SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter
Ended February 1, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-5400
FARAH INCORPORATED
(Exact name of registrant as specified in its charter)
Texas 74-1061146
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4171 N. Mesa, Building D, Suite 500, El Paso, Texas 79902-1433
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (915) 496-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
As of March 13, 1998 there were outstanding 10,322,632 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
QUARTERS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997
(Unaudited)
(Thousands of dollars except share
and per share data)
February 1, February 2,
1998 1997
----------------- ----------------
<S> <C> <C>
Net sales $ 59,044 61,938
Cost of sales 43,140 44,230
----------------- ----------------
Gross profit 15,904 17,708
Selling, general and
administrative expenses (14,420) (16,046)
Royalty income 345 45
Termination of foreign
operations (3,980) (2,462)
Relocation expenses (792) -
Production conversion expenses - (272)
----------------- ----------------
Operating loss (2,943) (1,027)
Other income (expense):
Interest expense (707) (1,199)
Interest income 30 191
Foreign currency
transaction gains 156 111
Other, net (83) 42
----------------- ----------------
(1,096) (363)
Loss before for
income taxes (4,039) (1,390)
Income tax provision (benefit) (969) 565
----------------- ----------------
Net loss (3,070) (1,955)
Retained earnings:
Beginning 8,586 8,316
----------------- ----------------
Ending $ 5,516 6,361
================= ================
Net loss per share -
basic and diluted $ (0.30) (0.19)
================= ================
Weighted average shares of
common stock outstanding
- basic and diluted 10,278,239 10,191,103
================= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, 1998 AND NOVEMBER 2,
1997 (Unaudited)
(Thousands of dollars except share data)
February 1, November 2,
1998 1997
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 3,351 2,332
Trade receivables, net 29,144 43,053
Inventories:
Raw materials 16,053 12,339
Work in process 16,756 18,457
Finished goods 45,059 43,996
--------------- --------------
Total inventories 77,868 74,792
Other current assets 10,079 10,851
--------------- --------------
Total current assets 120,442 131,028
Property, plant and equipment, net 34,249 36,033
Other non-current assets 12,403 8,531
--------------- --------------
$ 167,094 175,592
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 33,982 35,572
Current installments of
long-term debt 5,647 5,301
Trade payables 17,587 20,600
Other current liabilities 11,949 13,492
--------------- --------------
Total current liabilities 69,165 74,965
Long-term debt, excluding current
installments 15,083 13,771
Other non-current liabilities 2,845 2,957
Deferred gain on sale of building 677 1,185
Shareholders' equity:
Common stock, no par value,
$.01 stated value, 20,000,000
shares authorized; issued
10,315,264 in 1998 and 1997 46,026 46,026
Additional paid-in capital 30,627 30,627
Cumulative foreign currency
translation adjustment (2,736) (2,416)
Retained earnings 5,516 8,586
--------------- ---------------
79,433 82,823
Less: Treasury stock, 36,275
shares in 1998 and 1997, at cost 109 109
--------------- ---------------
Total shareholders' equity 79,324 82,714
--------------- ---------------
$ 167,094 175,592
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED FEBRUARY 1, 1998 AND FEBRUARY 2, 1997
(Unaudited)
(Thousands of dollars)
February 1, February 2,
1998 1997
----------------- ------------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (3,070) (1,955)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 1,684 1,256
Amortization of deferred gain on building sale (508) (508)
Amortization of deferred gain on subsidiary sale - (784)
Writedown of property, plant and equipment 2,856 1,360
Loss on sale of assets 10 -
Deferred income taxes (1,086) 421
Decrease (increase) in:
Trade receivables 13,909 8,094
Inventories (3,076) (4,272)
Other current assets (31) 337
Increase (decrease) in:
Trade payables (3,013) (1,442)
Other current liabilities (1,542) (1,863)
----------------- ------------------
Net cash from operating activities 6,133 644
----------------- ------------------
Cash flows used in investing activities:
Purchases of property, plant and equipment (1,643) (1,837)
----------------- ------------------
Net cash used in investing activities (1,643) (1,837)
----------------- ------------------
Cash flows from (used in) financing activities:
Net increase (decrease) in short-term debt (1,590) 2,587
Repayment of long-term debt (1,506) (366)
Proceeds from sale of common stock - 491
Other (307) (1,013)
----------------- ------------------
Net cash from (used in) financing activities (3,403) 1,699
----------------- ------------------
Effect of exchange rate changes on cash (68) (121)
----------------- ------------------
Net increase in cash 1,019 385
Cash, beginning of quarter 2,332 3,777
----------------- ------------------
Cash, end of quarter $ 3,351 4,162
================= ==================
Supplemental cash flow disclosures:
Interest paid $ 1,243 611
Income taxes paid 84 161
Assets acquired through direct financing
loans or capital leases 3,163 809
Property, plant and equipment held for sale and
transferred to other non-current assets 2,063 -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The attached condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. As a result, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
The Company believes that the disclosures made are adequate to make the
information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's 1997
Annual Report on Form 10-K.
