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 (NO FEE REQUIRED)
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For the Fiscal Year Ended November 2, 1997
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.)
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
CommonStock, 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 9, 1998 there were outstanding 10,278,989 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
9, 1998) was $52,982,574.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report:
Proxy Statement Dated January 30, 1998 - Part III.
The Exhibit Index is on Page 58 of Form 10-K.
<PAGE>
TABLE OF CONTENTS
Item Description Page
PART I
1 Business 3
2 Properties 11
3 Legal Proceedings 11
4 Submission of Matters to a Vote of Security Holders 11
PART II
5 Market for the Registrant's Common Equity and Related
Stockholder Matters 12
6 Selected Financial Data 13
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
8 Financial Statements and Supplementary Data 26
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 47
PART III
10 Directors and Executive Officers of the Registrant 48
11 Executive Compensation 48
12 Security Ownership of Certain Beneficial Owners
and Management 48
13 Certain Relationships and Related Transactions 48
PART IV
14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K 48
<PAGE>
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 number 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., Inc. ("Farah U.S.A."), Farah International, Inc. ("Farah International")
and Savane Direct Incorporated ("Savane Direct," formerly Value Slacks, Inc).
Farah U.S.A. (76% of consolidated revenue for fiscal 1997) manufactures and
sells a variety of casual and dress apparel to retailers throughout the United
States. Farah International (18% of consolidated revenue for fiscal 1997)
manufactures and sells apparel in Europe and the South Pacific region. Farah
International's primary markets are the United Kingdom, Australia and New
Zealand. Savane Direct (6% of consolidated revenue for fiscal 1997) operates
retail stores that sell first quality apparel manufactured by the Company,
close-outs and seconds from Farah U.S.A., and a limited amount of merchandise
purchased from third parties. As of November 2, 1997, Savane Direct had 36
retail stores, all located in the United States.
Products
The Company manufactures and markets 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, skirts 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 manufactures and markets apparel products with an array of
fabrics that emphasize comfort, fit and performance. The "performance fabrics"
maintain a fresh, neat appearance, and are primarily 100% cotton fiber and
blended fabrics (polyester/rayon or polyester/wool). In fiscal 1995, the Company
co-developed a process for dyeing color-fast fabrics for use in its garments.
The garments are treated with a soft-hand stain repellent finish. Depending upon
the fabric, it may be chemically pre-treated by the fabric supplier or finished
by the Company to achieve soft, wrinkle-free and shrink-resistant features. The
result is a garment having a longer-lasting, fresher and cleaner appearance.
Since the process was first developed, it has been expanded to additional
product lines. These products can be found under the Deep Dye Savane label which
now represents the best selling label in the Company's cotton slacks business.
The Company also sells products under the Farah and John Henry labels and
private label products using similar dyeing and wrinkle-resistant technologies.
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. Savane product is sold primarily to department
stores. The major product lines included under this label are as follows:
Savane Casuals for Men and Boys - Savane Casuals include pants
and shorts for men and boys. Savane casual pants are made from 100%
cotton fabrics and are treated with Deep Dye, PROCESS 2000, or other
similar processes. 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 using softening agents which results
in a soft finish. Savane Deep Dye Casuals were introduced in fiscal
1996 and are treated with the Deep Dye process, which provides
fade-resistant features. Savane Deep Dye Casuals include Deep Dye
Fancies which are patterned goods made from 100% cotton. Fancies are
upscale casual slacks that have a semi-dress look, are moderately
priced and have the no-wrinkle, easy care features. The Company
recently introduced a new 100% cotton stretch casual slack that is
marketed under a "comfort stretch" concept and is priced in the
mid-range of casual wear. The new slack has all the qualities of the
Company's traditional no-fade, no-wrinkle cotton slack; yet it also
features a stretch characteristic that provides added comfort. Initial
shipments of this product began in the first quarter of fiscal 1998.
The Company offers a similar product made of a cotton lycra blend,
providing stretch qualities and wrinkle-resistant characteristics. It
was first introduced earlier in fiscal 1997 without the
wrinkle-resistant features under the Savane Golf label; however, the
product was met with limited success. Since then, the Company
introduced the wrinkle-free version, which is offered for the Spring
1998 season on a limited basis at prices higher than the new comfort
stretch slack. In fiscal 1998 the Company will begin production of a
new Luster Wash product, which provides a dressier look for cotton
casuals than our casual Deep Dye cotton products. The Company also
offers a variety of seasonal goods, with linen as the principal Spring
seasonal fabric and corduroy for the Fall season.
Savane Casuals for Women - The casual women's wear market is
an area for additional growth of the Savane label. The Company
initially introduced Savane casuals for women late in fiscal 1996.
Distribution and the selection of products in this line increased
during fiscal 1997. The women's line includes casual cotton twill
slacks in selected basic colors, shorts, skirts, a limited line of
shirts, as well as other seasonal basic slacks. These products offer
the same no-wrinkle, easy care performance features as the men's
products.
Savane Shirts - The shirt business is another area for
potential growth of the Savane label. The Company began shipping Savane
shirts for men late in the fiscal 1996 fourth quarter with distribution
of these products increasing throughout fiscal 1997. The line of shirts
offered by the Company includes woven, 100% cotton shirts as well as
polyester/cotton shirts. The Savane woven shirts are treated with Deep
Dye and PROCESS 2000 technologies.
Savane Dress Wear - Savane dress wear includes men's slacks,
coats and suit separates. Dress products are made mainly of
polyester/wool and polyester/wool/lycra blend fabrics. A Deep Dye Dress
product is also offered, providing the same fade-resistant features as
Deep Dye Casuals. In the first quarter of 1997, the Company began
shipments of Savane Elements(TM), a new upscale dress line. This line
uses high-performance Savane fabric finishes on polyester and worsted
wool. Similar to the Savane dress line, the Savane Elements dress line
includes slacks, sport coats and suit separates.
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 this label are fabricated using
wrinkle-resistant technologies. The Company markets these products primarily
through the mass-merchant distribution channel.
John Henry - This label is primarily used for dress slacks, suit
separates and sport coats 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 fiscal 1998 as the Company delivers more product to Sears.
Private Label - The Company produces casual and dress product for
various retailers using their own labels. Products produced include casual wear,
dress, women's wear and boys. Such product is produced to customers'
specifications.
Operating Strategy
The Company's operating 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) to reduce overall product costs by
sourcing more product through third party contractors, allowing the Company to
better control inventory levels and match production with customer demands, and
(3) to minimize administrative costs.
The Savane label has grown to a widely recognized name in men's apparel
since the Company first introduced its wrinkle-free line of casual wear under
the Savane name in 1993. Today, Savane is the second largest seller of men's
slacks in U.S. department stores (NPD Market Survey reports of Department Store
Sales).
As the Savane business grew, sales declined in the Company's two other
product lines, Farah and John Henry. Competition from Savane products, which
were being sold in the same channels of distribution, contributed to the
decrease in Farah and John Henry products. Accordingly, the Company repositioned
its three primary product lines into separate and distinct channels of
distribution to attempt to maximize sales in each of the product groups. The
Savane label was and continues to be sold primarily at the department store
level and certain other limited market sectors. 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 fiscal 1996 fourth quarter,
the Company began selling its Farah brand products to a limited number of stores
of a major retailer in the mass-merchant distribution channel.
Following the repositioning of its products, the Company began focusing
on other strategies to increase sales in all three of its product categories.
During fiscal 1996, the Company introduced casual and dress Deep Dye pants,
women's wear, and shirts, all under the Savane label. In the first quarter of
fiscal 1997, a new line of upscale dress wear, called Savane Elements, was
introduced. Sales in these product categories continued to grow throughout
fiscal 1997. In the second quarter of fiscal 1997, the Company introduced a
cotton lycra stretch pant, which was marketed without wrinkle-free features
under the Savane Golf label; but was met with limited success. The pant was
redeveloped as a wrinkle-free product and is now being sold to a limited number
of retailers under the Savane label for the Spring 1998 season. In the first
quarter of fiscal 1998, the Company began initial shipments of a new cotton
stretch pant made of 100% cotton. The Company is also pursuing licensing
agreements with selected apparel and apparel-related vendors to further expand
the Savane label.
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 Company has since expanded the John Henry line to include
additional dress slacks, sports coats and suit separates.
In the third quarter of fiscal 1997 the Company broadened its
distribution of the Farah label to more stores within a large mass-merchant
customer. Furthermore, in the first quarter of 1997, the Company entered into an
agreement with its 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.
In addition to product realignment and marketing strategies, the
Company continues to examine costs at all levels. In fiscal 1995, the Company
shifted its sourcing strategy to place less dependence on Company owned
facilities, allowing for greater flexibility in production sourcing. In
connection with this strategy, the Company sold its coat manufacturing facility
in San Jose, Costa Rica in October 1995; and in June 1996, the Company sold its
largest production facility, located in Piedras Negras, Mexico. During fiscal
1997, the Company also closed one of its Irish manufacturing facilities
following a fire and sold its remaining Irish manufacturing facility in the
third quarter of fiscal 1997. In the first half of fiscal 1998, the Company
plans to close or sell its finishing facility in Cartago, Costa Rica, and to
reduce production significantly at its remaining manufacturing plant in San
Jose, Costa Rica. Currently, approximately two-thirds of the Company's
production is supplied by outside contractors. By the end of fiscal 1998 it is
estimated that three-fourths of all production will be supplied by outside
contractors. The Company believes this shift in production sourcing allows for
greater flexibility as market demands fluctuate (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Risk Factors
Affecting the Company's Business and Prospects").
<PAGE>
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. directs its products to the men's, boys' and women's
segments of the apparel market, with approximately 93% of branded sales in
fiscal 1997 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 represent 15% of Farah
U.S.A. sales in fiscal 1997.
Sales and Product Distribution. Farah U.S.A. has aligned its product
labels in three distinct markets. Savane continues to have a strong position in
department stores, while the John Henry brand is sold to Sears. Farah-labeled
products are sold primarily to one customer in the mass-merchant channel.
Farah U.S.A. has eight regional corporate account executives who are
directly responsible for certain major retail accounts. Each member of the field
sales force reports to a corporate account executive and is responsible for
primary relationships with smaller retailers.
Farah U.S.A.'s sales force uses a computer system that was first
implemented in fiscal 1990 as part of a company-wide program to increase quality
and customer service. The system was upgraded in fiscal 1997, allowing for
direct communication between the sales force and retail buyers on the Internet.
The system runs on laptop computers that members of the Farah U.S.A. sales force
carry 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. The system enables the sales force to execute orders more
efficiently and assist the retailer in attaining higher margins by optimizing
inventory mixes and levels. See additional discussion of the Company's computer
systems and effects of the Year 2000 Issue under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors
Affecting the Company's Business and Prospects."
Farah U.S.A. fills retailers' orders from inventory at its El Paso,
Texas facility. The Company sends most shipments directly to retailers' stores
or their independent distribution centers. Certain retailers pick up their goods
at the El Paso facility. In the first quarter of 1998, the Company will begin
moving its inventory to a newly constructed distribution center in Santa Teresa,
New Mexico. The move to this new facility is expected to be completed by the end
of March 1998 (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Risk Factors Affecting the Company's Business and
Prospects").
Sourcing. Farah U.S.A. continues to shift its sourcing of product and
production activities away from Company-owned facilities to more third party
contractors. Currently, the Company operates a cutting facility in the U.S. and
two facilities in Mexico that provide both sewing and finishing services. It
also has a long term joint venture arrangement in a Mexican finishing facility
with a third party Mexican corporation. In addition, the Company currently
operates two facilities in Costa Rica, which also provide sewing and finishing
services. However, the Company intends to reduce its operations in Costa Rica
(see discussion in "Operating Strategy" above). The Company obtains
approximately 26% of its sewing requirements and 29% of its finishing
requirements from its Costa Rican facilities. Farah U.S.A. also purchases
finished product (generally shirts) from third party suppliers in Mexico and the
Orient.
Finished product is generally sourced or produced outside of the U.S.A.
in order to maintain lower product costs. The Company concentrates much of its
sourcing in Mexico as little or no import duties are incurred. Finished product
is delivered to the Company's distribution center in El Paso, Texas for
distribution to Farah U.S.A.'s customers.
The men's apparel industry in the United States has two primary selling
seasons. The Spring selling season extends from December to April. The Fall
selling season extends from May to November. Farah U.S.A.'s operations follow
this seasonal pattern. Farah U.S.A. begins to manufacture and place orders for a
given season two to six months before the retail season 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, short-term disruptions could occur should
Farah U.S.A. need to seek additional or replacement suppliers. The order lead
time for fabrics is approximately two to six months. Payment terms are generally
60 days. Fabrics are delivered to the Company's cloth cutting facility in El
Paso, Texas. Quality control procedures allow the Company 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.
