-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DJjbdr62ShkB4k2ThOBdtBrsCAt1NNYgqE+NsUnJP/q134yGxpfH928SDBFXaYnj LgZnTCIEh6UK+BLfNmGHMw== 0001047469-98-044638.txt : 19981222 0001047469-98-044638.hdr.sgml : 19981222 ACCESSION NUMBER: 0001047469-98-044638 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAGGAR CORP CENTRAL INDEX KEY: 0000892533 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 752187001 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20850 FILM NUMBER: 98773096 BUSINESS ADDRESS: STREET 1: 6311 LEMMON AVE CITY: DALLAS STATE: TX ZIP: 75209 BUSINESS PHONE: 2143528481 MAIL ADDRESS: STREET 1: 6311 LEMMON AVENUE CITY: DALLAS STATE: TX ZIP: 75209 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. COMMISSION FILE NUMBER: 0-20850 HAGGAR CORP. (Exact name of registrant as specified in the charter) NEVADA 75-2187001 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 6113 LEMMON AVENUE DALLAS, TEXAS 75209 (Address of principal executive offices) Registrant's telephone number, including area code: (214) 352-8481 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - --------------------------- ----------------------------- Common stock Nasdaq National Market System ($0.10 par value per share) Securities registered pursuant to Section 12(g) of the Act: NONE. 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 Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of December 15, 1998 there were 7,638,693 shares of common stock outstanding. The aggregate market value of the 7,090,675 shares of the common stock of Haggar Corp. held by nonaffiliates on such date (based on the closing price of these shares on the Nasdaq National Market System) was approximately $85,088,100. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. THIS PAGE INTENTIONALLY LEFT BLANK. 2 PART I ITEM 1. BUSINESS INTRODUCTION. Haggar Corp., together with its subsidiaries (collectively the "Company"), designs, manufactures, imports and markets casual and dress men's apparel products including pants, shorts, suits, sportcoats and shirts. Products are offered in a wide variety of styles, fabrics, colors and sizes. The Company's products are sold primarily through approximately 7,000 retail stores operated by its customers, which include major department stores, specialty stores and mass market retailers throughout the United States. The Company offers its premium apparel products under the Haggar-Registered Trademark- brand name, and also offers a more moderately priced line of products through its mass-market retailer division, The Horizon Group. The Company owns several other trademarks under which it markets or has marketed its products. In addition, the Company's specialty label division offers retailers quality products bearing the retailer's own label. In 1995, as part of its strategic growth objectives, the Company began opening and operating retail stores located in outlet malls throughout the United States. As of September 30, 1998, the Company had opened 53 such stores which market first quality Company products to the general public. These stores also serve as a retail-marketing laboratory for the Company. The Company was established in 1926 by J. M. Haggar, Sr., and has built its reputation by offering high quality, ready-to-wear men's apparel at affordable prices through innovations in product design, marketing and customer service. Haggar Clothing Co. is the primary operating subsidiary. Both Haggar Corp. and Haggar Clothing Co. are incorporated in Nevada. PRODUCTS AND MAJOR BRANDS. The Company's apparel products are manufactured with a wide array of fabrics that emphasize style, comfort, fit and performance. The Company is well known for its use of "performance fabrics" that maintain a fresh, neat appearance. The Company's product lines are currently dominated by natural fiber (wool or cotton) and blended (polyester/wool or polyester/rayon) fabrics, although the Company also produces some apparel using a single synthetic (polyester or rayon) fabric. A significant portion of the Company's apparel lines consists of basic, recurring styles, which the Company believes are less susceptible to "fashion markdowns", as compared with higher fashion apparel lines. Thus, while the Company strives to offer current fashions and styles, the bulk of its product lines change relatively little from year to year. This consistency in product lines enables the Company to operate on a cost-efficient basis and to more accurately forecast the demand for particular products. HAGGAR-Registered Trademark-. The Company's Haggar-Registered Trademark- brands represented 76.9% of total apparel sales in fiscal 1998. These brands receive widespread recognition among United States consumers for high quality, affordable men's apparel. The full range of products offered by the Company is marketed under these brands, including dress and casual pants, sportcoats, suits, shirts and shorts. The Company has developed specific product lines under these brands, intended to keep the Company in the forefront of the trend among men toward more casual clothing, while maintaining the Company's traditional strength in men's dress apparel. Examples of these lines include Haggar Wrinkle-Free Cottons-Registered Trademark-, City Casuals-TM- and Haggar Black Label-TM-. Haggar Wrinkle-Free Cottons-Registered Trademark- offer all the comfort features of 100% cotton pants and maintain their neat appearance, without the need for ironing or dry cleaning. City Casuals-TM- and Haggar Black Label-TM- are fashionable lines of coordinated coats, vests, pants and shirts designed to 3 meet the need for "business casual" and high quality casual assortments. The Haggar brand is also licensed to manufacturers of related apparel in categories outside the core product lines of the Company. Haggar branded products are sold nationwide primarily in major department stores, including J.C. Penney, May Company Department Stores, Federated Department Stores, Mervyn's California, Belk Department Stores and Kohl's Department Stores. The Company also markets its Haggar branded men's clothing through its own retail stores located in outlet malls throughout the United States. THE HORIZON GROUP. The Company's mass retailer division, The Horizon Group, markets products including dress pants, casual pants, shorts, suits, sportcoats and shirts. These products, which are offered at lower price points than Haggar brand products, are generally sold to mass market retailers, such as Wal-Mart. In addition to manufacturing products under its own labels, the Company also manufactures men's apparel for certain of its customers under the individual store's proprietary label. The Company's specialty label products are primarily sold to major department stores, including J.C. Penney. INTRODUCTION OF NEW PRODUCTS. The Company is emphasizing the introduction of new products in order to capitalize on its brand name recognition and retailer relationships. While the Company has offered casual products in the past, it has increased its efforts in this category through aggressive marketing and expansion of its lines of Haggar Wrinkle-Free Cottons-Registered Trademark-, City Casuals-TM-, Black Label-TM- and Cotton Flex-TM- products. In 1998, the company introduced its Fade Free-TM- Khakis, and continues to develop new products. The Company continues to emphasize its lines of shirts designed to complement its pant product lines. While there is substantial competition in these markets, the Company believes that it is well positioned to take advantage of market opportunities. DEPENDENCE ON KEY CUSTOMERS. The number of major apparel retailers has decreased in recent years, and the retail apparel industry continues to undergo consolidation. The Company's five largest customers accounted for 57.4%, 54.0%, and 55.2% of net sales during the fiscal years ending September 30, 1998, 1997 and 1996, respectively. The Company's largest current customer, J.C. Penney Company, Inc., accounted for 27.9%, 27.3%, and 26.3% of the Company's net sales during the fiscal years ending September 30, 1998, 1997 and 1996, respectively. The Company's second largest current customer, Kohl's Department Stores, Inc., accounted for 10.4%, 7.1% and 6.0% of the Company's net sales during the fiscal years ending September 30, 1998, 1997 and 1996, respectively. No other customer accounted for more than 10% of consolidated revenues. The loss of the business of one or more of the Company's largest customers could have a material adverse effect on the Company's results of operations. The Company has no long-term commitments or contracts with any of its customers. COMPETITION. The apparel industry is highly competitive due to its fashion orientation, its mix of large and small producers, the flow of imported merchandise and a wide variety of retailing methods. Competition has been exacerbated by consolidations and closings of major department store groups. The Company has many diverse competitors, some of whom have greater marketing and financial resources than the Company. Intense competition in the apparel industry can result in significant discounting and lower gross margins. The Company is the market leader in sales of men's dress pants, custom-fit suits (separately sized pants and matching jackets which may be purchased together to form a suit requiring little or no alteration) and sportcoats, and holds the number two market share in men's casual pants. The principal elements of competition in the apparel industry include style, quality and price of products, brand loyalty, customer service and advertising. The Company's product innovations and value-added services such as 4 floor-ready merchandise, electronic data interchange, fixturing and concept shops position it to compete as a market leader. The Company also believes that its brand recognition, merchandise with relatively low vulnerability to changing fashion trends and affordable pricing enhance its competitive position in the apparel industry. Additionally, it feels its national advertising campaign promotes consumer demand for its products and enhances its brand and Company image. DESIGN AND MANUFACTURING. With limited exceptions, products sold by the Company's various divisions are manufactured to the designs and specifications (including fabric selections) of designers employed