2. The foregoing financial information reflects all adjustments (which consist
only of normal recurring adjustments) which are, in the opinion of
management, necessary to present a fair statement of the financial position
and the results of operations and cash flows for the interim periods.
Certain prior year amounts have been reclassified to conform with the
fiscal 1998 presentation.
3. During the first quarter of fiscal 1998, the Company decided to close its
finishing facility in Cartago, Costa Rica and reduce sewing operations
in the Company's San Jose, Costa Rica facility. The Company recorded a
pre-tax charge of $4.0 million in the first quarter of fiscal 1998 on the
write-down of its Costa Rican assets to expected realizable value and the
accrual of severance payments and other closing expenses. This amount has
been classified as "Termination of foreign operations" in the Condensed
Consolidated Statement of Operations and Retained Earnings. The reduction
of activity in Costa Rica will result in the termination of approximately
700 employees at the two facilities. The Company expects the reduction in
activity and the termination of the employees to occur prior to the end of
fiscal 1998. The Company will hold the Cartago facility for sale, as well
as some of the manufacturing equipment in both locations. These assets have
a book value of $2.1 million, after a write-down for impairment, and are
included in "Other non-current assets" on the Company's February 1, 1998
Condensed Consolidated Balance Sheet. The Company is uncertain as to the
timing of the disposal of the Costa Rican assets held for sale.
4. The Company completed the move of its inventory to its new distribution
center in March 1998. In moving to the new distribution center, the
Company incurred duplicate operating costs, moving expenses, costs
associated with testing and modification of systems and procedures, and
professional fees of $792,000 in the first quarter of fiscal 1998 (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors Affecting the Company's Business and Prospects").
5. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share."
SFAS 128 supersedes APB Opinion No. 15, "Earnings Per Share." SFAS 128
requires dual presentation of basic and diluted earnings per share for
entities with complex capital structures. SFAS 128 is effective for
interim and annual periods ending after December 15, 1997. The Company has
implemented SFAS 128 for the first quarter of fiscal 1998. The first
quarter of fiscal 1997 has been restated to conform with the presentation
required by SFAS 128. The implementation of this standard did not have a
material impact on the Company's calculation of earnings per share for
the first quarter of fiscal 1997 or 1998.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by including the
potential dilutive effect of securities or contracts that are convertible
to common stock such as options and convertible debt. Because the Company
experienced net losses in the first quarter of fiscal 1998 and the first
quarter of fiscal 1997, the inclusion of the potential common shares would
be antidilutive. Therefore, the first quarter fiscal 1998 and first quarter
fiscal 1997 calculations of basic net loss per share were identical to the
calculations of diluted net loss per share; and no reconciliation of the
basic and diluted loss per share calculations is presented.