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 finished
goods inventory levels sufficient to meet the retailer's demand on short notice.
Farah U.S.A. ships most "Quick Response" orders 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 service demands 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
point-of-sale 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 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, ensuring that displays are neat and orderly, responding to
customer questions and comments and ensuring that the stores are satisfied with
the Company's service.
Advertising. Farah U.S.A.'s advertising program is comprised of
national print advertising and participation in cooperative advertising programs
with retailers. In fiscal 1996, the Company shifted its advertising strategy to
focus more heavily on print media and point-of-sale merchandise and less on
national television campaigns. The Company's use in 1996 and 1997 of advertising
in several national magazines and various other printed material, rather than
television advertising, resulted in significant cost reductions that have
allowed increases in customer store display tables and fixturing. The Company
intends to pursue this advertising concept by offering high quality fixturing at
our customer's retail stores. Additionally, cooperative advertising programs
allow the Company and individual retailers to combine their efforts and share
the costs of local television, radio and newspaper advertisements.
Competition. The apparel industry is highly competitive due to its
emphasis on fashion, 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. A large number of manufacturers
compete in the men's slacks segment of the apparel industry. The Company
believes its largest competitors in the United States are Levi Strauss & Co. and
Haggar Corp. In addition, collection wear designer labels (e.g., Polo, Tommy
Hilfiger, and Claiborne) are also gaining greater market share in the men's
slacks segment. Some of these competitors may have greater financial and
marketing resources and therefore, may offer significant competition to the
Savane label.
Farah International
Farah International sells apparel primarily in the United Kingdom,
Australia and New Zealand, under the Farah and Savane labels. Farah
International's product lines include principally dress and casual slacks, and
shirts and sweaters manufactured by third parties. These 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 1997 the majority of Farah
International's products utilized 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 1997 accounted for approximately 63% of its sales. Distribution channels
in the United Kingdom are significantly different from those in the United
States in that typically retailers carry more private label brands than branded
products. However, the Farah label is a recognized branded label in the U.K.
market, as the Company has been doing business there for a number of years. As a
result, most of the product sold in the U.K. is under the Farah label with the
remainder sold under the Savane label and other private labels. Farah
International's primary distribution channels in the United Kingdom are large
retail outlets and independent menswear stores. Product sold in the U.K. has
historically been supplied by the Company's manufacturing facilities in Ireland.
Over the years it has been increasingly difficult to produce product in Ireland
at competitive costs. Consequently, by the end of fiscal 1996, the Company had
reduced the amount of product supplied by Ireland for the U.K.'s needs, with the
balance of product coming from third party contractors. As a result of the fire
that occurred in the Company's leased facility in Galway, Ireland in January
1997, the Company assessed and decided to terminate the balance of its Irish
operations. The Company reported a pretax charge of $2.5 million in the first
quarter of fiscal 1997 and an additional charge of $2.5 million in the fourth
quarter of fiscal 1997 to complete the discontinuance of operations in Ireland.
As part of its plan, the Company entered into a supply agreement with the new
owners of the facilities.
Farah Australia and Farah New Zealand accounted for approximately 36%
of Farah International's sales in fiscal 1997. Most of the Company's product has
been sold under the Farah and Savane labels with approximately 10% being sold
under private labels. All of the product sold in Australia and New Zealand has
been provided by two factories in Fiji operated by a joint venture in which the
Company has a 50% interest.
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.
Savane Direct (formerly Value Slacks, Inc.)
Prior to mid-fiscal 1996, the focus of the Company's retail store
division (formerly known as Value Slacks) was to enter remote markets, generally
by opening stores in suburban areas and other locations across the U.S. and
Puerto Rico. Generally, the retail store division sold closeout goods,
irregulars and excess merchandise produced by its affiliate company, Farah
U.S.A., at lower prices. As the factory outlet store concept gained greater
acceptance in the U.S., Value Slacks began reducing operations in Puerto Rico
and expanding in the U.S. By the end of fiscal 1995, all Puerto Rican stores
were closed and there were 36 stores owned by the Company in the U.S.
Performance of the retail division in the recent past has been poor as
competition from the mass-merchant discount retailers and other men's apparel
manufacturers entering the retail market has increased. Recognizing this, in
late fiscal 1996, the Company began to shift its focus to create a group of
upscale Savane retail shops which offer a line of first quality products in a
full range of colors and sizes. The new stores are typically located in high
traffic suburban areas that target middle class America. The new stores have a
more fashionable appearance with upscale fixturing and displays. Concurrently,
the Company has been closing older non-performing stores. The balance of the
stores are being reevaluated, with some being remodeled to enhance their
appearance and changing the mix of merchandise being offered to more first
quality goods. Since the change in direction of the retail division, the Company
has opened 6 new stores and closed 8 older stores such that the Company now
operates 36 stores, all in the U.S. After initiating the change in direction,
the Company began to see improvement in operating results in the latter half of
fiscal 1997.
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Trademarks
The Company owns many U.S. and foreign trademark registrations,
including Savane, Savane Elements, PROCESS 2000, Farah and Farah Clothing
Company(R), 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 2033.
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 received are not necessarily firm
commitments. Therefore, the Company does not consider customer orders to be
"backlog" or necessarily an indication of future sales.
Seasonality
The Company's products are primarily marketed for the Spring and Fall
retail selling seasons each year, with interim items introduced periodically to
complement the two primary selling seasons. Sales volume for the first quarter
is generally the lowest of the year. Fourth quarter sales volume is the highest
of the year. Farah U.S.A. closes some of its factories in the first quarter for
approximately two weeks at Christmas time. The Company's introduction of more
year-round basic products has diminished the seasonality somewhat.
Employees
As of November 2, 1997, the Company had approximately 3,950 employees.
As of that date, Farah U.S.A., Farah International and Savane Direct had
approximately 3,610, 150 and 190 employees, respectively. Of these employees,
approximately 460 were either salaried or paid based on sales commissions
earned, with the remainder paid on an hourly basis or on the basis of
production. Approximately 135 of Farah U.S.A.'s United States employees are
members of the Amalgamated Clothing and Textile Union and approximately 790 of
its employees are members of a union in Mexico. The collective bargaining
agreement with the Company's United States employees expires in February 2000.
The collective bargaining agreement for the Company's employees in Mexico
expires in December 1998. 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
The Company does have limited exposure to foreign currency fluctuations
from its international operations; however, during 1997, the Company did not
utilize derivative financial instruments.
Customers
As consolidation in the retail industry occurs, fewer customers
comprise a larger percentage of the Company's total consolidated net sales.
During fiscal 1997, the Company's ten largest customers accounted for
approximately 66% of the Company's consolidated revenues. In fiscal 1997, sales
to three customers were 10% or more of consolidated sales. One customer
accounted for $35.9 million (13.1%) of the Company's consolidated sales; another
accounted for $35.2 million (12.8%) of consolidated sales; and a third customer
accounted for $27.3 million (10.0%) of consolidated sales.
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.
<PAGE>
Item 2. PROPERTIES
The Company's principal executive offices and United States
distribution facility are located in El Paso, Texas. The Company considers both
its domestic and international facilities to be suitable and adequate and to
have sufficient productive capacity for current operations (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors Affecting the Company's Business and Prospects"). The Company's lease on
its previous corporate headquarters in El Paso, Texas expires in May 1998.
Accordingly, the Company relocated its corporate offices to another El Paso
location. The new offices are leased under an operating lease agreement. The
Company has also leased a new distribution warehouse located in Santa Teresa,
New Mexico. Relocation to the new warehouse began in the first quarter of fiscal
1998.
The following table reflects the general location, use and approximate
size of the Company's significant real properties currently in use or under
construction:
<TABLE>
<CAPTION>
Approximate Owned/
Location Use Square Footage Leased (1)
-------- --- --------------
-------------
<S> <C> <C> <C>
El Paso, Texas Garment manufacturing plant 116,000 Owned (2)
Chihuahua, Mexico Garment manufacturing plant 73,800 Owned
San Jose, Costa Rica Garment manufacturing plant 124,000 Owned
Cartago, Costa Rica Garment manufacturing plant 77,000 Owned
Auckland, New Zealand Office/Warehouse 9,000 Owned
El Paso, Texas Corporate offices 43,500 Leased
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
Retail locations in the United
States 36 Retail stores 100,000 Leased
Santa Teresa, New Mexico Distribution Warehouse 250,000 Leased (5)
Juarez, Mexico Garment manufacturing plant 73,500 Leased
Queretero, Mexico Warehouse 32,700 Leased
</TABLE>
(1) See Note 7 of Notes to Consolidated Financial Statements for a discussion
of lease terms.
(2) The facility is currently used for storage. Underlying land is leased
through February 2002.
(3) Originally, the facility was owned by the Company and was sold and leased
back in 1988. The initial lease term which is ten years ends in 1998. As
of the end of fiscal 1997, approximately 69% of the facility was subleased
to a third party.
(4) The facilities are leased by a 50% joint venture of which the Company is a
party.
(5) On November 30, 1996, the Company entered into a lease for a new
distribution center to be constructed. The facility was completed in the
fourth quarter of 1997. Relocation to the new warehouse began in the first
quarter of fiscal 1998.
Item 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings in the normal
course of business. Based on advice of legal counsel, the Company believes that
the outcome of such litigation will not materially affect the Company's
consolidated financial position, results of operations or cash flows (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors Affecting the Company's Business and Prospects").
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK
There were 10,278,989 shares of the Company's common stock, no par
value, outstanding as of January 9, 1998, owned of record by approximately 2,200
shareholders. Trading volume during fiscal 1997 averaged approximately 54,800
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>
<CAPTION>
1997 1996
--------------------------- ----------------------------
High Low High Low
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
1st Quarter $ 9 6 7 1/ 8 4 1/ 2
2nd Quarter 11 1/8 8 1/4 6 3/ 8 4 1/ 2
3rd Quarter 10 6 1/4 9 5 3/ 4
4th Quarter 7 15/16 5 1/2 7 7/ 8 5 7/ 8
</TABLE>
The closing sales price of the Company's common stock on the New York
Stock Exchange as of January 9, 1998, was $5.1875.
As of November 2, 1997, there were approximately $1.7 million aggregate
principal amount of the Company's 8.5% convertible subordinated debentures due
February 1, 2004, outstanding, owned of record by 24 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.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Thousands of dollars, except share and per share data
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------- -------------- ------------- ------------
Summary of Operations:
<S> <C> <C> <C> <C> <C>
Net sales $ 273,719 247,598 240,797 242,775 180,114
Cost of sales 199,790 183,540 185,822 172,300 127,020
Selling, general and
administrative expenses 66,436 62,189 68,002 58,294 47,372
Termination of foreign operations 5,106 - - - -
Production conversion expenses 2,061 - - - 4,000
Relocation expenses 904 - - - -
Operating income (loss) (578) 1,869 (13,027) 12,181 1,722
Other income (expense):
Foreign currency transaction
gains (losses) 163 374 512 449 (151)
Gain (loss) on sale of assets (24) 10,041 756 (6) 320
Other, net 203 684 209 237 (3)
Interest expense, net (3,392) (3,231) (3,726) (1,756) (1,452)
Income (loss) before income taxes (3,628) 9,737 (15,276) 11,105 436
Income tax provision (benefit) (3,898) 2,981 (2,335) 300 304
Net income (loss) 270 6,756 (12,941) 10,805 132
Per Share Information:
Net income (loss) $ .03 .66 (1.28) 1.16 0.02
Book value per share based on shares
outstanding at balance sheet dates $ 8.05 8.07 7.29 8.53 5.45
Shares outstanding 10,278,989 10,172,971 10,145,326 10,080,341 7,971,625
Financial Position at Year-End:
Current assets $ 131,028 118,338 127,911 123,919 95,325
Property, plant and equipment, net 36,033 25,370 33,363 22,872 13,220
Other assets, non-current 8,531 10,155 12,553 11,260 10,346
Total assets 175,592 153,863 173,827 158,051 118,891
Current liabilities 74,965 59,807 78,903 56,535 61,346
Long-term debt 13,771 4,706 12,568 5,170 1,179
Other liabilities 2,957 3,992 3,136 3,103 3,627
Deferred gain on sale of building 1,185 3,218 5,250 7,282 9,314
Shareholders' equity 82,714 82,140 73,970 85,961 43,425
Total liabilities and shareholders' 175,592 153,863 173,827 158,051 118,891
equity
Current ratio 1.7 to 1 2.0 to 1 1.6 to 1 2.2 to 1 1.5 to 1
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth certain financial data expressed as a
percentage of net sales, for the years indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
1997 1996 1995
---------- --------- --------
<S> <C> <C> <C>
Net sales:
Farah U.S.A. 75.7 % 73.8 % 73.5 %
Farah International 18.1 19.4 19.7
Savane Direct 6.2 6.8 6.8
---------- --------- --------
Total net sales 100.0 100.0 100.0
Cost of sales 73.0 74.1 77.2
---------- --------- --------
Gross profit 27.0 25.9 22.8
Selling, general and
administrative expenses 24.3 25.1 28.2
Termination of foreign operations 1.8 0.0 0.0
Production conversion expenses 0.8 0.0 0.0
Relocation expenses 0.3 0.0 0.0
---------- --------- --------
Operating income (loss) (0.2) 0.8 (5.4)
Other income (expense), net (1.1) 3.1 (0.9)
---------- --------- --------
Income (loss) before income
taxes (1.3) 3.9 (6.3)
Income tax expense (benefit) (1.4) 1.2 (0.9)
---------- --------- --------
Net income (loss) 0.1 % 2.7 % (5.4) %
========== ========= ========
</TABLE>
1997 Sales Compared to 1996
Consolidated sales increased by $26.1 million, or 10.5% in fiscal 1997,
compared to fiscal 1996. Sales in the Company's Farah U.S.A. and Farah
International business groups increased during 1997. Sales in the Company's
Savane Direct business group did not change in any material respect.