by those divisions. During fiscal 1998, approximately 12% of the Company's products (measured in units) were produced in the United States, with the balance manufactured in foreign countries. Facilities operated by the Company accounted for all of its domestic-made products. A portion of all product lines manufactured by the Company is produced domestically with the exception of shirts and vests. Approximately 25% of the Company's foreign-made products were manufactured by facilities owned by the Company in Mexico and the Dominican Republic, with the remaining 75% manufactured by unaffiliated companies in the Far East, Asia, South America, Central America, Mexico and the Dominican Republic. The Company's foreign sourcing operations are subject to various risks of doing business abroad, including currency fluctuations, quotas and other regulations relating to imports, natural disasters and, in certain parts of the world, political or economic instability. Although the Company's operations have not been materially adversely affected by any of such factors to date, any substantial disruption of its relationships with its foreign suppliers could adversely affect its operations. Some of the Company's imported merchandise is subject to United States Customs duties. In addition, bilateral agreements between the major exporting countries and the United States impose quotas which limit the amounts of certain categories of merchandise that may be imported into the United States. Any material increase in duty levels, material decrease in quota levels or material decrease in available quota allocations could adversely affect the Company's operations. RAW MATERIALS. Raw materials used in manufacturing operations consist mainly of fabrics made from cotton, wool, synthetics and blends of synthetics with cotton and wool. These fabrics are purchased principally from major textile producers located in the United States. In addition, the Company purchases such items as buttons, thread, zippers and trim from a large number of other suppliers. Ten vendors supplied approximately 58% of the Company's fabric and trim requirements during the fiscal year ended September 30, 1998. The Company has no long-term contracts with any of its suppliers, but does not anticipate substantial shortages of raw materials in 1999. TRADEMARKS. The Company owns many federal trademark registrations and has pending several other trademark applications in the United States Patent and Trademark Office. The Company has also registered or applied for registration of a number of trademarks for use on a variety of apparel items in various foreign countries. The Company regards its trademarks and other proprietary rights as valuable assets and believes that they have significant value in the manufacturing and marketing of its products. 5 The Company seeks to capitalize on consumer recognition and acceptance of the Haggar-Registered Trademark- brands by licensing, both domestically and internationally, the use of these trademarks on a variety of products. Typically, the licensee's agreement with the Company gives it the right to produce, market and sell specified products in a particular country or region under one or more of the Company's trademarks. For example, the Company has granted exclusive domestic licenses to unaffiliated manufacturers for the production and marketing of men's leather goods, neckwear, sweaters, hosiery, dress shirts and outerwear under the Haggar-Registered Trademark-. SEASONALITY. In recent history, the Company has had some seasonality with higher sales and income in its first and fourth quarters, which is prior to and during the selling season for fall merchandise. (see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Seasonality). BACKLOG. A substantial portion of the Company's net sales is based on orders for immediate delivery, or so-called "soft-planning orders," submitted by apparel retailers (which do not constitute purchase commitments). An analysis of backlog is not, therefore, necessarily indicative of future net sales. Retailers' use of such soft-planning orders increases the difficulty of forecasting demand for the Company's products. EMPLOYEES. The Company employs approximately 2,344 persons domestically and 1,635 persons in foreign countries. In 1998, approximately 2,710 employees were engaged in manufacturing operations, and the remainder were employed in executive, marketing, wholesale and retail sales, product design, engineering, accounting, distribution and purchasing activities. None of its domestic employees are covered by a collective bargaining agreement with any union. While the Company is not a party to any collective bargaining agreements covering its foreign employees, applicable labor laws may dictate minimum wages, fringe benefit requirements and certain other obligations. The Company believes that relations with its employees are good. ENVIRONMENTAL REGULATIONS. Current environmental regulations have not had and, in the opinion of the Company, assuming the continuation of present conditions, will not have any material effect on the business, capital expenditures, earnings or competitive position of the Company. FINANCIAL INSTRUMENT DERIVATIVES. The Company does not utilize financial instrument derivatives. 6 ITEM 2. PROPERTIES The Company's principal executive offices are located at 6113 Lemmon Avenue, Dallas, Texas 75209. The general location, use, approximate size and information with respect to the ownership or lease of the Company's principal properties currently in use are set forth below:
Approximate Owned/ Lease Location Use Square Footage Leased Expiration ---------------------------------------------------------------------------------------- Dallas, Texas Headquarters 443,000 Owned Dallas, Texas Warehouse 157,000 Leased 1998 Fort Worth, Texas Warehouse & Distribution 660,000 Owned Weslaco, Texas Fabric Cutting 115,000 Owned Weslaco, Texas(1) Excess Facility 95,000 Leased 1999 Weslaco, Texas Warehouse 137,000 Owned Edinburg, Texas Fabric Cutting & Manufacturing 121,000 Owned Leon, Mexico Manufacturing 39,000 Owned La Romana, Dom. Rep. Manufacturing 41,000 Leased 2001 Higuey, Dom. Rep. Manufacturing 13,000 Leased 2011 Robstown (1) Excess Facility 68,000 Owned Oklahoma City (1) Excess Facility 95,000 Leased 2001 Various (53 locations) (2) Retail Sales 160,000 Leased 2000 - 2003
(1) These properties were previously used by the Company as manufacturing plants but are no longer utilized by the Company. The Company is profitably subleasing the property in Oklahoma City, Oklahoma, to the U.S. Postal Service. (2) These properties are the Company's 52 retail stores located in outlet malls throughout the United States and one outlet store which sells a combination of retail and second quality products at its headquarters in Dallas. The retail stores range in size from approximately 2,700 to 10,000 square feet. All of the properties owned by the Company are free from material encumbrances, except the Company's fabric cutting facility located at Weslaco, Texas, which is subject to a lien securing an industrial revenue bond financing in the amount of $2.7 million. The Company believes that its existing facilities are well maintained, in good operating condition and adequate for its present and anticipated levels of operations. Future manufacturing needs are anticipated to be met through owned facilities and through the use of outside contractors. The Company's Customer Service Center ("CSC") in Fort Worth, Texas, is expected to meet the Company's distribution requirements for the foreseeable future. 7 ITEM 3. LEGAL PROCEEDINGS The Company has been named as a defendant in several legal actions arising from its normal business activities, including actions brought by certain terminated employees. Although the amount of any liability that could arise with respect to these actions cannot be accurately predicted, the claims and damages alleged, the progress of the litigation to date, and past experience with similar litigation leads the Company to believe that any liability resulting from these actions will not individually or collectively have a material adverse effect on the financial condition of the Company. In addition, the Company has been named as a defendant in two legal actions arising out of the collapse of the roof of the Company's warehouse during a severe storm in May 1995. Although the amount of any liability that could arise with respect to such actions cannot be accurately predicted, the Company does not believe any such liability will have a material adverse effect on the financial position of the Company. The Company maintains general liability, workers' compensation, and employers liability insurance. The Company intends to pass the costs associated with lawsuits to its insurance carriers, under the applicable policies, if any, subject to the deductible limits and other provisions and exclusions of those policies. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market System under the symbol "HGGR." The following table sets forth, for the fiscal quarters indicated, the high and low prices for the Common Stock as reported by the Nasdaq National Market System and the dividends paid per common share.
1998 FISCAL QUARTER ----------------------------------------------------------------------------------- 1st 2nd 3rd 4th -------------------- -------------------- -------------------- -------------------- High 18 16 1/4 16 5/8 13 1/8 Low 13 1/4 12 1/8 12 1/2 10 3/16 Dividend $0.05 $0.05 $0.05 $0.05 1997 FISCAL QUARTER ----------------------------------------------------------------------------------- 1st 2nd 3rd 4th -------------------- -------------------- -------------------- -------------------- High 18 3/4 17 3/4 15 15 1/2 Low 14 1/2 11 7/8 11 1/2 11 5/8 Dividend $0.05 $0.05 $0.05 $0.05
As of December 15, 1998, the Company had approximately 198 stockholders of record and approximately 3,003 beneficial owners. 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial information below should be read in conjunction with the consolidated financial statements of the Company and notes thereto and "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial information for the five years ended September 30, 1998, is derived from financial statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants.