6. On January 5, 1997, a fire occurred at the Company's leased garment
manufacturing plant in Galway, Ireland, in which certain inventory and
manufacturing equipment owned by the Company were either destroyed or
damaged. As a result of the fire and its related impact, the Company
recorded a charge (after tax and net of insurance proceeds) of $2.5 million
in the first quarter of fiscal 1997. This amount has been classified as
"Termination of foreign operations" in the first quarter fiscal 1997
Condensed Consolidated Statement of Operations and Retained Earnings. The
Company recognized an additional pre-tax loss of $2.6 million in the fourth
quarter of fiscal 1997 in connection with the closure of its Irish
facilities.
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The following sets forth certain financial data as percentages of net
sales:
<TABLE>
First Quarter Ended
-------------- --- --------------
1998 1997
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<S> <C> <C>
Net sales:
Farah U.S.A. 75.7% 76.7%
Farah International 16.6 16.8
Savane Direct 7.7 6.5
-------------- --------------
Total net sales 100.0 100.0
Cost of sales 73.1 71.4
-------------- --------------
Gross profit 26.9 28.6
Selling, general and
administrative expenses -24.4 -25.9
Royalty income 0.6 0.0
Termination of foreign operations -6.7 -4.0
Relocation expenses -1.3 0.0
Production conversion expenses - -0.4
-------------- --------------
Operating income (loss) -4.9 -1.7
Other expense, net 1.9 0.6
-------------- --------------
Loss before income taxes -6.8 -2.3
Income tax expense (benefit) -1.6 0.9
-------------- --------------
Net loss -5.2% -3.2%
============== ==============
</TABLE>
Consolidated sales during the first quarter of fiscal 1998 decreased
$2.9 million (4.7%) compared to the first quarter of fiscal 1997. First quarter
sales increased at Savane Direct (formerly known as Value Slacks) and decreased
at Farah U.S.A. and Farah International.
Farah U.S.A. sales for the first quarter of fiscal 1998 were $44.7
million, compared to $47.5 million in the first quarter of fiscal 1997, a 6.0%
decrease. Unit sales decreased 8.0% while the average unit selling price
increased 2.2%. Sales of Savane product declined 3.8% in the first quarter of
fiscal 1998, compared to the same period in fiscal 1997. Sales of Savane men's
dress products and women's wear increased 3.6% and 29.8%, respectively, during
the first quarter of fiscal 1998. Savane shirt sales increased 154.0% compared
to the first quarter of fiscal 1997. A 6.9% reduction in sales of Savane men's
casual products, combined with a 28.0% decrease in men's coat sales, more than
offset the increases in sales of men's dress products, shirts, and women's wear.
Additionally, boys' pant sales decreased 46.8% due in part to conversion of some
retailers from Savane boy's products to private label products. The poor
Christmas retail selling season affected overall Savane sales. A slight decline
in the average per unit selling price for Savane products also contributed to
the sales decrease during the first quarter of fiscal 1998. Competition in the
men's apparel business continues to make the achievement of increases in market
share and unit price difficult. The Company is pursuing an expansion of its
Savane business through the introduction of products, including its new cotton
stretch wrinkle-free pant (see "Risk Factors Affecting the Company's Business
and Prospects").
During the first quarter of fiscal 1998, John Henry label sales
increased 61.5% versus the first quarter of fiscal 1997. Replenishment sales of
John Henry product to Sears continue to increase. The introduction of John Henry
suit separates to Sears contributed to the increase in John Henry dress pant and
coat sales during the first quarter of fiscal 1998. Additionally, the Company is
attempting to expand distribution of the John Henry line to new retail customers
within the same market segment (see "Risk Factors Affecting the Company's
Business and Prospects").
Sales of Farah label products increased 4.9% during the first quarter
of fiscal 1998, compared to the first quarter of fiscal 1997. Sales for the
first quarter of fiscal 1997 included initial shipments to a large number of
stores of a retailer in the mass-merchant distribution channel, while first
quarter fiscal 1998 sales were comprised of replenishment orders. Replenishment
orders of Farah product to this retailer continue to grow. Additionally, the
Company is working with the same mass-merchant to expand distribution of the
Farah label beyond the domestic market (see "Risk Factors Affecting the
Company's Business and Prospects").
