmen and replacing them with coordinators, whose purpose is to ensure that
the merchandise and promotional materials are properly displayed and assist
store personnel. Also, contributing to reductions in Farah U.S.A.'s SG&A costs
were reductions in personnel, professional fees and insurance.
SG&A at Farah International decreased from 31.0% to 29.7% as a percent
of sales in 1995 and 1996, respectively. Similar to Farah U.S.A., the reductions
were due to decreases in advertising, outside services and professional fees. At
Value Slacks, SG&A costs as a percent of sales increased from 52.3% in 1995 to
57.7% in 1996. The increase was largely due to reserves established at year end
for the planned realignment of store operations, increased labor costs and
depreciation expense associated with opening new stores in the U.S., and
increased advertising and other selling costs related to the satellite sales
program.
1995 Selling, General and Administrative Expenses Compared to 1994
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.
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. In addition, advertising, labor
and certain other operating costs as a percent of sales are higher in the U.S.
than in Puerto Rico.
Other Income (Expense)
<TABLE>
<CAPTION>
The following table illustrates the changes in interest expense, net of
interest income, over the past three fiscal years, and the other significant
items included in non-operating income and expense (in thousands):
<S> <C> <C> <C> <C>
1996 1995 1994
---- ---- ----
Interest expense, net $ 3,231 3,726 1,756
Interest expense, net, as a percent of sales 1.3% 1.5% 0.7%
Average debt 40,352 47,910 26,689
Average interest rate 9.4% 9.7% 9.0%
Gain (loss) on sale of assets 10,041 756 (6)
Foreign currency transaction gains 374 512 449
</TABLE>
As noted above, the largest item included in other income (expense) for
fiscal 1996 was gain on sale of assets. Included in this line item is a pre-tax
gain of approximately $9,300,000 realized on the sale of the Company's Piedras
Negras, Mexico facility. On June 7, 1996, the Company sold its Piedras Negras,
Mexico sewing and finishing facility to Galey & Lord, Inc. for a purchase price
of approximately $22,200,000 in cash. Proceeds from the sale, net of expenses,
were used to retire a long-term capital lease obligation of approximately
$7,200,000 plus other long-term obligations. The balance of the proceeds of
approximately $13,800,000 was applied to the Company's Credit Agreement.
As discussed below in "Liquidity and Capital Resources," the Company
also significantly reduced its inventory levels. The proceeds from the sale of
the Piedras Negras, Mexico facility and the reductions in inventory were the
principal factors contributing to the reduced borrowings in 1996 and had the
effect of reducing net interest expense for the year. Interest expense should
remain relatively low in the first half of 1997, increasing in the second half
of the year, as investments in capital projects and joint venture arrangements
are financed through the Company's Credit Agreement or other borrowings.
Income Tax Expense (Benefits)
The Company's effective tax rate was 30.6% for fiscal 1996, compared
with 15.3% and 2.7% in fiscal 1995 and fiscal 1994, respectively. Taxes in 1996
resulted mainly from the gain on the sale of the Piedras Negras, Mexico
facility, and from international operations. As of November 3, 1996 the Company
had net deferred tax assets of approximately $6,373,000, partially offset by a
valuation allowance of $3,825,000. Realization of the remaining portion of the
net deferred tax asset is dependent upon future taxable income. The Company will
continue to evaluate realizability of its deferred tax assets and the need for
adjustments to the valuation allowance based on actual and expected operating
performance, executed or proposed tax strategies, or other changes in facts or
circumstances as they arise.
Subsequent Event
On January 5, 1997, a fire occurred at the Company's leased garment
manufacturing plant in Galway, Ireland. Certain inventory and manufacturing
equipment were destroyed or damaged; however, the Company believes that it is
fully insured for such losses. It is anticipated that it will take a minimum of
six months to fully restore operations at the Galway facility. Losses may be
incurred related to the prolonged business interruption of this facility and its
related impact on the Company's other manufacturing facility in Ireland.