Year Ended September 30, 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net sales $ 402,475 $ 406,030 $ 437,942 $ 448,532 $ 491,235 Cost of goods sold 277,713 287,434 315,351 324,699 345,846 Restructuring charge (1) - - 8,680 1,244 - ----------- ----------- ----------- ----------- ----------- Gross profit 124,762 118,596 113,911 122,589 145,389 Selling, general and administrative expenses (112,296) (113,061) (113,037) (110,432) (106,258) Restructuring charge (1) - - (5,320) - - Gain from storm damage (2) - - 1,140 4,807 - Royalty income 2,878 2,076 2,630 3,049 2,655 ----------- ----------- ----------- ----------- ----------- Operating income (loss) 15,344 7,611 (676) 20,013 41,786 Other income, net 1,094 1,954 1,563 786 1,510 Interest expense (3,452) (3,525) (4,293) (4,995) (1,273) ----------- ----------- ----------- ----------- ----------- Income (loss) from operations before provision for income taxes 12,986 6,040 (3,406) 15,804 42,023 Provision (benefit) for income taxes 4,962 2,297 (986) 5,995 16,342 ----------- ----------- ----------- ----------- ----------- Net income (loss) $ 8,024 $ 3,743 $ (2,420) $ 9,809 $ 25,681 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) per common share on a diluted basis $ 0. 94 $ 0.44 $ (0.28) $ 1.14 $ 2.95 on a basic basis $ 0. 94 $ 0.44 $ (0.28) $ 1.15 $ 3.00 Cash dividends declared per common share $ 0. 20 $ 0.20 $ 0.20 $ 0.20 $ 0.20 Weighted average number of common shares on a diluted basis 8,545 8,555 8,552 8,623 8,700 on a basic basis 8,545 8,555 8,552 8,549 8,544 BALANCE SHEET DATA (AT PERIOD END): Working capital $ 123,754 $ 126,554 $ 136,172 $ 178,849 $ 130,644 Total assets 251,975 262,053 278,334 315,352 257,298 Long-term debt 24,937 31,800 42,112 78,585 15,032 Stockholders' equity 165,475 164,514 162,482 166,406 158,002
(1) During fiscal year 1996, the Company decided to restructure its worldwide manufacturing capacity, which resulted in a $14.0 million nonrecurring charge. During fiscal year 1995, the Company elected to close certain operating plants, which resulted in a $1.2 million nonrecurring charge. (2) During fiscal year 1995, the Company recognized a gain from the recording of an insurance claim, net of direct costs, arising out of damage to the Company's main distribution center caused by a severe thunderstorm on May 5, 1995. During fiscal 1996, the Company recognized an additional $1.1 million gain from storm damage as a result of collections of insurance proceeds in excess of the fiscal 1995 recorded receivable. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the consolidated results of operations and financial condition of Haggar Corp. should be read in conjunction with the accompanying consolidated financial statements and related notes contained in "Item 8, Financial Statements and Supplementary Data" to provide additional information concerning the Company's financial activities and condition. RESULTS OF OPERATIONS. The following table sets forth certain financial data expressed as a percentage of net sales for each of the fiscal years ended September 30, 1998, 1997 and 1996.
Year Ended September 30, 1998 1997 1996 ------- ------- ------- Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold (69.0) (70.8) (72.0) Restructuring charge - - (2.0) ------- ------- ------- Gross profit 31.0 29.2 26.0 Selling, general and administrative expenses (27.9) (27.8) (25.8) Restructuring charge - - (1.2) Gain from storm damage - - 0.2 Royalty income 0.7 0.5 0.6 ------- ------- ------- Operating income (loss) 3.8 1.9 (0.2) Other income, net 0.3 0.5 0.4 Interest expense (0.9) (0.9) (1.0) ------- ------- ------- Income (loss) from operations before provision (benefit) for income taxes 3.2 1.5 (0.8) Provision (benefit) for taxes 1.2 0.6 (0.2) ------- ------- ------- Net income (loss) 2.0 % 0.9% (0.6)% ------- ------- ------- ------- ------- -------
FISCAL 1998 COMPARED TO FISCAL 1997 Net sales decreased 0.9% to $402.5 million in fiscal 1998 compared to net sales of $406.0 million in fiscal year 1997. The decrease in net sales during fiscal 1998 reflects a 1.2% decrease in unit sales and 0.2% decrease in average sales price. Net sales for 1998 decreased from the 1997 level mainly due to soft sales at retail resulting from a consolidating retail environment as well as a reduction in the sales of sportcoats and suits. Gross profit as a percent of net sales increased to 31.0% in 1998 compared to 29.2% in 1997. The increase in gross profit is primarily the result of an improved manufacturing mix between products manufactured domestically and products manufactured internationally and fewer markdowns to inventory. Selling, general and administrative expenses as a percent of net sales remained relatively stable at 27.9% in fiscal 1998 compared to 27.8% in fiscal 1997. However, actual selling, general and administrative expenses decreased to $112.3 million in 1998 from $113.1 million for 1997. The $0.8 million decrease in selling, general and administrative expenses during fiscal 1998 was primarily the cumulative result of (i) an increase of approximately $3.9 million in expenses related to the opening and operations of 11 new retail stores during fiscal 1998 and a full year of operations for 13 stores opened in fiscal 1997, (ii) a decrease of approximately $3.7 million in shipping and labor costs resulting from increased efficiencies at the CSC and (iii) decreased selling expenses of $1.0 million due to the decrease in net sales. 11 The Company is in the process of negotiating leases for 15 new retail stores to be opened in fiscal 1999. The Company intends to continue to evaluate the growth potential for retail outlet malls and may open additional retail stores as opportunities arise. Other income, net decreased to $1.1 million in fiscal 1998 from $2.0 million in fiscal in 1997, primarily as the result of a $1.0 million gain recorded in 1997 from the dissolution of the Company's joint venture in the United Kingdom with Coats Viyella Plc. Royalty income increased to $2.9 million in fiscal 1998 compared to $2.1 million in 1997. The increase relates primarily to stronger sales of shirts and leather goods by domestic licensees, as well as stronger sales by our international licensees in Mexico and Canada. FISCAL 1997 COMPARED TO FISCAL 1996. Net sales decreased 7.3% to $406.0 million in fiscal 1997 compared to net sales of $437.9 million in fiscal 1996. The decrease in net sales during fiscal 1997 reflects a 9.9% decrease in unit sales offset by a 2.4% increase in average sales price. Net sales for 1997 decreased from the 1996 level mainly due to two major product conversions for two of the Company's more significant customers. Net sales were also less than expectations in 1997 as a result of shipping difficulties during the implementation of a new order fulfillment system. The order fulfillment system is currently operating as intended. Gross profit as a percent of net sales increased to 29.2% in 1997 compared to 26.0% in 1996. The increase in gross profit as a percent of net sales was due in part to a reduction in manufacturing costs as a result of the consolidation of manufacturing operations completed in 1997. Selling, general and administrative expenses as a percent of net sales increased to 27.8% in fiscal 1997 from 25.8% in fiscal 1996. Actual selling, general and administrative expenses remained constant at $113.0 million for 1997 and 1996. The primary reasons for the consistency in selling, general and administrative expenses during fiscal 1997 was primarily the cumulative result of (i) an increase in depreciation expense of approximately $2.6 million related to the CSC, (ii) a decrease of approximately $7.2 million in distribution costs in 1997 (startup labor cost for placing the CSC in operation in 1996 did not reoccur in 1997), (iii) severance costs of $2.4 million resulting from a reorganization of the Company's sales force and a reduction in corporate personnel, (iv) a decrease of $2.3 million in commissions due to decreased sales, and (v) an increase of approximately $4.4 million in expenses related to the opening and operations of 11 new retail stores during fiscal 1997 and a full year of operations for 20 stores opened in fiscal 1996. Other income increased in fiscal 1997 to $2.0 million from $1.6 million in fiscal 1996, primarily as the result of an approximate $1.0 million recovery of historical losses from the dissolution of the Company's joint venture in the United Kingdom with Coats Viyella. 12 INCOME TAXES. The Company's income tax provision, as a percent of income from operations before income tax, was 38.2% in fiscal 1998. Comparatively, the Company's income tax provision/benefit, as a percent of income/loss from operations before income tax, was 38.0% and 28.9% in fiscal 1997 and 1996, respectively. For fiscal 1998, 1997 and 1996, the effective income tax rates differed from the statutory rates because of state income taxes, tax credits utilized and certain permanent tax differences. SEASONALITY. In recent history, the Company has had some seasonality with slightly higher sales and income in the first and fourth quarters, which is prior to and during the selling season for fall merchandise, which reflects the buying patterns of the Company's customers. The following table presents certain data for each of the Company's last twelve fiscal quarters. The quarterly data is unaudited, but gives effect to all adjustments (consisting of normal recurring adjustments) necessary, in the opinion of management of the Company, to present fairly the data for such periods (in thousands, except per share data).