Private label sales for the first quarter of fiscal 1998 decreased
33.6%, compared to the first quarter of fiscal 1997. The decrease was primarily
the result of the conversion of private label business with one of the Company's
major customers to branded business with that same customer. In addition, the
Company's strategy to improve profit margins within the private label division
has caused the Company to be more selective with existing and new private label
programs (see "Risk Factors Affecting the Company's Business and Prospects").
Farah International sales decreased 5.7%, from $10.4 million in the
first quarter of fiscal 1997 to $9.8 million in the first quarter of fiscal
1998. Unit sales at Farah International increased 4.8%, while the average unit
selling price was 10.0% lower in the first quarter of fiscal 1998 than the same
period in fiscal 1997.
Farah U.K. sales comprised 61.1% of first quarter fiscal 1998 Farah
International sales, compared to 59.0% in the first quarter of fiscal 1997.
Farah U.K. sales decreased 2.5% for the first quarter of fiscal 1998 when
compared to the same period in fiscal 1997. The average per unit selling price
at Farah U.K. decreased 3.9%, while unit sales increased 1.5%. Concession sales
(sales on which the Company pays the retailer a commission) decreased as a
percentage of total Farah U.K. sales during the first quarter of fiscal 1998,
compared to the first quarter of fiscal 1997. Concession sales generate higher
per unit prices than other sales. This decrease in concession sales was the
primary factor behind the drop in total sales and the average selling price per
unit at Farah U.K.
Sales at Farah Australia and Farah New Zealand accounted for 38.9% and
39.4% of Farah International sales in the first quarter of fiscal 1998 and the
first quarter of fiscal 1997, respectively. Unit sales in Australia and New
Zealand increased 15.1% in the first quarter of fiscal 1998, compared to the
first quarter of fiscal 1997. However, the average selling price per unit and
total sales declined 19.0% and 6.7%, respectively. An increase in private label
sales was the primary factor behind the higher unit sales at Farah Australia and
New Zealand. Lower average selling prices more than offset the higher unit
sales. The increase in private label sales as a percentage of Farah Australia's
total sales contributed to the reduction in the average selling price per unit,
as private label products generate lower sales prices than branded products. In
addition to the increase in private label sales as a percentage of Farah
Australia's business, the weakness of the Australian and New Zealand currencies,
relative to the U.S. dollar further depressed the average price per unit when
translated to the Company's reporting currency.
First quarter fiscal 1998 sales at the Company's retail division,
Savane Direct, were $4.6 million, compared to $4.0 million in the first quarter
of fiscal 1997, a 13.4% increase. The average selling price per unit at Savane
Direct was 6.8% higher during the first quarter of fiscal 1998 than in the first
quarter of fiscal 1997. Same store sales at Savane Direct were 7.5% higher
during the first quarter of fiscal 1998 compared to the first quarter of fiscal
1997. The implementation of a strategy built around closing the least profitable
Savane Direct stores, opening new stores in better locations, and converting a
higher proportion of Savane Direct's product mix to first quality merchandise is
the primary reason for the sales increase and for the increase in the average
sales price per unit. In addition, after-Christmas sales at Savane Direct were
better in the first quarter of fiscal 1998 than for the same period of fiscal
1997.
As a percent of sales, gross profit was 26.9% in the first quarter of
fiscal 1998, versus 28.6% in the first quarter of fiscal 1997. Gross profit as a
percentage of sales increased at Farah International and Savane Direct and
decreased at Farah U.S.A.
Farah U.S.A. gross profit as a percent of sales was 22.9% in the first
quarter of fiscal 1998 compared to 26.4% in the same period of fiscal 1997.