Accordingly, management is currently evaluating whether it is economically
feasible to continue its operations in Ireland. The Company is uncertain to what
extent these losses are covered by insurance. Farah Ireland supplies
approximately 45% of the products sold by the Company's Farah U.K. subsidiary
whose annual sales approximated $30 million in fiscal year 1996. The Company has
moved quickly to begin replacing the loss of inventory and production during the
interruption period with outside contractors, however some loss of sales and
related profit margins at Farah U.K. are expected. While the exact amount of the
losses are not determinable at this time, the Company believes that the pre-tax
write-off to be recorded in the 1997 first quarter is not expected to exceed
$2.5 million.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
Key statistics demonstrating financial condition of the Company are as
follows:
<S> <C> <C>
Thousands of dollars
1996 1995
----------- ---------
Working capital 58,531 49,008
Total debt 26,738 59,754
Long-term debt 4,706 12,568
Shareholders' equity 82,140 73,970
Current ratio 2.0:1 1.6:1
Long-term debt-to-equity .06:1 .17:1
Total debt-to-equity .33:1 .81:1
Days sales in accounts receivable 59 57
Inventory turnover 2.7 2.5
</TABLE>
The improvement in the Company's working capital, as shown in the above
statistics, resulted mainly from cash flow of approximately $22,200,000 from the
sale of the Company's Piedras Negras, Mexico facility. Proceeds from the sale
were used to reduce both short-term and long-term borrowings. Liquidity was also
improved by a substantial reduction in inventories. Inventory levels decreased
by $10,730,000 during fiscal 1996, a 15% decline. The improvements in liquidity
and working capital were partially offset by the use of cash to purchase
property, plant and equipment of approximately $4,397,000.
Working capital increased by $9,523,000 during the year. This increase
resulted mainly from the decrease in short-term borrowings of approximately
$24,035,000, offset partially by a reduction in inventory of $10,730,000 and an
increase in trade payables of $6,394,000. The reduction in short-term
borrowings, as previously discussed, resulted mainly from the application of
proceeds from the sale the Company's Piedras Negras, Mexico facility. The
decrease in inventory resulted from higher sales and successful efforts to
manage production levels to better match demand. Trade payables increased as a
result of higher raw material purchases near the end of the year and as a result
of an increase in liabilities to production contractors. In conjunction with the
sale of the Piedras Negras facility, the Company entered into a long term supply
agreement whereby the buyer of the facility will continue to sew and finish
garments for the Company. Since the sale of the facility, the percentage of
Farah U.S.A. production from outside contractors has increased from 33% at the
end of fiscal 1995, to 62% at the end of fiscal 1996. The Company intends to
source growth in production with outside contractors and expansion of existing
facilities as discussed below.
The Company's primary Credit Agreement, which expires July 1, 1998,
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 and inventory. The Credit
Agreement is collateralized by substantially all of the Company's assets, except
for certain property, plant and equipment, and is guaranteed by Farah
Incorporated and each of Farah U.S.A.'s domestic affiliates. As of November 3,
1996, usage under the Credit Agreement was $23,045,000 (including letters of
credit of $2,610,000) and available credit was $26,955,000. 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 were 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, 1996,
the Company was in compliance with the minimum working capital and minimum
tangible net worth covenants. The Company's Farah U.S.A. capital expenditures,
however, exceeded the covenant limit by approximately $285,000. The Company's
lender waived this covenant for fiscal 1996. Fiscal 1997 capital expenditures
are also expected to exceed the current covenant level in the Credit Agreement
and Management is currently negotiating an increase in this limit. In addition,
the Credit Agreement prohibits the payment of dividends by the Company.
In fiscal 1997, major liquidity requirements will be for the financing
of capital expenditures, estimated to approximate $19,000,000. Approximately
$7,000,000 will be used to increase current production capacity. To help
preserve control over the Company's unique finishing processes, it is currently
involved in negotiations to form joint ventures with existing apparel
manufacturing companies in Mexico. As part of the joint venture agreements, the
Company will share the cost to upgrade facilities and purchase additional
laundry, pressing and sewing equipment.