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- (1) (2) Net sales 1998 $102,471 $ 94,683 $ 90,192 $115,129 1997 104,157 98,608 87,996 115,269 1996 98,418 110,840 103,769 124,915 Gross profit 1998 $ 30,913 $ 29,414 $ 28,615 $ 35,820 1997 30,738 28,424 24,504 34,930 1996 27,084 30,100 28,933 27,794 Selling general and administrative expenses 1998 $ 28,931 $ 27,258 $ 26,687 $ 29,420 1997 27,797 28,485 27,550 29,229 1996 26,629 26,999 26,667 32,742 Income (loss) before income taxes 1998 $ 1,838 $ 1,917 $ 1,996 $ 7,235 1997 2,295 746 (3,213) 6,212 1996 1,614 2,553 1,762 (9,335) Net income (loss) 1998 $ 1,130 $ 1,175 $ 1,231 $ 4,488 1997 1,383 440 (1,926) 3,846 1996 1,004 1,584 1,082 (6,090) Net income (loss) per common share and 1998 $ 0.13 $ 0.14 $ 0.14 $ 0.53 common share equivalent 1997 0.16 0.06 (0.23) 0.45 on a basic and diluted basis 1996 0.12 0.19 0.13 (0.71)
(1) In the second quarter of fiscal 1997, the Company had decreased sales due to product conversions and to shipment delays as a result of problems encountered during the implementation of an upgraded customer service, order processing and billing software system. (2) During the fourth quarter of fiscal 1996, the Company recorded restructuring charges of $14.0 million related to the decision to restructure its manufacturing capacity through consolidation of three Texas sewing facilities into one operation. The restructuring charges were $8.7 million included as a component of cost of sales and $5.3 million included as operating expenses. 13 LIQUIDITY AND CAPITAL RESOURCES. The Company's trade accounts receivable potentially expose the Company to concentrations of credit risk as all of its customers are in the retail apparel industry. The Company performs ongoing credit evaluations of its customers' financial condition and establishes an allowance for doubtful accounts based upon factors related to the credit risk of specific customers, historical trends and other information. The Company maintained the days sales outstanding at 43 days for fiscal 1998 and 1997. Inventories at the end of fiscal 1998 decreased to $92.2 million from $105.2 million at the end of fiscal 1997. The reduction in inventory levels during fiscal 1998 reflects the Company's ongoing efforts to manage inventory. The Company's external financing needs are met through an unsecured revolving credit facility (the "Facility") with certain banks. The Facility provides the Company with a $100.0 million line of credit. The amount available under the Facility is limited to the lesser of $100.0 million minus any letter of credit exposure or the borrowing base as defined in the Facility. During fiscal 1998, the Company amended the Facility to extend the expiration date to June 30, 2001. As of September 30, 1998, the Company had no outstanding balance under the Facility and had a borrowing capacity of $89.2 million. The Company's UK subsidiary, Haggar Apparel, LTD maintains a $4.2 million line of credit with a bank in the United Kingdom to fund its operating activities. At September 30, 1998, approximately $3.5 million was outstanding under this line of credit. The line of credit has been partially collateralized by a $4.2 million letter of credit from the Company and is payable upon demand. Interest under the line is payable at 1% above the bank's base rate. In 1995, the Company completed the sale and issuance of $25.0 million in senior notes. The proceeds from the notes were used to partially fund the construction of the Company's new CSC. Significant terms of the senior notes include a maturity date of ten years from the date of issuance, interest payable semi-annually and annual principal payments beginning in the fourth year. The interest rate on the senior notes is fixed at 8.49%. The terms and conditions of the note purchase agreement governing the senior notes include restriction on the sale of assets, limitations on additional indebtedness and the maintenance of certain net worth requirements. The Company provided cash from operating activities for the fiscal year ended September 30, 1998, of $37.0 million, primarily as a result of the reduction in inventory of $13.0 million and accounts receivables by $7.4 million. The Company used cash in investing activities of $9.6 million during fiscal 1998, the result of purchases of property, plant, and equipment of $10.2 million primarily in conjunction with the opening of retail stores during the fiscal year. Cash flows used in financing activities of $9.3 million for the 1998 fiscal year were primarily the result of a net reduction in long-term debt of $3.3 million and the purchase of $5.6 million in treasury stock. By comparison, the Company provided cash from operating activities of $23.4 million for the fiscal year ended September 30, 1997, primarily as a result of the reduction in inventory of $11.1 million. The Company used cash in investing activities of $12.3 million during fiscal 1997, the result of purchases of property, plant, and equipment of $15.0 million (primarily in conjunction with the opening of retail stores during the fiscal year). Cash flows used in financing activities of $11.9 million for the 1997 fiscal year were primarily the result of a net reduction in long-term debt of $10.5 million. The Company believes that the cash flow generated from operations and the funds available under the foregoing credit facilities will be adequate to meet its working capital and related financing needs for the foreseeable future. Inflation did not materially impact the Company in 1998, 1997, or 1996. 14 NEW ACCOUNTING STANDARDS. The Company will adopt the provisions of SFAS No. 131, "Disclosures about Segments of An Enterprise and Related Information," in fiscal 1999. SFAS No. 131 requires the Company to disclose certain information about segments whose operating results are regularly reviewed by the Company's chief operating decision maker and for which discrete financial information is available. Certain qualitative and quantitative aggregation criteria are used to determine which segments should be reported. The Company will adopt the provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" in the first quarter of fiscal 1999. SFAS No. 132 requires the Company to standardize certain disclosures and include additional information on changes in benefit obligations and fair values of plan assets. Had the Company adopted SFAS No. 132 this year, there would have been no material affect to the financial statements for the years ended September 30, 1998, 1997, and 1996. In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued to establish accounting and reporting standards for derivative instruments and hedging activities. The Company does not utilize derivative instruments nor does it perform hedging activities as defined in the new pronouncement. The Company will adopt this new accounting standard in fiscal 2000. Had the Company adopted SFAS No. 133 this year, there would have been no material affect to the financial statements for the years ended September 30, 1998, 1997, and 1996. YEAR 2000. GENERAL The Year 2000 issue concerns the inability of information technology (IT) and non-information technology systems and processes to properly recognize and process date-sensitive information before, during, and after December 31, 1999. The Company presently expects that its core operations and essential functions will be ready for the Year 2000 transition. The Company has appointed a full-time project manager to coordinate the assessment and remediation of Year 2000 issues affecting the Company. The Company addressed the problem by creating a Year 2000 plan that was developed using a bottom-up planning approach, which includes all business units and physical facilities. The Company's Year 2000 plan focuses on both IT and non-IT systems and processes, including: 1) applications software programs that run the Company's primary business systems; 2) hardware/PC software such as LANs, servers, personal computers (including operating systems and PC based software applications), telecommunications, and office equipment; 3) engineering systems which include manufacturing and lab equipment; and 4) facility systems that support physical infrastructure. The Company is also communicating with all of its customers, vendors and licensees regarding the status of their Year 2000 compliance programs. USE OF STEERING COMMITTEE The Company's Year 2000 program includes a steering committee comprised of members from various functional groups. The committee was established to provide an oversight and control function that reviews and evaluates the progress of the Year 2000 program. STATE OF READINESS The Company's Year 2000 program has company-wide implications, which requires efforts from 22 project leaders managing 68 different projects. The Year 2000 program classifies the IT and non-IT systems into critical, priority, required and desirable categories. The critical category is defined as systems that must be in place at the turn of the century or business will be severely affected, such as the manufacturing and distribution systems and the retail point of sale system. The priority category includes systems that the Company can do without for only a few days such as telephones or energy management systems. A required system is defined as a system needed to remain competitive or in compliance with laws and regulations such as security systems and voice mail. The desirable systems enable employees to work more efficiently such as paging or copiers. 