Sales of the Farah label, which is sold within the mass- merchant channel,
increased as a percentage of total unit sales. This increase reduced the average
unit selling price and resulting gross profit as a percentage of sales at Farah
U.S.A., as sales of Farah label product generally earn lower average prices
and generate lower gross margins than sales of the Company's other products.
Additionally, the average cost of sales per unit at Farah U.S.A. increased
7.1% during the first quarter of fiscal 1998, compared to the same period in
fiscal 1997. Lower overall production rates resulted in higher costs per unit.
Higher markdown expenses during the first quarter of fiscal 1998 on some of the
Company's seasonal shirts and patterned cotton pants also contributed to the
increased cost of sales per unit at Farah U.S.A.
Farah International gross profit as a percent of sales increased from
31.5% in the first quarter of fiscal 1997 to 36.0% in the first quarter of
fiscal 1998. The Company's new strategy of sourcing its United Kingdom products
entirely from outside contractors contributed to the increased gross profit
margins in the first quarter of fiscal 1998 by reducing the average cost of
sales per unit. Additionally, since Farah Australia sources much of its
production in Fiji and pays for that production in Fiji currency, the weakness
of Fiji's currency, relative to the Australian dollar, lowered Farah
International's first quarter fiscal 1998 cost of sales. Finally, the absence of
fixed costs incurred in Ireland after the fire at one of the Company's Irish
facilities in the first quarter of fiscal 1997 lowered Farah International's
average cost per unit sold in the first quarter of fiscal 1998, relative to the
same period in fiscal 1997. Higher markdown expenses and lower levels of
concession sales at Farah U.K. combined to partially offset this increase in
gross profit.
Savane Direct's gross profit as a percent of sales increased from 46.4%
in the first quarter of fiscal 1997 to 47.2% in the first quarter of fiscal
1998. The move to more first quality merchandise was the primary factor behind
the higher first quarter fiscal 1998 gross profit margins at Savane Direct.
Selling, general and administrative expense ("SG&A") as a percent of
sales was 24.5% and 25.9% in the first quarter of fiscal 1998 and the first
quarter of fiscal 1997, respectively. SG&A as a percentage of sales decreased
1.7, 1.3 and 4.9 percentage points at Farah U.S.A., Farah International and
Savane Direct, respectively. At Farah U.S.A., the decrease in SG&A was primarily
attributable to lower selling expenses resulting from the Company's effort to
decrease advertising and other selling costs. In addition, the Company incurred
lower professional fees, outside services and freight expenses. The drop in
Farah U.K. concession sales, which generate higher selling costs than most other
Farah U.K. sales, played a role in the decrease in SG&A at Farah International.
Additionally, the disposal of the Company's Irish operation eliminated a portion
of the SG&A costs formerly incurred by Farah International. At Savane Direct,
increased sales resulted in a decrease in SG&A as a percentage of sales as fixed
costs remained constant at the higher sales levels.
During the first quarter of fiscal 1998, the Company decided to close
its finishing facility in Cartago, Costa Rica and reduce sewing operations in
the Company's San Jose, Costa Rica facility. As a result of this action, the
Company will transition some product that is currently sourced in Costa Rica to
Mexico, with the goal of saving the duties that it would otherwise incur. The
Company recorded a pre-tax charge of $4.0 million in the first quarter of fiscal
1998 on the write-down of its Costa Rican assets to expected realizable value
and the accrual of severance payments and other closing expenses. This amount
has been classified as "Termination of foreign operations" in the Condensed
Consolidated Statement of Operations and Retained Earnings. The reduction of
activity in Costa Rica will result in the termination of approximately 700
employees at the two facilities, with the reduction in activity and the
termination of the employees expected to occur prior to the end of fiscal 1998.
The Company will hold the Cartago facility, as well as some of the manufacturing
equipment in both locations for sale. These assets have a net book value of $2.1
million, after a write-down for impairment, and are included in "Other
non-current assets" on the Company's February 1, 1998 Condensed Consolidated
Balance Sheet. The Company is uncertain as to the timing of the disposal of the
Costa Rican assets held for sale (see "Risk Factors Affecting the Company's
Business and Prospects").