Sales at Farah U.S.A. increased by $24.5 million, or 13.4% in fiscal
1997, compared to fiscal 1996. Unit sales and the average sales price per unit
increased by 12.1% and 1.1%, respectively. Farah U.S.A. sales were $207.2
million in 1997 and $182.8 million in 1996. The following table compares fiscal
1997 and fiscal 1996 Farah U.S.A. sales by product line.
<TABLE>
<CAPTION>
Thousands of dollars
---------------------------
1997 1996 % Change
--------------------------- ------------
<S> <C> <C> <C>
Savane $ 139,373 118,154 18.0%
Farah and
Farah Clothing Co. 23,140 18,520 25.0
John Henry 12,676 8,224 54.1
Private Label 32,031 37,853 (15.4)
------------- ------------ ------------
$ 207,220 182,751 13.4%
============= ============ ============
</TABLE>
Sales of the Company's Savane products increased 18% during fiscal
1997. Unit sales of Savane product increased 19% from fiscal 1996 to 1997, while
the average selling price per unit decreased approximately 1%. Increased men's
casual product sales accounted for most of the growth in the Savane label.
Women's casual wear and men's shirts, which were introduced in July and October
1996, respectively, accounted for much of the remaining Savane sales growth.
Sales of men's dress wear increased by 2.9% during fiscal 1997, versus fiscal
1996. As it is becoming increasing difficult to gain more market share in the
men's slacks business, the Company is planning to grow the Savane label by
expanding and entering new product lines in both the men's and women's casual
and dress categories (see "Risk Factors Affecting the Company's Business and
Prospects").
The Savane product sales mix remained relatively constant from fiscal
1996 to 1997, with the primary changes stemming from the introduction of women's
wear and shirts discussed above. Men's casual pant and shirt sales comprised
77.0% of 1997 Savane sales, compared to 76.5% in 1996. Men's dress pants and
coats accounted for 19.3% and 22.1% of Savane sales in 1997 and 1996,
respectively. Women's wear made up 3.7% of Savane sales in fiscal 1997 and 1.4%
in fiscal 1996.
John Henry product sales were $12.7 million in fiscal 1997, a 54.1%
increase over 1996 sales. In the third quarter of 1996 the Company repositioned
the John Henry label with a "roll-out" program to Sears. Since the Sears program
began, replenishment sales of John Henry product have continued to grow. An
expansion of the John Henry line consisting of the roll-out of dress pants and
suit separates is expected to increase John Henry sales to Sears in 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 product increased during fiscal 1997 by $4.6 million, or
25.0%, compared to fiscal 1996. During fiscal 1996, the Company repositioned the
Farah label from department stores to the mass-merchant distribution channel.
The initial roll-out of Farah product to a major retailer in the mass-merchant
distribution channel occurred in the fourth quarter of fiscal 1996. The Company
has increased sales of Farah product to that same customer by expanding
distribution to an increased number of new stores and by converting an existing
private label program to a Farah-branded program. The Company is now working
with the same mass-merchant to begin expanding distribution of the Farah label
beyond the domestic market (see "Risk Factors Affecting the Company's Business
and Prospects").
Private label sales decreased by $5.8 million , or 15.4%, during fiscal
1997, compared to fiscal 1996. The conversion of a private label program with a
mass-merchant to a Farah label program (discussed above) contributed to this
decrease. In addition, the Company reduced its volume of private label business
with customers who provided comparatively low gross margins. The Company is
focusing on growing its private label business with existing and new higher
margin private label customers in fiscal 1998 (see "Risk Factors Affecting the
Company's Business and Prospects").
Farah International's sales, which are comprised primarily of sales in
the United Kingdom and Australia, increased by $1.6 million, or 3.4%, from $48.0
million in fiscal 1996 to $49.7 million in fiscal 1997. Unit sales and the
average selling price per unit increased 2.4% and 1.0%, respectively, at Farah
International.
Farah U.K. sales comprised 63.0% of Farah International's fiscal 1997
sales, compared to 62.6% in fiscal 1996. The average selling price in the U.K.
increased by 4.8%, primarily due to the strength of the British Pound Sterling
versus the U.S. Dollar. Excluding currency fluctuations, the average sales price
per unit at Farah U.K. decreased by 1.1%. Unit sales in the U.K. were comparable
in both fiscal 1996 and fiscal 1997.
Farah Australia sales accounted for 30.6% of Farah International's
fiscal 1997 sales, compared to 29.9% in fiscal 1996. Sales at Farah Australia
increased by 5.9% from fiscal 1996 to 1997. A 7.2% decline in the average sales
price per unit partially offset the effect of a 14.1% increase in unit volume.
An increase in private label business, combined with continued strong
performance of the Savane wrinkle-free product in Australia, created the growth
in sales volume. The increased prominence of private label business in Farah
Australia's sales mix contributed to the decreased average selling price per
unit. The relative weakness of the Australian Dollar versus the U.S. Dollar in
1997, compared to 1996, also played a role in the decline in the average sales
price per unit in Australia. Exclusive of currency fluctuations, the average
sales price per unit in Australia decreased 5.3%.
Sales at Savane Direct, the Company's retail store division were $16.8
million in both fiscal 1997 and fiscal 1996. The average sales price per unit at
Savane Direct increased 20.1% in fiscal 1997, while unit sales decreased 16.7%.
During fiscal 1997, the Company pursued a strategy built around closing the
least profitable Savane Direct stores, opening new stores in better locations,
and converting Savane Direct's product mix to include a higher proportion of
first quality merchandise. This strategy resulted in a net decrease in the
number of Savane Direct stores. Same store sales increased 4.1% in fiscal 1997
compared to fiscal 1996. The conversion to more first quality merchandise during
fiscal 1997 and the closing of less profitable locations were the primary
factors creating the increase in the average selling price per unit at Savane
Direct.
1996 Sales Compared to 1995
Consolidated sales increased by $6.8 million 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 Savane Direct.
Sales at Farah U.S.A. increased by $5.7 million or 3.2%, from $177.0
million in fiscal 1995 to $182.8 million 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>
<CAPTION>
Thousands of dollars
---------------------------
1996 1995 % Change
--------------------------- ------------
<S> <C> <C> <C>
Savane $ 118,154 107,560 9.8%
Farah and
Farah Clothing Co. 18,520 27,145 (31.8)
John Henry 8,224 11,477 (28.3)
Private Label 37,853 30,853 22.7
------------- ------------ ------------
$ 182,751 177,035 3.2%
============= ============ ============
</TABLE>
The Company's largest label, Savane, experienced increased sales of
approximately 10% for the year. The increase in sales was 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, women's wear, 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. 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.
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 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.
After those initial shipments, John Henry sales improved by more than 50%
compared to the same period in 1995. 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.
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 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 women's wear, boys and dress.
Farah International, comprised primarily of sales in the United Kingdom
and Australia, recorded sales growth of 1.1% from $47.5 million in fiscal 1995
to $48.0 million 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.
Savane Direct, the Company's retail store division, reported increased
sales of 3.6%, with sales increasing from $16.2 million in fiscal 1995 to $16.8
million 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, the Company
implemented a new marketing strategy to more properly align its 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.
1997 Gross Profit Compared to 1996
Gross profit increased by $9.9 million from fiscal 1996 to fiscal 1997.
Gross profit as a percentage of sales was 27.0% and 25.9% in fiscal 1997 and
1996, respectively. Farah U.S.A. recorded gross profit as a percentage of sales
of 23.8% in 1997, compared to 22.0% in 1996. Farah International's gross profit
as a percentage of sales declined from 33.9% in fiscal 1996 to 33.6% in 1997.
Gross profit at Savane Direct increased from 45.5% of sales in 1996 to 47.5% in
1997.
Gross profit at Farah U.S.A. grew as a result of an increase in the
average selling price per unit. Additionally, the continued effort to reduce
production costs had a positive effect on gross margins. Partially offsetting
the increase in fiscal 1997 gross profit was the adverse effect of the Savane
Golf pant program previously discussed. Due to poor initial product quality, the
Company incurred costs to rework the product. The Company also accepted a
significant number of returns and gave markdown allowances to its customers in
order to sell the balance of the golf pant inventory. Also suppressing fiscal
1997 gross profit was the Company's shirt program. Fiscal 1997 was the first
year of the program since the Company assumed the business from Oxford
Industries, Inc. in 1996. The Company experienced both quality and delivery
problems from contractors in the Orient and Mexico as contracts were transferred
to the Company from Oxford and new contracts were sought.
Increases in production costs at Farah International offset the slight
increase in the average price per unit sold. Gross profit as a percentage of
sales decreased from 30.6% to 30.3% from fiscal 1996 to 1997 at Farah U.K.
Margins at Farah Australia dropped from 37.7% in fiscal 1996 to 35.3% in fiscal
1997. The weakness of the Australian Dollar, relative to the U.S. Dollar
contributed to this pattern, as a portion of Farah Australia's raw materials are
purchased from the United States.
Gross profit as a percentage of sales at Savane Direct increased from
45.5% in fiscal 1996 to 47.5% in fiscal 1997. The move to more first quality
merchandise and the closing of stores that had previously produced lower margins
contributed to the increase in gross profit as a percentage of sales at Savane
Direct. Improvements in inventory management also positively affected Savane
Direct gross margins.
<PAGE>
1996 Gross Profit Compared to 1995
Gross profit increased by $9.1 million 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 Savane Direct,
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 start-up 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 Savane Direct 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.
1997 Selling, General and Administrative Expenses Compared to 1996
Selling, General, and Administrative expenses ("SG&A") declined as a
percentage of sales from 25.1% in fiscal 1996 to 24.3% in fiscal 1997. SG&A as a
percentage of sales decreased at Farah U.S.A. and Savane Direct and increased at
Farah International. Sales growth at Farah U.S.A more than offset increases in
cooperative and other advertising expenses, resulting in a drop in SG&A as a
percentage of sales from 20.9% in fiscal 1996 to 20.3% in fiscal 1997. Farah
U.S.A. sales and SG&A costs increased by 13.4% and 9.9%, respectively in fiscal
1997.
SG&A costs as a percentage of sales at Farah International increased
from 29.7% in 1996 to 31.9% in 1997. Increased SG&A costs at Farah U.K. produced
most of the increase in SG&A at Farah International. Higher concession and
exhibition costs, combined with the hiring of additional quality assurance
personnel produced the SG&A expense increase at Farah U.K. during 1997.
At Savane Direct, SG&A costs as a percentage of sales declined to 51.0%
in fiscal 1997 from 57.7% in 1996. The store closing reserve recorded by Savane
Direct in the prior fiscal year produced 1996 SG&A costs that were higher than
those incurred in fiscal 1997. Additionally, reductions in overhead costs
resulting from the strategic closing of several Savane Direct stores contributed
to the decrease in fiscal 1997 SG&A expense at Savane Direct.
<PAGE>
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. The Company 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 to 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
Savane Direct, 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.