15 Overall, the Company's Year 2000 compliance program was approximately 30% complete as of November 1998, which was principally on schedule with the program plan. An evaluation of IT and non-IT systems indicates that the remediation of the applications software programs for critical systems was 54% complete, priority systems' remediation was 39% complete, and required systems' remediation was 60% complete. The remediation of desirable applications software programs is scheduled to begin in the second quarter of fiscal 1999. Altogether, applications software program projects were on schedule with an expected completion in July 1999. The remediation of hardware/PC software was approximately 18% complete for critical systems and 24% complete for priority systems. The remediation of required systems is 30% complete and desirable hardware/PC software is scheduled to start in the second quarter of fiscal 1999. In summary, hardware/PC software projects were on schedule with intended completion by August 1999. Remediation of critical engineering systems was 39% complete and priority systems' remediation was 9% complete. Remediation of required and desirable systems is scheduled to begin in the second quarter of fiscal 1999. Overall, engineering systems were essentially on schedule and expected to continue until December 1999 with substantially all systems' remediation completed by August 1999. Remediation of facilities' systems was 11% complete for critical systems and 37% complete for priority systems. Remediation for required systems and desirable systems was 54% and 51% complete, respectively. Remediation of all facilities' systems is on schedule with a planned completion by July 1999. SIGNIFICANT THIRD PARTIES The Company understands that there are risks associated with Year 2000 issues that it cannot directly control, primarily the readiness of its key suppliers and customers. The Company's operations might be adversely affected by the failure of its significant customers or vendors to adequately address the Year 2000 problem. The Company has contacted the majority of its customers and vendors and asked for information about their plans for addressing the Year 2000. The Company has received responses from most of its key customers, and as of September 30, 1998, none of the responses indicate that there will be a significant problem. A number of the vendor responses have been received, which the Company is in the process of reviewing. The Company intends to substantially complete its assessment of key customers and vendors by the second quarter of fiscal 1999. Communications with customers and vendors will continue as more information becomes available in order to evaluate potential risks to the Company's business operations. COST TO ADDRESS YEAR 2000 ISSUES The Company is executing the Year 2000 program primarily with existing internal resources. The Company does not separately track the internal costs associated with the Year 2000 program, however, the principal costs are related to payroll and the associated benefits for its information systems group. Year 2000 remediation costs are expensed in the year incurred. As of September 30, 1998, the Company has incurred costs for outside consultants, hardware and software applications that are not material to the results of operations or financial condition of the Company. In addition, the Company does not expect future remediation expenditures to be material, except for the payroll and related benefits of its existing internal resources, which would have been incurred in any event. At this time, the Company does not anticipate separately tracking the costs of remediation for its existing internal resources. No projects with any significant impact to the Company's operations have been deferred due to the Year 2000 program. The Company presently has elected to upgrade the accounting and manufacturing software, voice mail system, EDI system and network servers due to the Year 2000 issue. These upgrades would not have occurred had the Year 2000 problem not existed. The cost of the upgrades is not material to the results of operations or financial condition of the Company. 16 RISKS OF YEAR 2000 ISSUES To date, the Company has no indication that the time to replace or convert any specific function or system is so great as to threaten the Company's present schedule. The Company's program and plans currently indicate compliant systems will be deployed by the end of August 1999. If the Company completes its remediation plans, then any adverse effects from the Year 2000 problem will result from circumstances outside the Company's control. As the Company cannot anticipate such circumstances now, the Company has not yet developed "most reasonably likely worst case Year 2000 scenarios." The Company, however, will begin examining potential scenarios and associated risks starting the second quarter of 1999. Scenarios might include a possible but presently unforeseen failure of key vendor or customer business processes or systems. This situation could conceivably persist for some months after the Year 2000 transition and could lead to possible revenue losses. Although at this time the Company believes that it is adequately addressing the Year 2000 issues, there can be no assurance that the Year 2000 issues will not have a material adverse effect on its business, financial conditions or results of operations. In addition, disruptions in the economy generally resulting from Year 2000 issues could have a materially adverse effect to the Company. CONTINGENCY PLANS To date, the Company has been focusing on the conversion and replacement of non-compliant systems. In the second and third quarters of fiscal 1999, the Company anticipates developing contingency plans for potential interruptions in the supply chain, transportation, and communications with customers and vendors. Some of these plans could include use of alternate vendors or product designs that do not use raw materials from non-compliant vendors, if any. The Company expects an assessment with an action plan in place by June 1999 for "reasonably likely worst case Year 2000 scenarios", if any. FORWARD LOOKING STATEMENTS. This report contains certain forward-looking statements. In addition, from time to time the Company may issue press releases and other written communications, and representatives of the Company may make oral statements, which contain forward-looking information. Except for historical information, matters discussed in such oral and written communications are forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially from those in such forward-looking statements. Risks and uncertainties inherent to the Company's line of business include such factors as natural disasters, general economic conditions, the performance of the retail sector in general and the apparel industry in particular, the competitive environment, consumer acceptance of new products and the success of advertising, marketing and promotional campaigns. Additional risks and uncertainties which could cause the Company's actual results to differ from those contained in any forward-looking statements are discussed elsewhere herein. SUBSEQUENT EVENTS (UNAUDITED). HURRICANE GEORGES On September 22, 1998, Hurricane Georges damaged two of the Company's leased manufacturing facilities. Both facilities are insured for damage to the building, equipment, inventory, and for business interruption. Although the total assessment of damage has not been completed, the range of loss is estimated at $4.0 to $6.0 million, substantially all of which is expected to be covered by insurance. Insurance proceeds are expected to be used to repair the roofs, fix the equipment, and cover any inventory loss. The deductibles for the insurance claims are not significant. 17 STOCK REPURCHASE In August 1998, the Board of Directors authorized the repurchase of up to two million shares of the Company's common stock. As of September 30, 1998, 516,000 shares of common stock had been purchased for approximately $5,570,000 and classified as treasury stock using the treasury stock cost method. Subsequent to September 30, 1998, the Company has purchased an additional 413,000 shares for approximately $4,350,000. ACQUISITION The Company has signed a definitive agreement to purchase all the common stock of Jerell Inc. for $37.3 million. Jerell Inc. (a Texas Corporation) is primarily engaged in the marketing of women's apparel products. The effective date of the Company's purchase is scheduled for January 1999. No results of operations for Jerell Inc. are included with the Company's results for the period ending September 30, 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Public Accountants, Financial Statements and Notes to Financial Statements follow. 18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Haggar Corp.: We have audited the accompanying consolidated balance sheets of Haggar Corp. (a Nevada corporation) and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1998. 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 Haggar Corp. and subsidiaries as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas October 29, 1998 19 HAGGAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended September 30, ----------------------------------- 1998 1997 1996 --------- -------- --------- Net sales $ 402,475 $406,030 $ 437,942 Cost of goods sold 277,713 287,434 315,351 Restructuring charge - - 8,680 --------- -------- --------- Gross profit 124,762 118,596 113,911 Selling, general and administrative expenses (112,296) (113,061) (113,037) Restructuring charge - - (5,320) Gain from storm damage - - 1,140 Royalty income 2,878 2,076 2,630 --------- -------- --------- Operating income (loss) 15,344 7,611 (676) Other income, net 1,094 1,954 1,563 Interest expense (3,452) (3,525) (4,293) --------- -------- --------- Income (loss) from operations before provision (benefit) for income taxes 12,986 6,040 (3,406) Provision (benefit) for income taxes 4,962 2,297 (986) --------- -------- --------- Net income (loss) $ 8,024 $ 3,743 $ (2,420) --------- -------- --------- --------- -------- --------- Net income (loss) per share on a basic and diluted basis $ 0.94 $ 0.44 $ (0.28) --------- -------- --------- --------- -------- --------- Weighted average number of common shares and common share equivalents outstanding on a basic and diluted basis. 