The Company recently completed the move of its inventory to its new
distribution center as scheduled. In moving to the new distribution center, the
Company incurred duplicate operating costs, moving expenses, costs associated
with testing and modification of systems and procedures, and professional
fees of $792,000 in the first quarter of fiscal 1998 (see "Risk Factors
Affecting the Company's Business and Prospects").
On January 5, 1997, a fire occurred at the Company's leased garment
manufacturing plant in Galway, Ireland, in which certain inventory and
manufacturing equipment owned by the Company were either destroyed or damaged.
As a result of the fire and its related impact, the Company recorded a charge
(after tax and net of insurance proceeds) of $2.5 million in the first quarter
of fiscal 1997. This amount has been classified as "Termination of foreign
operations" in the first quarter fiscal 1997 Condensed Consolidated Statement of
Operations and Retained Earnings. The Company recognized an additional pre-tax
loss of $2.6 million in the fourth quarter of fiscal 1997 in connection with
the closure of its Irish facilities.
The Company recorded a tax benefit on a consolidated loss in the first
quarter of fiscal 1998 and tax expense on a consolidated loss in the first
quarter of fiscal 1997. The Company's effective tax rates for the first quarter
of fiscal 1998 and the first quarter of fiscal 1997 were 24.0% and -40.6%,
respectively. In the first quarter of fiscal 1998, the Company recorded a tax
benefit on only a portion of the $4.0 million charge it recorded in connection
with the decision to reduce activity in Costa Rica. Most significant in
fiscal 1997 was that the Company did not provide tax benefits on the loss in
connection with the fire at its Irish facility. The Company's effective
tax rate also varies with the mix of income or loss in countries in which the
Company conducts its business.
Financial Condition
At February 1, 1998, the Company's primary Credit Agreement provided up
to $75 million of credit through July 1, 2001, for the Company's United States
and United Kingdom operations for either borrowings or letters of credit. The
Credit Agreement includes a term loan payable in monthly installments over a 48
month period and a revolving line of credit. The outstanding balance of the term
loan was $8.5 million as of February 1, 1998. Formulas derived from accounts
receivable and inventory define borrowing capacity for the revolving portion of
the Credit Agreement. The Credit Agreement states that the interest rate on
outstanding borrowings (both term and revolving) will be prime (8 1/2% at
February 1, 1998) plus 1/2% 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 below $17.5 million when outstanding borrowings are less than $17.5
million. The Company may also from time to time convert all or part of the loan
outstanding under the Credit Agreement into a loan based on the LIBOR Rate.
Upon conversion, the interest rate is the LIBOR rate plus 2.75%. The conversion
to and continued applicability of the LIBOR Rate is conditioned upon
specific notification requirements, a minimum of $5.0 million of LIBOR Rate
loans outstanding, and various other requirements. At February 1, 1998, the
Company had $33.5 million, including $8.0 million of the term loan balance, in
LIBOR loans outstanding under the Credit Agreement. Interest rates on the LIBOR
contracts outstanding at February 1, 1998 ranged from 8.36% to 8.69%. At
February 1, 1998, usage under the Agreement was $43.5 million, with $35.0
million and $8.5 million related to the revolving facility and term loan,
respectively. The excess credit line available was $15.9 million. As of
February 1, 1998, the Company was in compliance with all covenants pursuant
to the Credit Agreement.
The Company's operations provided net cash of $6.1 million in the first
quarter of fiscal 1998. Decreased trade receivables, offset by increased
inventory levels and decreased trade payables were the largest factors producing
the net increase in cash from operations during the first quarter. The decrease
in trade receivables is consistent with the normal seasonality of the Company's
business. The increase in inventory levels is a result of sales not meeting
expectations and the Company's attempt to build inventory in order to meet
second quarter demand. The decrease in trade payables resulted mainly from a
decrease in payables for piece goods. This reduction is due to the fact that
the Company made the bulk of its first quarter piece good purchases early in the
quarter.