Termination of Foreign Operations
The loss on the disposal of the Irish facility is the result of a fire
that occurred at a facility that the Company leased in Galway, Ireland. The
subsequent reevaluation by the Company of its Irish operations resulted in the
decision to terminate manufacturing activity in Ireland and in the sale of its
Irish facility in Kiltimagh. The charge recorded in connection with the disposal
of those facilities consisted primarily of the write-down of equipment,
severance payments, and legal and professional fees.
Production Conversion Expenses
The Company opened two new laundry facilities and expanded a finishing
facility in Mexico during fiscal 1997. Due to start-up costs such as those
associated with training new employees, the facilities incurred higher
production costs and produced more irregular units than the Company expects
under normal production conditions. The Company believes that such costs and
irregular rates will decline at these facilities in fiscal 1998 (see "Risk
Factors Affecting the Company's Business and Prospects").
As a result of the sale of its Piedras Negras facility in fiscal 1996,
the Company relies more heavily on outside contractors as sources of production.
The establishment of new relationships with contractors in fiscal 1997 resulted
in irregular production rates above those that the Company normally expects to
incur. The expense connected with the conversion to new contractors is comprised
of the cost of selling excess irregular units at prices below production costs.
Relocation Expenses
In the third quarter of fiscal 1997, the Company completed its move to
a new corporate headquarters. In addition, the Company is currently in the
process of relocating its distribution center to a new facility from which it
expects to realize improved distribution and inventory management efficiencies.
The Company anticipates completion of the distribution center relocation in the
second quarter of fiscal 1998. In moving to the new headquarters and
distribution center the Company incurred duplicate operating costs, moving
expenses and professional fees.
<PAGE>
Other Income (Expense)
The following table illustrates the changes in interest expense and
interest income, over the past three fiscal years and the other significant
items included in non-operating income and expense (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest expense $ 4,108 4,065 4,627
Interest income (716) (834) (901)
---------- ---------- -----------
Interest expense, net 3,392 3,231 3,726
========== ========== ===========
Interest expense, net, as a percent of sales 1.2% 1.3% 1.5%
Average debt 42,464 40,352 47,910
Average interest rate 9.4% 9.4% 9.7%
Gain (loss) on sale of assets (24) 10,041 756
Foreign currency transaction gains 163 374 512
</TABLE>
Total debt and interest expense increased throughout fiscal 1997 as the
Company undertook a number of significant capital projects. As discussed above
in "Production Conversion Expenses" and "Relocation Expenses," fiscal 1997
capital projects included an expansion of a manufacturing facility, a move to a
new corporate headquarters, and a transition to a new distribution facility.
Additionally, as discussed below in "Impact of the Year 2000 Issue," during
fiscal 1997 the Company continued revisions to its computer systems with the
goal of enabling those systems to utilize dates beyond December 31, 1999.
As discussed below in "Liquidity and Capital Resources," the Company
negotiated a new revolving credit agreement with the same lender during the
third quarter of fiscal 1997. The new agreement reduced the interest rate on the
Company's line of credit. Increases in the prime interest rate earlier in the
year, combined with higher interest rates on the financing of some capital
expenditures, offset the interest rate reduction obtained in the new credit
agreement.
Interest income was derived primarily from a note receivable that was
scheduled to mature in 2007. In the fourth quarter of 1997, the note was prepaid
by the borrower.
In fiscal 1996 "Gain (loss) on sale of assets" included a pre-tax gain
of approximately $9.3 million realized on the sale of the Company's Piedras
Negras, Mexico facility.
Income Tax Expense (Benefit)
The Company's effective tax rate was 107.4% in fiscal 1997, compared
with 30.6% and 15.3% in fiscal 1996 and fiscal 1995, respectively. The Company
recorded a tax benefit of $3.9 million in fiscal 1997. The recognition of $3.2
million of deferred tax assets that were generated but not recognized in prior
years comprised the largest portion of the Company's 1997 tax benefit. The
Company recorded the benefit of these previously unrecognized deferred tax
assets as a result of the determination that realization of a portion of its
deferred tax assets that were previously covered by a valuation allowance is
more likely than not. A net increase in deferred tax assets comprised most of
the remaining 1997 tax benefit. As of November 2, 1997 the Company had net
deferred tax assets of $8.7 million, partially offset by a valuation allowance
of $1.1 million. Realization of the remaining portion of the net deferred tax
asset depends upon future taxable income. The Company must generate
approximately $22.5 million of taxable income in future years in order to
realize the benefit of its deferred tax asset. Included in net deferred tax
assets are net operating loss carryforwards in the United States and in the
United Kingdom. The Company has domestic net operating loss carryforwards of
$11.6 million, of which $7.1 million expire in 2010. The remaining $4.5 million
of domestic net operating loss carryforwards expire in 2012. The Company can
carry forward indefinitely its unused United Kingdom net operating loss of $3.0
million. The Company will continue to evaluate the 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.
<PAGE>
Liquidity and Capital Resources
Key statistics demonstrating the financial condition of the Company are
as follows:
<TABLE>
<CAPTION>
Thousands of dollars
1997 1996
---------- ---------
<S> <C> <C>
Working capital 56,063 58,531
Total debt 54,644 26,738
Long-term debt 13,771 4,706
Shareholders' equity 82,714 82,140
Current ratio 1.7:1 2.0:1
Long-term debt-to-equity .17:1 .06:1
Total debt-to-equity .66:1 .33:1
Days sales in accounts receivable 56 59
Inventory turnover 2.9 2.7
</TABLE>
The Company's working capital decreased by $2.5 million from fiscal
1996 to fiscal 1997. The current ratio decreased from 2.0 at November 3, 1996 to
1.7 at November 2, 1997. Increases in short-term borrowings and the current
portion of long-term debt, partially offset by increased inventory and decreased
accounts payable, were the primary factors reducing the Company's working
capital.
Short-term borrowings increased by $14.8 million during fiscal 1997.
The Company's use of $11.6 million in cash to purchase property and equipment, a
$12.8 million increase in inventories, and a $3.4 million decrease in accounts
payable all contributed to the increase in short-term borrowings. The growth in
inventories resulted from expanding the number of products the Company offers
and increasing shelf stock to meet customer demands. The Company used $7.2
million of proceeds from the early retirement of a note receivable and related
certificate of deposit that was previously pledged, to reduce its revolving
credit agreement balance. (Approximately $5.0 million of the note receivable was
previously classified as non-current.) Additionally, as part of its new
revolving credit agreement discussed below, the Company received a $10 million
term loan which was also used to reduce the revolving credit agreement balance.
The proceeds from the note receivable, certificate of deposit and the term loan
reduced the working capital effect arising from property and equipment
purchases, inventory growth and accounts payable reductions. The current portion
of long-term debt increased by $4.0 million from 1996 to 1997. The term loan
accounted for most of the increase with the remaining balance coming from other
financings of capital expenditures.
During fiscal 1997, the Company negotiated a new primary Credit
Agreement with the same lender. The agreement expires July 1, 2001. The current
and previous Credit Agreements differ in their maximum available credit lines
and in their interest rates. Additionally, the new Credit Agreement includes a
term loan payable in monthly installments of $208,333, with the remaining
balance due at the end of a 48 month period. The balance of the term loan was
$9.2 million, $2.5 million of which was classified as current, as of November 2,
1997.
The new primary Credit Agreement provides maximum credit of $75.0
million for the Company's United States and United Kingdom operations for either
borrowings or letters of credit. The previous agreement provided $50.0 million.
Formulas derived from accounts receivable and inventory define borrowing
capacity under the Credit Agreement. As of November 2, 1997, usage under the
Credit Agreement was $36.5 million (including letters of credit of $1.3 million)
and the excess credit line available was $23.5 million.
The new primary Credit Agreement charges a lower interest rate than the
previous agreement. The interest rate under the new Credit Agreement and term
loan is prime (8 1/2% at November 2, 1997) plus 1/2% for borrowings and 1/6% per
month for letters of credit. The Company may also from time to time convert all
or part of the loans outstanding under the Credit Agreement or term loan 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. The
previous agreement charged interest at the prime interest rate plus 1%. At
November 2, 1997, 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 November 2, 1997 ranged
from 8.38% to 8.41%. An unused credit line fee of 1/2% per annum is charged on
the unused portion of the line when borrowings decrease below $17.5 million.
The Credit Agreement is collateralized by substantially all assets of
Farah U.S.A., Farah U.K. Limited and Savane Direct 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 Credit Agreement restricts certain additional indebtedness and
requires the maintenance of minimum tangible net worth, minimum working capital
and maximum capital expenditures for Farah Incorporated consolidated and Farah
U.S.A. As of November 2, 1997, the Company was in compliance with these
covenants. The Credit Agreement prohibits the payment of dividends by the
Company, and except for debt service of the Company's 8.5% convertible
subordinated debentures, the Credit Agreement restricts the subsidiaries from
transferring substantially all net assets to the parent company through
intercompany loans, advances or dividends.
In fiscal 1998, the financing of capital expenditures, estimated at
$9.2 million, will produce the Company's primary liquidity requirements. The
Company expects to complete the transition to its new distribution facility in
the second quarter of fiscal 1998. The lease on the existing distribution
warehouse expires in May 1998. The Company spent $3.9 million on new shelving,
equipment, and other leasehold improvements at the new distribution facility in
fiscal 1997 and expects to incur an additional $3.7 million in capital
expenditures at that location in fiscal 1998. The lease agreement provides the
Company use of the facility for a fifteen-year period with two additional
five-year options.
The Company is considering various long-term financing arrangements to
fund its 1998 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 1997, 1996 and 1995 were $18.3
million, $5.1 million and $15.7 million, respectively. As of November 2, 1997,
material commitments for capital expenditures were approximately $4.4 million.
Most of Farah U.S.A.'s major fabric suppliers provide 60-day terms,
subject to certain limits. During fiscal 1997 the maximum outstanding balance at
any month-end under these credit terms was $9.4 million.
Inflation did not materially impact the Company in fiscal 1997, 1996 or
1995.
Impact of the Year 2000 Issue
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 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.
Based on assessments made during fiscal 1996 and 1997, the Company
decided to replace its entire inventory management, warehouse distribution and
order processing systems so that those systems will utilize dates beyond
December 31, 1999 properly. The Company also updated the versions of its
warehouse distribution and financial software so that they utilize such dates
correctly. In addition, the Company will review all of its auxiliary computer
application systems for Year 2000 compliance in fiscal 1998 and will make any
necessary changes. In fiscal 1998, processor-controlled systems, such as
security systems and manufacturing equipment systems used by the Company will be
assessed for Year 2000 compliance, with any necessary changes to be made in
fiscal 1998 and fiscal 1999. The Company believes that the planned modifications
and conversions will allow it to mitigate the Year 2000 Issue. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material adverse effect on the Company's
operations.
The Company will initiate formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Issue. The Company's total estimated Year 2000 project costs and time
tables are based on presently available information, and include the Company's
assessment of the abilities of other third parties to effectively address the
issue. However, there can be no assurance that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company believes it has no exposure to contingencies related to the Year 2000
Issue for the products it has sold.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company plans to complete the inventory management and order processing portions
of the Year 2000 project no later than December 31, 1998 and plans to complete
the remainder of the project by June 30, 1999. The Company incurred $1.0 million
in costs attributable to the Year 2000 project in fiscal 1997 and expects to
incur $2.6 million in such costs in fiscal 1998. The majority of these costs
have been and will continue to be capitalized, as they relate to software
purchases and development.
The discussion above incorporates the Company's best estimates of the
costs and completion date of the Year 2000 project. The Company derived these
estimates using numerous assumptions of future events, including the continued
availability of certain resources and other factors. There can be no guarantee
that the Company will achieve these estimates. Therefore, actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
Subsequent Event
Subsequent to year-end, the Company's Board of Directors approved the
closure of the Company's finishing facility in Cartago, Costa Rica and a
reduction of sewing operations in the Company's San Jose, Costa Rica facility.
The Cartago facility, as well as some of the manufacturing equipment in both
locations will be held for sale. The Company expects to record a pre-tax charge
of $3.5 to $4.0 million in the first quarter of fiscal 1998 on the write-down of
these assets to expected realizable value and the accrual of costs related to
severance payments and other closing expenses. Approximately 700 employees will
be terminated between the two facilities. The Company expects the completion of
these events to occur prior to the end of fiscal 1998.
Risk Factors Affecting the Company's Business and Prospects
General. 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 document), 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 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.
Sourcing. In 1996, the Company terminated its shirt licensing agreement
with Oxford Industries, Inc. and reintroduced wrinkle-free shirtings as a
significant addition to the Savane label. Due to timing and sourcing
complexities and market acceptance, risk factors associated with shirts are
greater than those associated with the Company's traditional men' casual wear
product lines.