8,545 8,555 8,552 --------- -------- --------- --------- -------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 20 HAGGAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, --------------------- 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 20,280 $ 2,176 Accounts receivable, net 63,613 70,969 Inventories 92,244 105,242 Deferred tax benefit 7,623 10,073 Other current assets 1,557 3,833 -------- -------- Total current assets 185,317 192,293 Property, plant, and equipment, net 64,424 68,758 Other assets 2,234 1,002 -------- -------- Total assets $251,975 $262,053 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 22,995 $ 31,871 Accrued liabilities 20,299 22,747 Accrued wages and other employee compensation 6,398 3,481 Accrued workers' compensation 4,564 4,948 Short-term borrowings 3,453 2,362 Current portion of long-term debt 3,854 330 -------- -------- Total current liabilities 61,563 65,739 Long-term debt 24,937 31,800 -------- -------- Total liabilities 86,500 97,539 Commitments and contingencies Stockholders' equity: Commonstock - par value $0.10 per share; 25,000,000 shares authorized and 8,576,998 and 8,560,636 shares issued in 1998 and 1997, respectively 857 856 Additional paid-in capital 41,860 41,641 Retained earnings 128,329 122,018 -------- -------- 171,046 164,515 Less - Treasury stock, 525,254 and 9,254 shares at cost in 1998 and 1997, respectively (5,571) (1) -------- -------- Total stockholders' equity 165,475 164,514 -------- -------- Total liabilities and stockholders' equity $251,975 $262,053 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 21 HAGGAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Common Stock Unrealized ---------------- Additional Loss on Total $0.10 Par Value Paid-In Marketable Retained Treasury Stockholders' Shares $ Capital Securities Earnings Stock Equity --------- ---- ---------- ---------- -------- -------- ------------- BALANCE, September 30, 1995 8,560,636 $856 $41,641 $(206) $124,116 $ (1) $166,406 Common stock dividends declared ($0.20 per share) - - - - (1,710) - (1,710) Recovery of unrealized loss on marketable securities - - - 206 - - 206 Net income - - - - (2,420) - (2,420) --------- ---- ------- ----- -------- ------- -------- BALANCE, September 30, 1996 8,560,636 856 41,641 - 119,986 (1) 162,482 Common stock dividends declared ($0.20 per share) - - - - (1,711) - (1,711) Net income - - - - 3,743 - 3,743 --------- ---- ------- ----- -------- ------- -------- BALANCE, September 30, 1997 8,560,636 856 41,641 - 122,018 (1) 164,514 Common stock Issuance 16,362 1 219 - - - 220 Common stock dividends declared ($0.20 per share) - - - - (1,713) - (1,713) Purchase of Treasury Stock - - - - - (5,570) (5,570) Net income - - - - 8,024 - 8,024 --------- ---- ------- ----- -------- ------- -------- BALANCE, September 30, 1998 8,576,998 $857 $41,860 $ - $128,329 $(5,571) $165,475 --------- ---- ------- ----- -------- ------- -------- --------- ---- ------- ----- -------- ------- --------
The accompanying notes are an integral part of these consolidated financial statements. 22 HAGGAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended September 30, ---------------------------------- 1998 1997 1996 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 8,024 $ 3,743 $ (2,420) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 12,857 11,447 6,839 Gain on disposal of property, plant, and equipment (205) (480) (1,608) Net loss on sale of marketable securities - - 542 Changes in assets and liabilities - Accounts receivable, net 7,356 3,587 (7,589) Inventories, net 12,998 11,114 22,551 Insurance receivable - - 23,890 Current deferred tax benefit 2,450 2,337 288 Other current assets 2,276 (187) 148 Accounts payable (8,876) 3,883 (3,971) Accrued liabilities (2,448) (11,115) 8,118 Accrued wages and other employee compensation 2,917 34 104 Accrued workers' compensation expense (384) (947) (1,338) -------- -------- --------- Net cash provided by operating activities 36,965 23,416 45,554 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant, and equipment, net (10,179) (14,989) (16,070) Proceeds from sale of property, plant, and equipment, net 1,861 1,085 1,695 Proceeds from the sale of marketable securities - - 5,018 (Increase) decrease in other assets (1,232) 1,599 2,234 -------- -------- --------- Net cash used in investing activities (9,550) (12,305) (7,123) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings 1,091 295 432 Purchases of treasury stock at cost (5,570) - - Proceeds from issuance of long-term debt 18,000 61,000 422,000 Proceeds from issuance of common stock 220 - - Payments on long-term debt (21,339) (71,463) (458,439) Payments of cash dividends (1,713) (1,711) (1,710) -------- -------- --------- Net cash used in financing activities (9,311) (11,879) (37,717) -------- -------- --------- Increase (decrease) in cash and cash equivalents 18,104 (768) 714 Cash and cash equivalents, beginning of period 2,176 2,944 2,230 -------- -------- --------- Cash and cash equivalents, end of period $ 20,280 $ 2,176 $ 2,944 -------- -------- --------- -------- -------- --------- Supplemental disclosure of cash flow information Cash paid (received) for: Interest, net of amounts capitalized $ 3,554 $ 3,806 $ 3,350 Income taxes, net $ (2,221) $ (589) $ (1,359)
The accompanying notes are an integral part of these consolidated financial statements. 23 HAGGAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998, 1997 AND 1996 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Haggar Corp. and subsidiaries (the "Company") design, manufacture, import, and market men's apparel products including pants, shorts, suits, sportcoats, and shirts. The Company's products are sold to retail stores throughout the United States including major department stores, specialty stores and mass market retailers. The Company offers its premium apparel products under the Haggar-Registered Trademark- brand name, and also offers a more moderately priced line of products through its mass-market retailer division, The Horizon Group. In addition, the Company offers retailers quality products bearing the retailer's own label. The Company's Haggar Direct, Inc. subsidiary was formed in 1995 for the purpose of developing and operating retail stores located in retail outlet malls throughout the United States. The Company's foreign operations are conducted through Haggar Apparel, Limited, which markets the Company's branded products in Europe. Additionally, the Company derives royalty income from the use of its Haggar-Registered Trademark- trademarks by manufacturers of various products that the Company does not produce. The Company is headquartered in Dallas, Texas, with manufacturing facilities in Texas, Mexico and the Dominican Republic. The consolidated financial statements include the accounts of Haggar Corp., Haggar Clothing Co. ("Clothing Co."), which is the main operating subsidiary, Haggar Direct, Inc., Haggar Apparel, Limited, and all other subsidiaries of Clothing Co. All significant intercompany transactions and balances have been eliminated in consolidation. The accompanying consolidated financial statements reflect the application of certain accounting policies as described below and in the remaining notes. PRIOR YEAR RECLASSIFICATION Certain items in the prior year presentation have been reclassified to reflect the current year presentation. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. ALLOWANCE FOR DOUBTFUL ACCOUNTS Accounts receivable are net of allowances for doubtful accounts of $906,000 and $931,000 at September 30, 1998 and 1997, respectively. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk," consist primarily of trade accounts receivable. The Company's customers are not concentrated in any specific geographic region but are concentrated in the apparel industry. One customer accounted for 27.9%, 27.3% and 26.3% of the Company's net sales during the year ended September 30, 1998, 1997 and 1996, respectively. The next largest customer account for 10.4%, 7.1% and 6.0% of the Company's net sales during 1998, 1997 and 1996, respectively. No other customer accounted for more than 10% of consolidated revenues. The loss of the business of one or more of the Company's largest customers could have a material adverse effect on the Company's results of operations. The Company performs ongoing credit evaluations of its customers' financial condition. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. 24 INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market, and consisted of the following at September 30, 1998 and 1997 (in thousands):
1998 1997 ------------- ------------- Piece goods $ 9,438 $ 17,455 Trimming and supplies 2,669 3,841 Work-in-process 11,390 16,162 Finished garments 68,747 67,784 ------------- ------------- $ 92,244 $ 105,242 ------------- ------------- ------------- -------------
Work-in-process and finished garments inventories consisted of materials, labor and manufacturing overhead. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment, stated at cost, consisted of the following at September 30, 1998 and 1997 (in thousands):