Capital expenditures through February 1, 1998 approximated $4.8
million. Expenditures were mainly for leasehold improvements and equipment in
connection with the Company's move to a new distribution center. As of February
1, 1998, the Company had commitments for future capital expenditures of
approximately $600,000.
Year 2000 Systems Conversion
The Year 2000 Issue is the result of computer programs being
written using two digits, rather than four to define the applicable year. Any of
the Company's computer programs that have the date-sensitive software may
recognize a date using "00" as the year 1900 rather than as the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company is currently in the process of replacing its entire inventory
management, warehouse distribution and order processing systems so that those
systems will utilize dates beyond December 31, 1999 properly. The Company
believes that the planned modifications and conversions will be completed timely
and will allow it to mitigate the Year 2000 Issue. However, if such
modifications are not completed timely, the Year 2000 Issue could have a
material effect on the Company's operations (see "Risk Factors Affecting the
Company's Business and Prospects").
Risk Factors Affecting the Company's Business and Prospects
The Company cautions readers that various factors could cause the
actual results of the Company to differ materially from those indicated by
forward-looking statements made from time to time in news releases, reports,
proxy statements, registration statements and other written communications
(including the preceding sections of this Management's Discussion and Analysis),
as well as oral statements made from time to time by representatives of the
Company. Except for historical information, matters discussed in such oral and
written communications are forward-looking statements that involve risks and
uncertainties, including, but not limited to, economic and business conditions
in the U.S. and abroad; the level of demand for apparel products and the success
of planned marketing programs; 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 levels
and sourcing; the ability of the Company to access the credit market to finance
capital expenditures; and currency fluctuations.
The Company completed its relocation to a new distribution facility in
March 1998 after testing the new equipment and computer systems at the facility.
However, should the relocation produce shipping difficulties not anticipated in
the testing of the new facility, the Company could experience disruptions in
shipments. In addition, the Company will continue to incur certain costs
associated with its old distribution center through May 1998, when the lease
on that facility expires.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 11 Statement regarding computation of net loss per share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which
the report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARAH INCORPORATED
Date: March 17, 1998
Russell G. Gibson /s/ Russell G. Gibson
Executive Vice President
Principal Financial Officer
Polly H. Vaughn /s/ Polly H. Vaughn
Principal Accounting Officer
<PAGE>
<TABLE>
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-Q INDEX TO EXHIBITS
FEBRUARY 1, 1998
Page
Description Number
<S> <C> <C>
Exhibit 11 Statement regarding computation of
net loss per share. 13
Exhibit 27 Financial Data Schedule 14
</TABLE>
<PAGE>
Exhibit 11
FARAH INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE - Basic and Diluted
Net loss per share (basic and diluted) is based on weighted average shares
of common stock outstanding.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-01-1998
<PERIOD-END> FEB-01-1998
<CASH> 3,351
<SECURITIES> 0
<RECEIVABLES> 30,175
<ALLOWANCES> 1,031
<INVENTORY> 77,868
<CURRENT-ASSETS> 120,442
<PP&E> 68,032
<DEPRECIATION> 33,783
<TOTAL-ASSETS> 167,094
<CURRENT-LIABILITIES> 69,165
<BONDS> 1,663
0
0
<COMMON> 46,026
<OTHER-SE> 33,298
<TOTAL-LIABILITY-AND-EQUITY> 167,094
<SALES> 59,044
<TOTAL-REVENUES> 59,044
<CGS> 43,140
<TOTAL-COSTS> 61,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,199
<INCOME-PRETAX> (4,039)
<INCOME-TAX> (969)
<INCOME-CONTINUING> (3,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,070)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
<FN> The amount reported as EPS-PRIMARY
above is Basic Earnings Per Share as
defined in Statement of Financial
Accounting Standards No. 128.
</TABLE>