As with many companies, the Company is addressing and evaluating the
impact of the millennium dating issue on its computer systems. In addition to
modifying existing systems, the Company is also considering the replacement of
its entire order entry and inventory management systems. Should the Company
conclude to replace its systems, it expects to incur an estimated cost of
$2,200,000 in fiscal 1997. In the event the system is not replaced, the cost to
modify existing programs to address the dating issue will be charged to
operations in the year incurred.
The Company's lease on its existing corporate headquarters and
distribution warehouse expires in May 1998. As a result, the Company plans to
relocate its corporate offices to another El Paso location in the second quarter
of fiscal 1997. The new facility will be leased under an operating lease
agreement, with estimated expenditures for leasehold improvements and furniture
and fixtures of $1,700,000. The Company will also be relocating its distribution
warehouse. The Company has entered into a lease for a facility to be constructed
with an estimated completion date of September 1997. The lease agreement
provides an option to purchase the warehouse for $6,700,000, if Industrial
Revenue Bond financing can be obtained. Relocation to the new warehouse is
planned to be completed in the first quarter of fiscal 1998. New shelving,
product handling and other equipment for the warehouse is estimated to cost
approximately $4,000,000, of which most will be incurred in fiscal 1997.
The Company is considering various long-term financing arrangements to
fund the 1997 capital spending plans. If such sources of long-term financing
cannot be obtained, capital expenditures will be financed through the existing
Credit Agreement, cash from operations or capital lease obligations. The Company
believes its existing capital resources, together with the financing available
from the Credit Agreement and its ability to access other capital markets, if
necessary, will be adequate to meet its short-term and long-term liquidity
requirements.
Capital expenditures for fiscal years 1996, 1995 and 1994 were
$5,123,000, $15,679,000 and $12,065,000, respectively. As of November 3, 1996,
material commitments for capital expenditures were approximately $1,600,000.
Most of Farah U.S.A.'s major fabric suppliers provide 60-day terms,
subject to certain limits. During fiscal 1996, the maximum outstanding balance
at any month-end under these credit terms was $14,054,000.
Inflation did not materially impact the Company in fiscal 1996, 1995 or
1994.
Factors Affecting the Company's Business and Prospects
Statements in this Report that relate to future results or events are
based on the Company's current expectations. There are many factors that affect
the Company's business and the results of its operations that may cause the
actual results of operations in future periods to differ materially from those
currently expected or desired. These factors include general economic and
business conditions in the U.S. and abroad; the level of demand for apparel
products; the intensity of competition and the pricing pressures that may
result; changes in labor and import and export regulations; the ability of the
Company to timely and effectively manage production sourcing; the ability of the
Company to access the credit market to finance capital expenditures; the ability
of the Company to manage its inventory levels to minimize excess inventory;
currency fluctuations; and the success of planned advertising.
<TABLE>
<CAPTION>
OFFICERS
<S> <C> <C>
FARAH INCORPORATED FARAH U.S.A., INC.
Richard C. Allender Michael R. Mitchell Dianna S. Benton
President, Chairman of the Board President Vice President - Credit
Chief Executive Officer
Jackie L. Boatman Gilbert A. Martinez
Timothy B. Page Executive Vice President - Vice President - Information Systems
Executive Vice President Operations Chief Information Officer
Chief Operating Officer
Gary J. Kernaghan Mary Esther Minjares
Senior Vice President - Vice President -
Merchandising Product Replenishment
Russell G. Gibson
Executive Vice President, Franz A. Maccarrone Rodolfo A. Morales
Chief Financial Officer, Senior Vice President - Vice President -
Treasurer and Operations Research & Development
Assistant Corporate Secretary
Karen S. Castillo Edward P. Srsic, jr. Victor Ontiveros
Corporate Secretary Senior Vice President - Vice President - Sales Administration
Private Label
Jose A. Ramirez Polly H. Vaughn
FARAH INTERNATIONAL, INC. Senior Vice President - Vice President - Controller
Operations Administration
Helmut H. Meinel
Senior Vice President
Donald Lewis
Managing Director
Farah (Australia) Pty, Ltd
and Farah (New Zealand) Limited
Eric A.R. Thornton
Managing Director
Farah Manufacturing (U.K.) Limited
VALUE SLACKS
Donald G. Carney
President
Mark H. Wright
Vice President - Director of Stores
</TABLE>
Mailing Address
Farah Incorporated
P.O. Box 9519
El Paso, Texas 79985
Telephone: 915-593-4444
Transfer Agent and Registrar
Common Stock
Society National Bank
c/o Key Corp Shareholder Services, Inc.