The closure or sale of several of the Company's manufacturing plants in
Mexico, Costa Rica, and Ireland in fiscal 1995, 1996 and 1997 resulted in a
significant shift in the percentage of production activities supplied by outside
contractors. The percentage of production supplied by outside contractors
increased to more than 66% by the end of fiscal 1997. Although the shift in
production to outside contractors allows greater flexibility in sourcing as
market demands fluctuate, conversion costs are incurred to start-up new
contractors. During 1997, the Company experienced higher than normal irregular
production rates at some of the new locations. As previously discussed, the
Company plans to further reduce production at its Costa Rica sewing plant, and
hold its Costa Rican laundry facility for sale in fiscal 1998. As the Company
continues to decrease reliance on owned facilities in the future, the risk for
increased irregular production, late deliveries, and higher other production
costs during the conversion process exists.
Relocation of Distribution Center. The Company will move to a new
distribution center in fiscal 1998. The target completion date for the move is
March 31, 1998. Although the Company has taken the necessary steps to ensure a
smooth transition, additional risks exist related to this relocation. The new
distribution center will function with a new state-of-the-art system, designed
to increase efficiencies in pulling and packing product. Any significant
difficulties experienced with this new system could result in disruptions in
shipments in the first and second quarters of 1998.
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 and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material effect on the Company's operations.
Customers. As consolidation in the retail industry occurs, fewer
customers comprise a larger percentage of the Company's total consolidated net
sales. During fiscal 1997, the Company's ten largest customers accounted for
approximately 66% of the Company's consolidated revenues. In fiscal 1997, sales
to three customers were 10% or more of consolidated sales. One customer
accounted for $35.9 million (13.1%) of the Company's consolidated sales; another
accounted for $35.2 million (12.8%) of consolidated sales; and a third customer
accounted for $27.3 million (10.0%) of consolidated sales.
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.
Recent Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share." SFAS 128 will supersede ABP Opinion No. 15, "Earnings Per Share." SFAS
128 requires dual presentation of basic and diluted earnings per share on the
face of the income statement for entities with complex capital structures. SFAS
128 is effective for annual and interim periods ending after December 15, 1997.
Earlier application is not permitted. Implementation of SFAS 128 would not have
had a material impact of the Company's earnings per share for fiscal 1997.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. The Company has several items of other
comprehensive income and will adopt this standard in its 1998 fiscal year.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." This Statement requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. Upon adoption of this pronouncement, additional disclosures will be
required by the Company. This Statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is encouraged. The Company intends
to adopt this statement for its 1998 fiscal year.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended November 2, 1997, November 3, 1996 and November 3, 1995 (Thousands
of dollars except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
----------------- --------------- ----------------
<S> <C> <C> <C>
Net sales $ 273,719 247,598 240,797
Cost of sales 199,790 183,540 185,822
----------------- --------------- ----------------
Gross profit 73,929 64,058 54,975
Selling, general and administrative expenses 66,436 62,189 68,002
Termination of foreign operations 5,106 - -
Production conversion expenses 2,061 - -
Relocation expenses 904 - -
------------- --------------- ----------------
Operating income (loss) (578) 1,869 (13,027)
Other income (expense):
Interest expense (4,108) (4,065) (4,627)
Interest income 716 834 901
Foreign currency transaction gains 163 374 512
Gain (loss) on sale of assets (24) 10,041 756
Other, net 203 684 209
----------------- --------------- ----------------
(3,050) 7,868 (2,249)
----------------- --------------- ----------------
Income (loss) before income taxes (3,628) 9,737 (15,276)
Income tax provision (benefit) (3,898) 2,981 (2,335)
----------------- --------------- ----------------
Net income (loss) $ 270 6,756 (12,941)
================= =============== ================
Net income (loss) per share $ .03 .66 (1.28)
================= =============== ================
Weighted average shares of common stock
(all periods) and common stock equivalents
(income periods only) outstanding 10,295,035 10,195,133 10,122,308
================= =============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
November 2, 1997 and November 3, 1996 (Thousands of dollars except share data)
<TABLE>
<CAPTION>
1997 1996
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 2,332 3,777
Trade receivables, net of allowance
of $746 in 1997 and $662 in 1996 43,053 41,671
Inventories:
Raw materials 12,339 11,404
Work-in-process 18,457 15,251
Finished goods 43,996 35,378
-------------- -----------------
Total inventories 74,792 62,033
Other current assets 10,851 10,857
-------------- -----------------
Total current assets 131,028 118,338
Note receivable - 5,260
Property, plant and equipment, net 36,033 25,370
Other non-current assets 8,531 4,895
-------------- -----------------
$ 175,592 153,863
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 35,572 20,744
Current installments of long-term debt 5,301 1,288
Trade payables 20,600 24,038
Accrued compensation 2,755 3,101
Other current liabilities 10,737 10,636
-------------- -----------------
Total current liabilities 74,965 59,807
Long-term debt, excluding current installments 13,771 4,706
Other non-current liabilities 2,957 3,992
Deferred gain on sale of building 1,185 3,218
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, $.01 stated
value, 20,000,000 shares authorized; issued
10,315,264 in 1997 and 10,209,246 in 1996 46,026 46,024
Additional paid-in capital 30,627 29,894
Cumulative foreign currency
translation adjustment (2,416) (742)
Minimum pension liability adjustment - (1,243)
Retained earnings 8,586 8,316
-------------- -----------------
82,823 82,249
Less: Treasury stock, 36,275 shares, at cost 109 109
-------------- -----------------
Total shareholders' equity 82,714 82,140
-------------- -----------------
$ 175,592 153,863
============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended November 2, 1997, November 3, 1996 and November 3, 1995 (Thousands
of dollars except share data)
Cumulative
Foreign
Additional Currency
Common Stock Paid-in Translation
-----------------------------
Shares Amount Capital Adjustment
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Balance, November 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)
Net income - - - -
Foreign currency translation adjustment - - - (1,674)
Minimum pension liability adjustment - - - -
Exercise of stock options and other -
106,018 2 733 -
-------------- ------------ -------------- -------------
Balance, November 2, 1997 10,315,264 $ 46,026 $ 30,627 $ (2,416)
============== ============ ============== =============
Consolidated Statements of Shareholders' Equity (Continued)
Minimum
Pension Treasury Stock
Liability Retained ----------------------------
Adjustment Earnings Shares Amount
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
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
Net income - 270 - -
Foreign currency translation adjustment - - - -
Minimum pension liability adjustment 1,243 - - -
Exercise of stock options and other - - - -
-------------- ------------- ------------- ------------
Balance, November 2, 1997 $ - $ 8,586 36,275 $ 109
============== ============= ============= ============
</TABLE>
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended November 2, 1997, November 3, 1996 and November 3, 1995 (Thousands
of dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 270 6,756 (12,941)
Adjustments to reconcile net income (loss) to net cash
from (used in) operating activities:
Depreciation and amortization 5,675 5,434 4,020
Amortization of deferred gain on building sale (2,033) (2,032) (2,032)
Amortization of deferred gain on subsidiary sale (1,507) (2,538) -
Deferred income taxes (5,107) 1,654 (1,934)
(Gain) or loss on sale of assets 24 (10,041) (756)
Write-off of property, plant and equipment 1,524 - -
Loss on discount of note receivable 665 - -
Decrease (increase) in:
Trade receivables, net (1,382) (1,847) (2,893)
Inventories (12,759) 10,730 2,661
Other current assets 1,326 1,931 (1,016)
Increase (decrease) in:
Trade payables (3,438) 6,394 (4,662)
Other (246) (990) (1,098)
---------------- --------------- ---------------
Net cash from (used in) operating activities (16,988) 15,451 (20,651)
---------------- --------------- ---------------
Cash flows from (used in) investing activities:
Purchases of property, plant and equipment (11,618) (4,397) (11,756)
Proceeds from disposition of property, plant
and equipment 85 22,689 1,785
---------------- --------------- ---------------
Net cash from (used in) investing activities (11,533) 18,292 (9,971)
---------------- --------------- ---------------
Cash flows from (used in) financing activities:
Net increase (decrease) in short-term debt 14,828 (24,035) 26,771
Proceeds from issuance of long-term debt 10,000 4 6,426
Repayment of long-term debt (3,099) (9,371) (1,284)
Proceeds from repayment of note receivable 4,935 - -
Proceeds from sale of common stock 566 19 934
Other (135) (318) (923)
---------------- --------------- ---------------
Net cash from (used in) financing activities 27,095 (33,701) 31,924
---------------- --------------- ---------------
Effect of exchange rate changes on cash (19) 78 (17)
---------------- --------------- ---------------
Net increase (decrease) in cash (1,445) 120 1,285
Cash, beginning of year 3,777 3,657 2,372
---------------- --------------- ---------------
Cash, end of year $ 2,332 3,777 3,657
================ =============== ===============
Supplemental cash flow disclosures:
Interest paid $ 4,061 4,449 4,116
Income taxes paid 1,364 1,019 1,625
Assets acquired through direct financing
loans or capital leases 6,643 726 3,923
Exchange of non-monetary assets (466) - -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 2, 1997, November 3, 1996 and November 3, 1995
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 and shirts and women's slacks and skirts. 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 1997
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 inventory markdowns 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.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. The Company has several items of other
comprehensive income and will adopt this standard in its 1998 fiscal year.
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 2, 1997 and November 3, 1996.
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. 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 7 for further discussion.
INTANGIBLE ASSETS
At November 2, 1997 and November 3, 1996, intangible assets were
approximately $1.0 million and $1.4 million, respectively, and consisted
primarily of goodwill and trademarks. 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 was $281,000 in 1997, $353,000 in 1996 and $283,000
in 1995.
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 was $14.0 million in 1997, $10.7 million in 1996 and $17.0
million in 1995.
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 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."
Also included in foreign currency transaction gains and losses for 1997
is a gain of $758,000 due to cumulative translation adjustments transferred from
equity to operations upon the sale of one of the Company's foreign subsidiaries.
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 1997 and 1996 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. In
February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS
128 will supersede ABP Opinion No. 15, "Earnings Per Share." SFAS 128 requires
dual presentation of basic and diluted earnings per share on the face of the
income statement for entities with complex capital structures. SFAS 128 is
effective for annual and interim periods ending after December 15, 1997. Earlier
application is not permitted. Implementation of SFAS 128 would not have had a
material impact of the Company's earnings per share for fiscal 1997.
<PAGE>
2. Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
Thousands of dollars
Estimated useful ------------------------------
lives (years) 1997 1996
------------------- --------------- ------------
<S> <C> <C> <C>
Factory machinery and equipment 9-12 $ 29,594 27,060
Buildings 20-50 5,193 5,479
Building improvements 3-20 7,418 4,373
Other fixtures and equipment 3-20 16,580 13,813
Land 770 770
Factory machinery and other fixtures and
equipment under capital lease 4,170 3,440
Construction in progress 5,378 937
--------------- ------------
Total property, plant and equipment 69,103 55,872
Less accumulated depreciation
and amortization 33,070 30,502
--------------- ------------
Net property, plant and equipment $ 36,033 25,370
=============== ============
</TABLE>
Accumulated amortization on assets under capital leases totaled $2.1
million at November 2, 1997 and $1.3 million at November 3, 1996.
At November 2, 1997, construction in progress consisted of $4.6 million
of equipment purchased for the Company's new distribution center, and
approximately $800,000 for hardware, software and installation costs incurred
related to replacement of the Company's enterprise wide computer systems.
Construction in progress under capital leases was $2.6 million and $348,000 at
November 2, 1997 and November 3, 1996, respectively.
During 1997, the Company closed its manufacturing plant in Galway
Ireland and sold its remaining Irish facility located in Kiltimagh. Assets
abandoned or sold in Ireland approximated $1.5 million. See additional
discussion in Note 8.
In June 1996, the Company sold its facility located in Piedras Negras,
Mexico for a purchase price of approximately $22.2 million in cash. Proceeds
from the sale, net of expenses, were used to retire a long-term capital lease
obligation of approximately $7.2 plus other long-term obligations. The balance
of the proceeds of approximately $13.8 million was applied to the Company's
Credit Agreement.
Depreciation and amortization of property, plant and equipment
approximated $5.4 million in 1997, $5.1 million in 1996 and $3.7 million in
1995.