1998 1997 ------------- ------------- Land $ 2,923 $ 3,428 Buildings 28,855 29,880 Furniture, fixtures and equipment 77,504 76,931 Leasehold improvements 19,504 13,143 Construction in progress 2,154 3,587 ------------- ------------- Total 130,940 126,969 Less: Accumulated depreciation and amortization (66,516) (58,211) ------------- ------------- Net property, plant, and equipment $ 64,424 $ 68,758 ------------- ------------- ------------- -------------
DEPRECIATION AND AMORTIZATION The Company provides for depreciation and amortization using accelerated and straight-line methods by charges to operations in amounts, which allocate the cost of the assets over their estimated useful lives, as follows:
Estimated Asset Classification Useful Life -------------------- ----------- Buildings 15-40 Furniture, fixtures, and equipment 3-7 Leasehold improvements Life of Lease
25 FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosure about Fair Value of Financial Instruments," requires the disclosure of the fair market value of off- and on-balance sheet financial instruments. The carrying value of all financial instruments, including long-term debt and cash and temporary cash investments, approximates their fair value at year-end. Realized gains and losses on investments in preferred stocks are determined on a specific identification basis. During the second quarter of fiscal 1996, the Company sold all of its investments in preferred stock and equity securities. The Company had no realized gains or losses in fiscal 1997 and the Company recognized realized losses of $542,000 in 1996. The net effect of these gains and losses is reflected in Other income, net in the accompanying Consolidated Statements of Operations. MINORITY INTEREST In 1993, the Company established a subsidiary, Haggar UK, for the purpose of expanding its operations in the United Kingdom. The Company held a 51% interest in the subsidiary and its partner owned the remaining 49% interest. In 1997, the Company dissolved the joint venture with its partner, Coats Viyella, Plc., and the Company received $1,050,000 from Coats Viyella, Plc. for payment of historical losses. The payment is recorded in other income, net. In conjunction with the dissolution of the joint venture, the Company obtained the remaining 49% interest in the subsidiary's assets and liabilities. The Company's Haggar Apparel, Limited subsidiary maintains a $4.2 million line of credit with a bank in the United Kingdom to fund operating activities. The subsidiary had approximately $3.5 million and $2.4 million outstanding as of September 30, 1998 and 1997 respectively. The line of credit is collateralized by a $4.2 million letter of credit from the Company and is payable upon demand. Interest under the line of credit is payable at 1% above the bank's base rate. REVENUE RECOGNITION Revenue is recognized upon product shipment to customers. ADVERTISING Production costs of commercials and programming are charged to operations in the year first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the year incurred. For fiscal years 1998, 1997, and 1996, total advertising expense was $23.1 million, $22.9 million and $21.5 million, respectively. 26 OTHER INCOME Other income consisted of the following for the years ended September 30, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 -------- -------- -------- Gain (loss) on sale of assets, net $ 205 $ 480 $ 1,608 Interest income 495 218 61 Dissolution of Haggar UK joint venture - 1,050 - Investment income (loss), net - - (436) Other 394 206 330 -------- -------- -------- Total other income, net $ 1,094 $ 1,954 $ 1,563 -------- -------- -------- -------- -------- --------
NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT SFAS No. 128, "Earnings Per Share," issued in February 1997, mandates a change in the methodology for calculating earnings per share. The Company implemented the provisions of SFAS No. 128 in the first quarter of fiscal 1998. All periods prior to October 1, 1997, have been restated to conform with the standards of SFAS No. 128. Basic earnings per share excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period and the number of equivalent shares assumed outstanding under the Company's stock-based compensation plans. Options to purchase 214,999 common shares at prices ranging from $15.00 to $23.00 were not dilutive and were outstanding for the twelve months ended September 30, 1998. Options to purchase 243,999 common shares at prices ranging from $16.50 to $37.88 were not dilutive and were outstanding for the twelve months ended September 30, 1997. There were 960,468 options to purchase common shares at prices ranging from $16.50 to $37.88 that were not dilutive and were outstanding for the twelve months ended September 30, 1996. These shares for the aforementioned periods were not included in the diluted earnings per share calculation because the options' exercise prices were greater than the average market price of the common shares. Basic and diluted earnings per share were calculated as follows (in thousands, except per share data):
Twelve Months Ended September 30, ---------------------------- 1998 1997 1996 ------- ------ ------- Net income to common stockholders $ 8,024 $3,743 $(2,420) Weighted average common shares outstanding 8,530 8,551 8,552 Share equivalents, due to stock options 15 4 - ------- ------ ------- 8,545 8,555 8,552 ------- ------ ------- ------- ------ ------- Net Income per share - Basic and Diluted $ 0.94 $ 0.44 $ (0.28) ------- ------ ------- ------- ------ -------
27 USE OF ESTIMATES 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 and 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. NEW ACCOUNTING STANDARDS The Company will adopt the provisions of SFAS No. 131, "Disclosures about Segments of An Enterprise and Related Information," in fiscal 1999. SFAS No. 131 requires the Company to disclose certain information about segments whose operating results are regularly reviewed by the Company's chief operating decision maker and for which discrete financial information is available. Certain qualitative and quantitative aggregation criteria are used to determine which segments should be reported. The Company will adopt the provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" in the first quarter of fiscal 1999. SFAS No. 132 requires the Company to standardize certain disclosures and include additional information on changes in benefit obligations and fair values of plan assets. Had the Company adopted SFAS No. 132 this year, there would have been no material affect to the financial statements for the years ended September 30, 1998, 1997, and 1996. In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued to establish accounting and reporting standards for derivative instruments and hedging activities. The Company does not utilize derivative instruments nor does it perform hedging activities as defined in the new pronouncement. The Company will adopt this new accounting standard in fiscal 2000. Had the Company adopted SFAS No. 133 this year, there would have been no material affect to the financial statements for the years ended September 30, 1998, 1997, and 1996. 28 2. INCOME TAXES The components of the provision (benefit) for income taxes are as follows for the years ended September 30, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 --------- --------- -------- Current federal income tax $ 2,648 $ (116) $ (347) Deferred federal income tax 1,905 2,366 (595) State income tax 409 47 (44) --------- --------- -------- Provision (benefit) for income taxes $ 4,962 $ 2,297 $ (986) --------- --------- -------- --------- --------- --------
Temporary differences and carryforwards, which give rise to a significant portion of net deferred income tax, are as follows (in thousands):
1998 1997 --------- --------- Deferred income tax assets: Workers' compensation accrual $ 1,597 $ 1,731 Inventory cost capitalization and valuation 4,856 5,460 Allowances for accounts receivable 317 - Health and life insurance accrual 354 947 Reserve for reorganization 759 2,643 Other 985 1,107 --------- --------- 8,868 11,888 Less - Valuation allowance (250) (250) --------- --------- 8,618 11,638 Deferred income tax liability: Property plant, and equipment, net (1,585) (2,202) Prepaid insurance (155) (561) --------- --------- Net deferred income tax asset 6,878 8,875 Less - Current deferred tax benefit 7,623 10,073 --------- --------- Long-term deferred tax (liability) benefit $ (745) $ (1,198) --------- --------- --------- ---------
The provision (benefit) for income taxes was different than the amount computed using the statutory federal income tax rate for the reasons set forth in the following table (in thousands):
1998 1997 1996 --------- --------- -------- Tax computed at the statutory rate $ 4,415 $ 2,053 $ (1,158) State income taxes 409 47 (44) Tax credits utilized (260) (186) (96) Other 398 383 312 --------- --------- -------- $ 4,962 $ 2,297 $ (986) --------- --------- -------- --------- --------- --------
29 3. LONG-TERM DEBT Long-term debt consisted of the following at September 30, 1998 and 1997 (in thousands):
1998 1997 ---------- ---------- Borrowings under revolving credit line $ - $ 3,000 Industrial Development Revenue Bonds with interest at a rate equal to that of high-quality, short-term, tax-exempt obligations, as defined (3.85% at September 30, 1998), payable in annual installments of $100 to $200, and a final payment of $2,000 in 2005, secured by certain buildings and equipment 2,700 2,800 Allstate notes 25,000 25,000 Other 1,091 1,330 ---------- ---------- Total Debt 28,791 32,130 Less - Current portion 3,854 330 ---------- ---------- Long-Term Debt $ 24,937 $ 31,800 ---------- ---------- ---------- ----------