1201 Elm Street, Suite 5050
Dallas, Texas 75221-2320
Toll Free Number: 800-527-7844
Questions and communications regarding
lost stock certificates, change of address, dividend checks, consolidation of
accounts and transfer of certificates should be directed to the Transfer Agent.
Trustee and Paying Agent
8.5% Convertible Subordinated
Debentures due February 1, 2004
Texas Commerce Bank, N.A.
Corporate Trust
201 East Main
5th Floor
El Paso, Texas 79901
Telephone: 915-546-6528
FORM 10-K
A copy of the Company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission, will be furnished to any shareholder free of charge on
request to the Secretary of the Corporation.
CORPORATE DIRECTORY
DIRECTORS
Richard C. Allender (2, 4, 5) Sylvan Landau (2)
Chairman of the Board Executive Vice President
and Chief Executive Officer Retail Development
Farah Incorporated The Dallas Market Center
Clark L. Bullock (1, 3) Michael R. Mitchell (5)
Chairman of the Board and Chief Executive President
Officer Shelter Rock Investors Services Farah U.S.A., Inc.
Corporation
Christopher L. Carameros (4) Timothy B. Page (4)
Executive Vice President Executive Vice President
Cactus Apparel, Inc. Chief Operating Officer
Farah Incorporated
John D. Curtis (1, 3) Charles J. Smith (1, 2, 3, 4)
President Consultant
First Extended Service Corporation
(1) Member of the Audit Committee
(2) Member of the Nominating Committee
(3) Member of the Stock Option and Compensation Committee
(4) Member of the Executive Committee
(5) Member of the Retirement and Employee Benefits Committee
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
<S> <C> <C>
JURISDICTION OF PERCENT
NAME INCORPORATION OWNED
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%
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%
Farah Offshore Sourcing Company Cayman Islands 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%
SUBSIDIARY OF FARAH OFFSHORE SOURCING COMPANY:
Global Sourcing Services, Inc. Cayman Islands 50%
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Farah Incorporated and subsidiaries (the Company) on Form S-8 (File Nos.
33-11930, 33-46661, 33-61736, 33-53461 and 333-05353) of our report dated
December 18, 1996, on our audit of the consolidated financial statements of the
Company as of and for the year ended November 3, 1996, which report is
incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
El Paso, Texas
January 24, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
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 Nos. 33-11930, 33-46661, 33-61736, 33-53461
and 333-05353.
/S/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
January 24, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-03-1996
<PERIOD-END> NOV-03-1996
<CASH> 3,777
<SECURITIES> 0
<RECEIVABLES> 42,333
<ALLOWANCES> 662
<INVENTORY> 62,033
<CURRENT-ASSETS> 118,338
<PP&E> 55,872
<DEPRECIATION> 30,502
<TOTAL-ASSETS> 153,863
<CURRENT-LIABILITIES> 59,807
<BONDS> 1,663
0
0
<COMMON> 46,024
<OTHER-SE> 36,116
<TOTAL-LIABILITY-AND-EQUITY> 153,863
<SALES> 247,598
<TOTAL-REVENUES> 247,598
<CGS> 183,540
<TOTAL-COSTS> 245,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,065
<INCOME-PRETAX> 9,737
<INCOME-TAX> 2,981
<INCOME-CONTINUING> 6,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,756
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