<PAGE>
3. Debt and Liquidity
SHORT-TERM DEBT
The Company's primary Credit Agreement provides 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. The
balance of the term loan was $9.2 million as of November 2, 1997. Formulas
derived from accounts receivable and inventory define borrowing capacity under
the Credit Agreement. The Credit Agreement is collateralized by substantially
all assets of Farah U.S.A., Farah U.K. Limited and Savane Direct 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 for the Credit Agreement and term loan is
prime (8 1/2% at November 2, 1997) plus 1/2% for borrowings and 1/6% per month
for letters of credit. The Company may also from time to time convert all or
part of the loans outstanding under the Credit Agreement or term loan into a
loan based on the LIBOR Rate. Upon conversion, the interest rate is be 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
million of LIBOR Rate loans outstanding, and various other requirements. At
November 2, 1997, 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 November 2, 1997 ranged
from 8.38% to 8.41%. An unused credit line fee of 1/2% per annum is charged on
the unused portion of the line when borrowings decrease below $17.5 million. As
of November 2, 1997, usage under the Credit Agreement was $36.5 million
(including letters of credit of $1.3 million) and the excess credit line
available was $23.5 million. The Credit Agreement restricts certain additional
indebtedness and requires the maintenance of minimum tangible net worth, minimum
working capital and limits capital expenditures. As of November 2, 1997, the
Company was in compliance with these covenants. The Credit Agreement prohibits
the payment of dividends by the Company, and except for debt service of the
Company's 8.5% convertible subordinated debentures, the Credit Agreement
restricts the subsidiaries from transferring substantially all net assets to the
Parent Company through intercompany loans, advances or dividends.
The following table reflects short-term debt balances and interest
rates in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Thousands of dollars
------------------------------------------
1997 1996 1995
------------ ------------- -----------
<S> <C> <C> <C>
Average outstanding balance $ 31,813 31,473 36,842
Maximum month-end
balance outstanding $ 42,899 41,816 47,338
Weighted average interest rate:
During year 9.4% 9.4% 9.7%
Year-end 8.5% 9.2% 9.8%
</TABLE>
<PAGE>
LONG-TERM DEBT
<TABLE>
<CAPTION>
Thousands of dollars
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Term note, collateralized by substantially all assets of Company, bearing
interest at prime plus .5% and LIBOR plus 2.75% for LIBOR Rate Loans,
due July 1, 2001, payable in monthly installments of $208,333 $ 9,167 -
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 - 1,165
Collateralized loan for aircraft purchase bearing interest at 8.85%, fixed
through April 2, 2000, then at prime plus 1%, due in monthly
installments through April 2, 2007 1,078 -
Various notes, collateralized by property, plant and equipment, bearing
interest at rates ranging from 9.0% to 10.93%, due in monthly
installments through 2001 1,288 554
Various obligations under other capital leases 5,876 2,612
----------- ------------
Total long-term debt 19,072 5,994
Less current installments 5,301 1,288
----------- ------------
Net long-term debt $ 13,771 4,706
=========== ============
</TABLE>
Installments of long-term debt and capital lease obligations mature as follows:
<TABLE>
<CAPTION>
Thousands of dollars
---------------------------------
Long-term Capital Lease
Debt Obligations
-------------- ----------------
<S> <C> <C>
1998 $ 3,237 2,490
1999 3,040 1,715
2000 2,728 957
2001 1,771 507
2002 104 445
2003 and beyond 2,316 819
-------------- ----------------
13,196 6,933
Less interest portion - 1,057
============== ================
$ 13,196 5,876
============== ================
</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 1998.
<PAGE>
4. 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 employee 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 the cost recognition provisions of SFAS 123 are presented below.
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 and 1997 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 4,000 options in 1997, 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 these years.
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 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 57,500, 31,000 and 9,000 shares under
the Director Stock Option Plans in 1997, 1996 and 1995, respectively. Stock
options granted from the 1988 Stock Option Plan have a term of ten years and are
fully vested as of the date of grant. Stock options granted from the 1996 plan
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 1997, 1996 and 1995.
<PAGE>
A summary of the status of the Company's stock options as of November
2, 1997, November 3, 1996 and November 3, 1995 and the changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 Stock Options 1996 Stock Options 1995 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
------------- ------------ ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 949,713 $ 8.21 455,637 $ 10.87 478,985 $ 10.68
Granted 61,500 8.05 520,000 5.94 16,000 8.53
Exercised (98,650) 5.74 (3,500) 5.48 (25,514) 5.81
Forfeited (41,000) 14.01 (17,924) 11.08 (10,834) 11.02
Expired (6,063) 7.50 (4,500) 6.96 (3,000) 9.81
------------- ------------- --------------
Outstanding at end of year 865,500 8.21 949,713 8.21 455,637 10.87
============= ============= ==============
Exercisable at end of year 801,000 8.25 678,463 9.07 448,637 10.91
Weighted-average fair
market value of options
granted during the year $3.85 $2.66 $3.78
</TABLE>
As of November 2, 1997, the weighted average remaining term for
outstanding options is 7.17 years. 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 1997, 1996 and
1995: dividend yield of 0% for all years; expected volatility of 45.1% in 1997
and 51.3% in 1996 and 1995; risk-free interest rates are different for each
grant and range from 6.1% to 7.1%; and the expected lives of options are
different for each grant and range from 3.6 years to 4.8 years.
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 fiscal
1997, 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
12,500 shares vested in 1997, 37,665 shares vested in 1996 and 62,666 shares
vested in 1995. The Company recognizes the expense related to these awards over
the period of service specified in the vesting provision of the awards and
recorded compensation expense of $77,000 in 1997, $266,000 in 1996 and $704,000
in 1995 for restricted stock awards.
<PAGE>
PRO FORMA NET INCOME (LOSS) AND NET INCOME (LOSS) PER COMMON SHARE
Had the compensation cost for the Company's employee based compensation
plans been determined consistent with SFAS 123, the Company's net income (loss)
and net income (loss) per common share for 1997, 1996 and 1995 would approximate
the pro forma amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 270 6,756 (12,941)
Pro forma $ (78) 5,945 (12,973)
Net income (loss) per share:
As reported $ .03 .66 (1.28)
Pro forma $ (.01) .58 (1.28)
</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.
5. Income Taxes
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at November 2, 1997 and November 3, 1996 are
as follows:
<TABLE>
<CAPTION>
Thousands of dollars
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
U.S. federal NOL carryforwards $ 3,949 2,062
Foreign NOL carryforwards 1,382 771
Deferred gains 403 1,871
Foreign tax credit carryforwards 626 451
Other accrued expenses 4,031 3,563
Other 759 235
----------- ------------
Total deferred tax assets 11,150 8,953
----------- ------------
DEFERRED TAX LIABILITIES:
Tax in excess of financial statement
depreciation and amortization 1,732 1,980
Other 699 600
----------- ------------
Total deferred tax liabilities 2,431 2,580
----------- ------------
Net deferred tax asset 8,719 6,373
Valuation allowance (1,064) (3,825)
----------- ------------
Deferred income tax asset, net 7,655 2,548
Less current portion (4,207) (2,548)
----------- ------------
Long-term deferred income tax asset, net $ 3,448 -
=========== ============
</TABLE>
The fiscal 1997 increase in the Company's deferred tax assets was
primarily due to the Company's domestic and foreign net operating losses
incurred for the year. Realization of the deferred tax assets is dependent upon
the Company generating future taxable income from operations in the respective
taxing jurisdictions. The Company has domestic net operating loss carryforwards
of $11.6 million, of which $7.1 million expire in 2010. The remaining $4.5
million of domestic net operating loss carryforwards expire in 2012. The Company
does not believe it is more likely than not that it will generate sufficient
taxable income during the carryforward periods for certain portions of the
deferred tax assets and accordingly, provided a valuation allowance of $1.1
million and $3.8 million at November 2, 1997 and November 3, 1996, respectively.
During fiscal 1997, the Company reevaluated the realizability of its
deferred tax assets pursuant to the criteria of Statement of Financial
Accounting Standards No. 109, and concluded that it is more likely than not that
the Company will realize tax benefits associated with its domestic net operating
losses, together with certain other tax benefits, that were previously subject
to valuation allowance. As a result of this reevaluation, the beginning of the
year valuation allowance was reduced by approximately $3.2 million.
The federal examination of the Company's United States tax returns for
fiscal years 1994 and 1995 was completed during the year without any proposed
income or expense adjustments or modifications to its tax credits. The Company
is waiting for acceptance of the auditor's report from the Joint Committee on
Taxation of the United States Treasury Department.
Income (loss) before taxes and incomes taxes in 1997, 1996 and 1995 are shown
below:
<TABLE>
<CAPTION>
Thousands of dollars
--------------- -- ------------- -- --------------
1997 1996 1995
--------------- ------------- --------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES:
Domestic operations $ (855) 6,277 (16,728)
Foreign operations (2,773) 3,460 1,452
--------------- ------------- --------------
Total consolidated $ (3,628) 9,737 (15,276)
=============== ============= ==============
INCOME TAX PROVISION:
Domestic operations
Current $ 668 450 (1,087)
Deferred (3,956) 1,654 (1,934)
--------------- ------------- --------------
Total domestic (3,288) 2,104 (3,021)
Foreign operations
Current 541 877 686
Deferred (1,151) - -
--------------- ------------- --------------
Total foreign (610) 877 686
--------------- ------------- --------------
Total consolidated $ (3,898) 2,981 (2,335)
=============== ============= ==============
</TABLE>
The effective tax rate differs from the U.S. statutory rate of 34% as summarized
below:
<TABLE>
Thousands of dollars
--------------- -- ------------- -- --------------
1997 1996 1995
--------------- ------------- --------------
<S> <C> <C> <C>
Expected income taxes at U.S. statutory rate $ (1,234) 3,311 (5,194)
Non-deductible expenses 92 212 87
Permanent differences on assets sold - 172 -
Effect of differing tax rates in foreign 191 (91) 46
countries
Unrecognized deferred tax benefits 244 - 2,633
U.S. taxes on dividends from foreign countries 166 - 93
Recognition of previously unrecognized
deferred tax benefits (3,226) (761) -
Other (131) 138 -
--------------- ------------- --------------
Income taxes, as reported $ (3,898) 2,981 (2,335)
=============== ============= ==============
</TABLE>
At November 2, 1997, the Company's foreign subsidiaries had net
deferred tax assets of $2.0 million from net operating loss carryforwards and
deferred charges that are available to offset future foreign taxable income. In
addition, at November 2, 1997, the Company had $626,000 in foreign tax credit
carryforwards to offset any U.S. tax generated by future foreign income
repatriated and taxed in the U.S. These credits expire in the years 1998 through
2001 if not used.
<PAGE>
Certain of the Company's foreign subsidiaries have undistributed
accumulated earnings of approximately $25.5 million, as adjusted for U.S. tax
purposes at November 2, 1997. No U.S. tax has been provided on the undistributed
earnings because the Company intends to indefinitely reinvest such earnings in
the foreign operations. The amount of the unrecognized deferred tax liability
associated with the undistributed earnings that have not been previously taxed
in the U.S. was approximately $7.1 million at November 2, 1997. If earnings are
repatriated, foreign tax credits can offset a portion of the U.S. tax on such
earnings.
6. 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 1997, 1996 and 1995, the Company's
contribution to the plan was approximately $418,000, $306,000 and $444,000,
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 2, 1997, November 3, 1996 and November 3, 1995, included the following
components:
<TABLE>
<CAPTION>
Thousands of dollars
--------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 60 64 47
Interest cost on projected benefit obligation 579 576 577
Actual return on plan assets (1,300) (786) (1,514)
Net amortization and deferral 705 263 1,165
------------ ------------ -------------
Net periodic pension cost $ 44 117 275
============ ============ =============
</TABLE>
<PAGE>
The following table sets forth the funded status at November 2, 1997
and November 3, 1996, of the defined benefit plan:
<TABLE>
<CAPTION>
Thousands of dollars
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION:
Vested benefit obligation $ (7,694) (7,601)
Nonvested benefit obligation (129) (174)
------------- -------------
Accumulated benefit obligation $ (7,823) (7,775)
============= =============
Projected benefit obligation $ (7,823) (7,775)
Plan assets at market value 8,371 7,437
------------- -------------
Funded status 548 (338)
Unrecognized transition liability being recognized over
average future service of plan participants 335 401
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 793 1,243
Adjustment required to recognize minimum liability - (1,644)
------------- -------------
Prepaid/(Unfunded Reserve) $ 1,676 (338)
============= =============
</TABLE>
In determining the benefit obligations and service cost of the
Company's defined benefit plan, weighted average discount rates of 7.5% and
7.75% were used in 1997 and 1996, respectively. The expected long-term rate of
return on plan assets was 9.5% in both years.
<PAGE>
7. Commitments and Contingencies
Lease and Capital Expenditure Commitments
During 1988, the Company consummated a sale and leaseback of its main
El Paso, Texas, manufacturing and office facility. In connection with the sale,
the Company entered into a 10 year operating lease of the facility which expires
in May 1998. A deferred gain was recognized on the sale, of which $1.2 million
remains to be recognized through 1998. A portion of the sale was paid by
delivery of a $7.5 promissory note to the Company, collateralized by a second
mortgage on the property. In the fourth quarter of 1997, this note receivable
was prepaid by the borrower. In consideration for this prepayment, the Company
discounted the note 12.5%. A loss of approximately $665,000 was recognized in
this transaction, and is reflected in the caption "Other, net" on the
Consolidated Statement of Operations.
The Company and its subsidiaries occupy certain facilities and use
certain equipment under operating leases which expire at various dates from
fiscal 1998 to 2016. The following is a summary by year of the noncancelable
portion of future minimum lease payments under operating leases:
<TABLE>
<CAPTION>
Thousands
of dollars
---------------
<S> <C>
1998 $ 8,640
1999 5,096
2000 3,965
2001 3,179
2002 2,951
Later 25,185
years
--------------
Lease payments* $ 49,016
==============
</TABLE>
*Minimum payments have not been reduced by minimum sublease rental
income of $820,000 due in the future under noncancelable subleases.
The Company has subleased approximately 70% of its El Paso
manufacturing facility. The noncancelable portion of future minimum rental
income due in 1998 is $820,000.
Rental expense for all operating leases for 1997, 1996 and 1995 was
$8.4 million, $8.2 million and $8.7 million, respectively (net of sublease
income of approximately $1.3 million in 1997, $1.1 million in 1996 and $1.0
million in 1995).
At November 2, 1997, the Company had commitments for capital
expenditures of approximately $4.4 million.
Credit Risks
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 1997, 1996 and 1995, one U.S. customer accounted for $35.9
million (13.1%), $36.3 million (14.6%) and $30.2 million (12.5%), respectively,
of the Company's consolidated sales. In addition, in 1997 and 1996 another U.S.
customer accounted for $ 35.2 million (12.8%) and $26.6 million (10.7%) of
consolidated sales, respectively. A third customer accounted for $27.3 million
(10.0%) of consolidated sales in 1997.
<PAGE>
Legal Proceedings
The Company is involved in certain legal proceedings in the normal
course of business. Based on advice of legal counsel, the Company believes that
the outcome of such litigation will not materially affect its consolidated
financial position, results of operations or cash flows.
8. Termination of Foreign Operations, Production Conversion Expenses and
Relocation Expenses
Termination of foreign operations. During fiscal 1997, the
Company incurred a loss related to a fire and ultimate disposition of its Irish
operations. A total loss of approximately $5.1 million was recognized related to
these events. This loss resulted mainly from the write-down of fixed assets,
severance payments and legal and professional fees incurred. This amount has
been classified as "Termination of foreign operations" in the Consolidated
Statement of Operations.
Production conversion expenses. In fiscal 1997, the Company incurred
start-up costs related to two new laundry facilities in Juarez and Torreon,
Mexico and the expansion of the Company's existing facility in Chihuahua,
Mexico. Conversion costs were also incurred as the Company began to source more
product from global contractors. Expenses related to these items totaled
approximately $2.1 million, and have been separately stated in the line item
"Production conversion expenses" in the Consolidated Statement of Operations.
Relocation expenses. In the third quarter of fiscal 1997, the Company
completed its move to new corporate headquarters. In addition, the Company is
currently in the process of relocating its distribution center to a new facility
from which it expects to realize improved distribution and inventory management
efficiencies. The Company anticipates completion of the distribution center
relocation in the second quarter of fiscal 1998. In moving to the new
headquarters and distribution center, the Company incurred duplicate operating
costs, moving expenses and professional fees. These expenses approximated
$904,000, and have been separately stated under the caption "Relocation
expenses" in the Consolidated Statement of Operations.
9. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for its financial instruments. For cash
and 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
approximate fair value, as interest rates for these instruments approximate
current market rates. The carrying amount of the Company's convertible
debentures was $1.7 million at November 2, 1997 and November 3, 1996. The fair
value for these debentures for the same periods was $1.3 million and $1.2
million respectively. The fair value of the convertible debentures was based
upon quoted market prices at November 2, 1997 and November 3, 1996.
<PAGE>
10. Geographic Segment Information
The Company is engaged in one business segment. This includes the
design, manufacture, distribution and sale of men's, young men's, 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 1997, 1996 and 1995. 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>
<CAPTION>
Thousands of dollars
-------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
NET SALES:
United States to unaffiliated customers $ 224,051 199,574 193,274
Transfers between areas - - 266
------------ ------------- ------------
Total United States 224,051 199,574 193,540
Europe 31,752 30,677 32,033
South Pacific 17,916 17,347 15,490
Adjustments and eliminations - - (266)
------------ ------------- ------------
Total $ 273,719 247,598 240,797
============ ============= ============
OPERATING PROFIT (LOSS):
United States $ 5,180 1,981 (12,489)
Europe (4,801) 3 385
South Pacific 1,970 2,626 1,549
Adjustments and eliminations - - -
------------ ------------- ------------
Total 2,349 4,610 (10,555)
Net gain (loss) on sale of assets (24) 10,041 755
General corporate expenses (2,561) (1,683) (1,751)
Interest expense, net (3,392) (3,231) (3,725)
------------ ------------- ------------
Income (loss) before income taxes $ (3,628) 9,737 (15,276)
============ ============= ============
IDENTIFIABLE ASSETS:
United States $ 143,182 123,520 146,172
Europe 15,513 16,552 17,326
Far East and the South Pacific 21,000 17,645 14,357
Adjustments and eliminations (4,103) (3,854) (4,028)
------------ ------------- ------------
Total $ 175,592 153,863 173,827
============ ============= ============
</TABLE>
Approximately 66% and 26% of all product sold in the United States in
1997 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 2, 1997 were net assets located in Mexico and Costa
Rica totaling approximately $6.7 million and $8.3 million respectively.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." This Statement requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report certain information about their product
and services, the geographic areas in which they operate, and their major
customers. Upon adoption of this pronouncement, additional disclosures will be
required by the Company. This Statement is effective for fiscal years beginning
after December 15, 1997. Earlier application is encouraged. The Company intends
to adopt this statement for its 1998 fiscal year.
11. Quarterly Unaudited Information
Quarterly unaudited information for fiscal 1997 compared to fiscal 1996
is as follows:
<TABLE>
<CAPTION>
Thousands of dollars except share data
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
1997
Net sales $ 61,938 70,771 64,256 76,754
Gross profit 17,708 19,888 16,723 19,610
Net income (loss) (1,955) 3,211 (403) (583)
Net income (loss) per share (.19) .31 (.04) (.06)
Weighted average shares of common
stock and common stock equivalents
outstanding 10,191,103 10,434,026 10,276,022 10,278,989
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
</TABLE>
In the first quarter of 1997 an after tax loss of $2.5 million was
recorded related to a loss incurred in one of the Company's Irish
facilities, as a result of a fire.
In the fourth quarter of 1997 an additional after tax loss of $1.1
million was recorded related to the final disposition of the Company's
Irish facilities.
In the third quarter of 1996, the Company sold its Piedras Negras,
Mexico facility, resulting in an after-tax gain of approximately $6.9
million.
12. Subsequent Events
Subsequent to November 2, 1997, the Company's Board of Directors
approved the closure of the Company's finishing facility in Cartago, Costa Rica
and a reduction of sewing operations in the Company's San Jose, Costa Rica
facility. The Cartago facility, as well as some of the manufacturing equipment
in both locations will be held for sale. The Company expects to record a pre-tax
charge of $3.5 to $4.0 million in the first quarter of 1998 on the write-down of
these assets to expected realizable value and the accrual of costs related to
severance payments and other closing expenses. Approximately 700 employees will
be terminated between the two facilities. The Company expects the completion of
these events to occur prior to the end of fiscal 1998. This decision will
eliminate certain fixed costs and should result in lower product costs as the
Company sources more goods from Mexico and other lower cost suppliers (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors Affecting the Company's Business and Prospects").
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated balance sheets of Farah
Incorporated (a Texas corporation) and subsidiaries as of November 2, 1997 and
November 3, 1996 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years 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 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 2, 1997 and November 3, 1996, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
El Paso, Texas
December 17, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF FARAH INCORPORATED:
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Farah Incorporated (a Texas corporation)
and subsidiaries for the year ended November 3, 1995. 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 results of Farah Incorporated and their subsidiaries'
operations and cash flows for the year ended November 3, 1995 in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
December 15, 1995
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes or disagreements with accountants on accounting
and financial disclosure in fiscal 1997.
In fiscal 1996, the Board of Directors requested the Audit Committee of
the Board seek proposals from 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 LLP was notified of its dismissal.
This change in accountants enabled the Company to effect a savings in
audit and accounting fees. Arthur Andersen LLP's report on the Company's
financial statements for fiscal 1995 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified as to uncertainty, audit scope, or
accounting principles. During fiscal 1995 and the period from the end of that
fiscal year to the date of the Board's dismissal of Arthur Andersen LLP, there
were no disagreements with Arthur Andersen LLP 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 LLP, would have caused it to make a reference to the subject matter of
the disagreements in connection with its reports.
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is set forth under the caption
"Directors and Executive Officers" on pages 5 through 7, and "Performance of the
Common Stock" and "Stock Option and Compensation Committee Report on Executive
Compensation" on pages 14 through 15 of the Company's Proxy Statement dated
January 30, 1998 prepared in connection with its 1998 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 11 of the Company's
Proxy Statement prepared in connection with its 1998 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 3 through 4 of the Company's Proxy
Statement prepared in connection with its 1998 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 1998 Annual Meeting of Shareholders and is incorporated herein by
reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Documents filed as part of this Report. Page
<S> <C>
1. Financial Statements (included in Item 8, Financial
Statements and Supplementary Data):
Consolidated Statements of Operations - Years ended
November 2, 1997, November 3, 1996 and November 3,
1995 26
Consolidated Balance Sheets - November 2, 1997 and
November 3, 1996 27
Consolidated Statements of Shareholders' Equity -
Years ended November 2, 1997, November 3, 1996 and
November 3, 1995 28
Consolidated Statements of Cash Flows - Years ended
November 2, 1997, November 3, 1996 and November 3,
1995 29
Notes to Consolidated Financial Statements 30-44
Reports of Independent Public Accountants 45-46
Selected Financial Data for fiscal years ended
1993 to 1997 13
2. Schedule II Valuation and Qualifying Accounts -
Years ended November 2, 1997 and
November 3, 1996 57
All other schedules are omitted because they are not
applicable, not required under the instructions, or the
information is reflected in the consolidated financial
statements or notes thereto.
</TABLE>
(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.
3 Articles of Incorporation and Bylaws.
<S> <C> <C>
* 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 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
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
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
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
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
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 as 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 Lease Agreement dated October 4, 1996 between Farah U.S.A., Inc. and Orso Partners, Ltd.
(filed as Exhibit 10.57 to Form 10-K as of November 3, 1996).
* 10.55 Lease Agreement dated November 30, 1996 between Farah U.S.A., Inc. and Santa Teresa Limited
Partnership (filed as Exhibit 10.58 to Form 10-K as of November 3, 1996).
* 10.56 Amended and Restated Accounts Financing Agreement dated June 1, 1997 among Congress Financial
Corporation (Southwest) and Farah U.S.A., Inc., Value Clothing Company, Inc. and Farah
Manufacturing (U.K.) Limited (filed as Exhibit 10.59 to Form 10-Q as of May 4, 1997).
* 10.57 Exhibit No. 1 to Trademark Agreement dated June 1, 1997 by Farah Incorporated in favor
of congress Financial Corporation (Southwest)(filed as Exhibit 10.60 to Form 10-Q as of May 4,
1997).
* 10.58 Amended and Restated Inventory and Equipment Security Agreement dated June 1, 1997 (filed as
Exhibit 10.61 to Form 10-Q as of May 4, 1997).
* 10.59 Farah (U.K.) Supplement to Accounts Financing Agreement dated June 1, 1997 (filed as Exhibit
10.62 to Form 10-Q as of May 4, 1997).
* 10.60 Amended and Restated General Security Agreement (Multiple Farah Companies) dated June 1, 1997
(filed as Exhibit 10.63 to Form 10-Q as of May 4, 1997).
* 10.61 Amended and Restated General Security Agreement (Farah International, Inc.) dated June 1,
1997 (filed as Exhibit 10.64 to Form 10-Q as of May 4, 1997).
* 10.62 Trade Financing Agreement Supplement to Accounts Financing Agreement dated June 1, 1997
(filed as Exhibit 10.65 to Form 10-Q as of May 4, 1997).
* 10.63 General Security Agreement (Farah Incorporated) dated June 1, 1997 (filed as Exhibit 10.66 to
Form 10-Q as of May 4, 1997).
* 10.64 General Security Agreement (Value Clothing Company, Inc. and Value Slacks, Inc.) dated June
1, 1997 (filed as Exhibit 10.67 to Form 10-Q as of May 4, 1997).
* 10.65 Secured Promissory Note, in the original principal amount of $10,000,000 dated June 1, 1997,
made by Farah U.S.A., Inc. to the order of Lender (filed as Exhibit 10.68 to Form 10-Q as of
May 4, 1997).
* 10.66 The Acknowledgment and Confirmation of Guaranty and Other Financing Agreements, dated June 1,
1997, executed by Guarantors and Corporacion Farah Costa Rica, S.A. de C.V. for the benefit
of Lender (filed as Exhibit 10.69 to Form 10-Q as of May 4, 1997).
10.67 Form of Deferred Compensation Agreements dated December 18, 1997.
10.68 Letter Amendment dated December 5, 1997 to Employment Agreement dated July 10, 1995.
10.69 Letter Amendment dated December 5, 1997 to Employment Agreement dated August 25, 1994.
10.70 Letter Amendment dated December 5, 1997 to Employment Agreement dated August 25, 1994.
10.71 Letter Amendment dated December 5, 1997 to Employment Agreement dated March 2, 1996.
10.72 Letter Amendment dated December 5, 1997 to Employment Agreement dated August 25, 1994.
*Incorporated herein by reference.
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 28, 1998
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 28, 1998.
/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/ Charles J. Smith
- ------------------------------------ -----------------------------------
Christopher L. Carameros Charles J. Smith
Director Director
/s/ John D. Curtis
- ------------------------------------
John D. Curtis
Director
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Farah Incorporated
Our report on the consolidated financial statements of Farah Incorporated (a
Texas corporation) and subsidiaries is included on page 45 of this Form 10-K. In
connection with our audits of such consolidated financial statements, we have
also audited the related financial statement schedule on page 57 of this Form
10-K.
In our opinion, the financial schedule referred to above, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
El Paso, Texas
December 17, 1997
<PAGE>
<TABLE>
<CAPTION>
Schedule II
FARAH INCORPORATED AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended November 2, 1997 and November 3, 1996
(in thousands)
Balance at Charged to
beginning of costs and Balance at
Description year expenses Deductions end of year
- -------------------------------------------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Year Ended November 2, 1997:
Allowance for doubtful accounts $ 662 $ 126 $ 42 $ 746
Allowance for sales returns 384 192 123 453
Self-insurance reserves 1,220 2,728 3,199 749
Year ended November 3, 1996:
Allowance for doubtful accounts 720 169 227 662
Allowance for sales returns 302 166 84 384
Self-Insurance reserves 1,291 2,913 2,984 1,220
</TABLE>
<PAGE>
FARAH INCORPORATED AND SUBSIDIARIES
FORM 10-K INDEX TO ATTACHED EXHIBITS
(All Exhibits listed are on pages 59 through 72)
<TABLE>
<CAPTION>
Page
Numbers
<S> <C> <C>
Exhibit 10.67 Form of Deferred Compensation Agreements dated December 18, 1997. 59
Exhibit 10.68 Letter Amendment dated December 5, 1997 to Employment Agreement dated July 63
10, 1995.
Exhibit 10.69 Letter Amendment dated December 5, 1997 to Employment Agreement dated August 64
25, 1994.
Exhibit 10.70 Letter Amendment dated December 5, 1997 to Employment Agreement dated August 65
25, 1994.
Exhibit 10.71 Letter Amendment dated December 5, 1997 to Employment Agreement dated March 66
2, 1996.
Exhibit 10.72 Letter Amendment dated December 5, 1997 to Employment Agreement dated August 68
25, 1994.
Exhibit 21 Subsidiaries of Farah Incorporated 69
Exhibit 23.1 Consent of Independent Accountants (Coopers & Lybrand L.L.P.) 70
Exhibit 23.2 Consent of Independent Public Accountants (Arthur Andersen LLP) 71
Exhibit 27 Financial Data Schedule 72
</TABLE>
<PAGE>
Exhibit 10.67
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, 1998 and continuing through December 31, 1998,
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, 1998 an amount equal to
the Employee's total Deferred Income during 1998 and shall
credit that sum to a separate memorandum account on its books
("_________ 1998 Deferral Account" or "Deferral Account").
b) In addition, on December 31, 1998 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 1998 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, 1998) 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 1998 on the amounts described in (ii) above.
c) After December 31, 1998, 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-1998 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 1998, 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 1998:
(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
1998; 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 1998 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, 1999.
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 ___________________, 1997.
EMPLOYER
By____________________________________________
EMPLOYEE
By____________________________________________
<PAGE>
Below is a list of variables to the Deferred Compensation Agreements chosen by
the officers required to file with this Form 10-K.
<TABLE>
<CAPTION>
Name Period of Deferral % Deferred Payment Date
<S> <C> <C> <C>
Richard C. Allender January 1, 1998 to 5% January 9, 1999
December 31, 1998
Jackie L. Boatman January 1, 1998 to 5% January 9, 1999
December 31, 1998
Russell G. Gibson January 1, 1998 to 7% January 9, 1999
December 31, 1998
Michael R. Mitchell January 1, 1998 to 7% January 9, 1999
December 31, 1998
</TABLE>
<PAGE>
Exhibit 10.68
Farah Incorporated
4171 N. Mesa
Building D, Suite 500
El Paso, Texas 79902-1433
P.O. Box 13800
El Paso, Texas 79913-3800
- -------------------------------------------------------------------------------
December 5, 1997
Mr. Richard C. Allender
Farah Incorporated
P.O. Box 13800
El Paso, Texas 79925
Re: Amendment to Employment Agreement
Dear Richard,
Reference is made to that certain Employment Agreement by and between
Farah Incorporated (the "Company") and yourself dated July 10, 1995 (the
"Agreement"). The Company desires to make certain amendments to the Agreement.
Capitalized terms which are not defined in this letter shall have the meaning
ascribed to such terms in the Agreement.
From and after January 1, 1998, the Base Salary shall be $400,000.
Section 2(d) of the Agreement shall be deemed amended to provide that the
minimum number of annual premium payments shall be seven (7) instead of three
(3) and the Minimum Premium Commitment shall be deemed amended to read $847,000
instead of $363,000. 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/ Russell G. Gibson
Russell G. Gibson
Executive Vice President
Agreed and accepted as of the 5th day of December, 1997:
/s/ Richard C. Allender
Richard C. Allender
<PAGE>
Exhibit 10.69
December 5, 1997
Mr. Michael R. Mitchell
Farah Incorporated
P.O. Box 13800
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, as amended on March 2, 1996 (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, 1998" and
to insert the date "March 1, 1999." 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 5th day of December, 1997:
/s/ Michael R. Mitchell
Michael R. Mitchell
<PAGE>
Exhibit 10.70
December 5, 1997
Mr. Gary J. Kernaghan
Farah Incorporated
P.O. Box 13800
El Paso, Texas 79925
Re: Extension of Employment Agreement
Dear Gary,
Reference is made to that certain Amended and Restated Employment
Agreement by and between Farah Incorporated (the "Company") and yourself dated
August 25, 1994, as amended on March 2, 1996 (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, 1998" and
to insert the date "March 1, 1999." 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 5th day of December, 1997:
/s/ Gary J. Kernaghan
Gary J. Kernaghan
<PAGE>
Exhibit 10.71
December 5, 1997
Mr. Russell G. Gibson
Farah Incorporated
P.O. Box 13800
El Paso, Texas 79913-800
Re: Extension of Employment Agreement
Dear Russell,
Reference is made to that certain Employment Agreement by and between
Farah Incorporated (the "Company") and yourself dated March 2, 1996 (the
"Agreement"). The Company wishes to extend the term of the Agreement and make
certain amendments thereto. Therefore, the Company proposes that Section 1(b) of
the Agreement be amended to delete the date "March 1, 1997" and to insert the
date "March 1, 1999."
The Agreement shall be amended to add new Section 2(d) as follows:
(d) The Company's agrees to pay the cost of premiums
for a reverse split-dollar life insurance policy for the
Executive on such terms and conditions, and containing such
benefits for the Executive and the Company, as the Company's
Stock Option and Compensation Committee may deem appropriate.
The cost of premiums for such reverse split-dollar life
insurance policy shall be not greater than $20,000 per annum,
unless otherwise agreed by the Company.
The Agreement shall be amended to add a new sentence at the end of
Section 4(g) as follows:
In addition to the foregoing, if the Executive's employment is
terminated by the Executive as specified in Section 4(f), then
in addition to the other amounts payable by the Company
pursuant to this Section 4(g), the Company shall pay one
additional annual premium for the reverse split-dollar life
insurance policy described under Section 2(d) unless prior to
the date such annual payments is required under the terms of
the reverse split-dollar life insurance policy no payment is
required because of (i) of death of the Executive, except to
the extent of unpaid premiums as of the date of death, or (ii)
no further premium payments are required under the terms of
such policy.
The Agreement shall be amended to add new Section 4(h) as follows:
(h) If the Executive's employment is terminated by the Company
without cause, then in addition to any other obligations the
Company may have to the Executive pursuant to this Agreement,
the Company shall pay one additional annual premium for the
reverse split-dollar life insurance policy described under
Section 2(d) unless prior to the date such annual payments is
required under the terms of the reverse split-dollar life
insurance policy no payment is required because of (i) of
death of the Executive, except to the extent of unpaid
premiums as of the date of death, or (ii) no further premium
payments are required under the terms of such policy.
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 5th day of December, 1997:
/s/ Russell G. Gibson
Russell G. Gibson
<PAGE>
Exhibit 10.72
December 5, 1997
Mr. Jackie L. Boatman
Farah Incorporated
P.O. Box 13800
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 25, 1994, as amended on March 2, 1996 (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, 1998" and
to insert the date "March 1, 1999." 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 5th day of December, 1997:
/s/ Jackie L. Boatman
Jackie L. Boatman
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
FARAH INCORPORATED AND SUBSIDIARIES
JURISDICTION OF PERCENT
NAME INCORPORATION OWNED
<S> <C> <C>
PARENT:
Farah Incorporated
SUBSIDIARIES OF FARAH INCORPORATED:
Farah U.S.A., Inc. Texas 100%
Farah International, Inc. Texas 100%
Savane Direct Incorporated 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%
Empresas Savane, S.A. de C.V. Mexico 100%
Servicios Magnificos, 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 SAVANE DIRECT INCORPORATED:
Value Clothing Company, Inc. Texas 100%
SUBSIDIARIES OF FARAH (FAR EAST) LIMITED:
Corporacion Farah - Costa Rica, S.A. Costa Rica 100%
Farah (Fiji) Limited Fiji 50%
Farah (Exports) Ireland Ireland 100%
South Pacific Investments Limited Fiji 50%
SUBSIDIARY OF FARAH LIMITED (IRELAND):
Farah Manufacturing Company
(Ireland) Limited Ireland 100%
SUBSIDIARY OF FARAH CLOTHING COMPANY, INC:
Farah Marketing Ireland Limited Ireland 51%
<PAGE>
</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 17, 1997, on our audits of the consolidated financial statements of the
Company as of and for the years ended November 2, 1997 and November 3, 1996,
which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
El Paso, Texas
January 26, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 No. 33-11930, 33-46661,
33-61736, 33-53461 and 333-05353.
/S/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
January 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-02-1997
<PERIOD-END> NOV-02-1997
<CASH> 2,322
<SECURITIES> 0
<RECEIVABLES> 43,799
<ALLOWANCES> 746
<INVENTORY> 74,792
<CURRENT-ASSETS> 131,028
<PP&E> 69,103
<DEPRECIATION> 33,070
<TOTAL-ASSETS> 175,592
<CURRENT-LIABILITIES> 74,965
<BONDS> 1,663
0
0
<COMMON> 46,026
<OTHER-SE> 36,688
<TOTAL-LIABILITY-AND-EQUITY> 175,592
<SALES> 273,719
<TOTAL-REVENUES> 273,719
<CGS> 199,790
<TOTAL-COSTS> 274,297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,108
<INCOME-PRETAX> (3,628)
<INCOME-TAX> (3,898)
<INCOME-CONTINUING> 270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 270
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