Net assets mortgaged or subject to lien under the Industrial Development Revenue Bonds totaled approximately $1,100,000 at September 30, 1998. As of September 30, 1998, the Company had a revolving credit line agreement (the "Agreement") with certain banks subject to certain borrowing base limitations. During 1998, the Agreement was amended to extend the maturity date to June 30, 2001. The Company had additional available borrowing capacity of approximately $89,000,000 under this Agreement at September 30, 1998. The Company incurred approximately $171,800 in commitment fees related to the available borrowing capacity during the year ended September 30, 1998. The interest rates for the year ended September 30, 1998, ranged from 5.94% to 8.25%. The facility will mature June 30, 2001, unless renewed and is unsecured. The Agreement prohibits the company from pledging its accounts receivables and inventories and contains limitations on incurring additional indebtedness and requires the maintenance of certain financial ratios. In addition, the Agreement requires the Company and Clothing Co., to maintain tangible net worth, as defined, in excess of $149,000,000 and $55,000,000, respectively, as of September 30, 1998. For fiscal years after 1998, the Agreement requires the Company to maintain a tangible net worth in excess of the tangible net worth of the preceding fiscal year plus 50% of the Company's consolidated net income. The Agreement prohibits the payment of any dividend if a default exists after giving effect to such a dividend. In 1995, the Company completed the sale and issuance of $25,000,000 in senior notes. Proceeds from the notes were used to partially fund the construction of the Company's new Customer Service Center ("CSC"). Significant terms of the senior notes include a maturity date of ten years from the date of issuance, interest payable semi-annually and annual principal payments beginning in the fourth year. The interest rate on the senior notes is fixed at 8.49%. The terms and conditions of the note purchase agreement governing the senior notes include restriction on the sale of assets, limitations on additional indebtedness, and the maintenance of certain net worth requirements. 30 Principal payments due during the next five years on debt are as follows (in thousands):
Years Ending September 30, Amount -------------------------- -------- 1999 $ 3,854 2000 3,870 2001 3,888 2002 3,907 2003 3,929 Thereafter 9,343 -------- $ 28,791 -------- --------
4. LEASES AND OTHER COMMITMENTS OPERATING LEASES The Company leases certain of its manufacturing, computer and automotive equipment under agreements that expire at various dates through 2010 and contain options to renew at various terms. The following is a schedule of future minimum rental payments required under operating leases at September 30, 1998 (in thousands):
Years Ending September 30, Amount -------------------------- -------- 1999 $ 5,586 2000 4,497 2001 2,995 2002 1,226 2003 585 Thereafter 1,005 -------- $ 15,894 -------- --------
Rental expense was $7,802,000, $6,910,000 and $6,410,000 in the years ended September 30, 1998, 1997 and 1996, respectively. COMMITMENTS AND CONTINGENCIES The Company had approximately $17,397,363 in outstanding letters of credit at September 30, 1998, primarily in connection with certain self-insurance agreements and certain inventory purchases of the Company. The Company is involved in various claims and lawsuits incidental to its business. In the opinion of management, these claims and suits in the aggregate will not have a material adverse effect on the Company's financial position or the results of operations for future periods. 5. RELATED PARTY TRANSACTIONS The Company paid $136,000 to certain stockholders primarily for rent on a building in the year ended September 30, 1996. No related party payments were made in fiscal years 1997 and 1998. 31 6. RESTRUCTURING CHARGES In 1996, the Company decided to restructure its worldwide manufacturing capacity, including consolidation of its three Texas sewing operations into one facility. The cost of this restructure, recorded in the year ended September 30, 1996, was estimated to be $14,000,000, of which $8,680,000 was included in cost of sales and consisted principally of severance costs for manufacturing employees and $5,320,000 was included in operating expenses related principally to costs to resolve various legal issues in connection with the restructuring and prior plant closings as well as severance for non-manufacturing employees. The consolidation of the three Texas sewing operations was completed in 1997. During 1998 and 1997, the Company paid approximately $2.2 million, primarily legal and other professional fees and $88 million, primarily severance and professional fees related to the restructuring. The remaining obligations are currently recorded in accrued liabilities and are expected to be substantially paid by September 30, 1999. The amounts disclosed represent management's best estimate of the costs to be incurred. The actual amounts incurred could vary from these estimates if future developments differ from the underlying assumptions used by management in developing the accrual. 7. EMPLOYEE BENEFIT PLANS The Company provides a Profit Sharing and Savings Plan (the "Plan") to substantially all eligible employees of the Company, as defined. Discretionary profit sharing contributions, made by the Company, are allocated to eligible plan participants based on their respective compensation. The profit sharing contributions vest according to a defined vesting schedule. Full vesting occurs at the end of seven years of service or upon retirement, death, or disability of plan participants. Participants may contribute from 1% to 10% of their compensation to the Plan under Internal Revenue Code Section 401(k) ("401(k) Contributions"). The Company may make discretionary matching contributions in an amount equal to 50% of each participant's 401(k) Contribution up to 6% of the participant's contributions. Participant 401(k) Contributions are 100% vest at the date they are contributed. The Company's matching 401(k) Contributions vest over a period of three years. The Company contributed approximately $1,233,000, $800,000 and $700,000 for each of the years ended September 30, 1998, 1997 and 1996, respectively. The Company also has an Employee Benefits Trust (the "Trust") to provide eligible employees of the Company, as defined, with certain welfare benefits. Trust contributions are made by the Company as defined by the trust agreement. The Company contributed approximately $5,397,000, $7,785,000 and $10,378,000 to the Trust for the years ended September 30, 1998, 1997 and 1996, respectively. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," sets standards of financial accounting and reporting for an employer that provides postretirement benefits other than pensions to its employees. Although the Company provides welfare benefits to a limited number of eligible retired employees, as defined, such benefits have been insignificant for the years ended September 30, 1998, 1997 and 1996. Additionally, such benefits are expected to be insignificant in future years. The Company has a noncompensatory employee stock purchase plan to provide employees with a convenient way to acquire Company stock through payroll deductions. Substantially all employees meeting limited employment qualifications may participate in the stock purchase plan. 32 LONG-TERM INCENTIVE PLAN The Company has a long-term incentive plan which authorizes the grant of stock options to key employees. The options vest over a period of three to five years and expire ten years from the date of grant. The options are issued at an exercise price not less than the fair market value of the Company's common stock on the date of the grant. The long-term incentive plan allows for 1,300,000 shares to be granted. The following table summarizes the changes in common stock options in fiscal 1998, 1997 and 1996:
Weighted Average Shares Exercise Price --------- ---------------- Options outstanding as of September 30, 1995 864,468 $18.64 Options granted 109,000 16.26 Options canceled (7,000) 17.50 ------ ----- Options outstanding as of September 30, 1996 966,468 18.38 Options granted 514,938 13.51 Options canceled (716,469) 18.15 --------- ------ Options outstanding as of September 30, 1997 764,937 15.32 Options granted 742,231 12.72 Options exercised (16,362) 13.50 Options canceled (267,986) 17.68 --------- ------ Options outstanding as of September 30, 1998 1,222,820 Options available for grant as of September 30, 1998 77,180 Options exercisable as of September 30, 1998 577,344 $13.72
The range of option prices for the options outstanding as of September 30, 1998, was $11.00 to $23.00 with a weighted average remaining contractual life of approximately 6 years. The number of options exercisable in fiscal 1997 and 1996 were 196,932 and 466,770. The weighted average exercise price of these exercisable options was $18.73 and $18.16, for 1997 and 1996. In fiscal 1998, the Company canceled 205,000 options and reissued 167,731 options in place of the original options at a reduced option price of $12.88, which was the fair market value on the date of reissuance. In fiscal 1997, the Company canceled 521,134 options and reissued 423,938 options in place of the original options at a reduced option price of $13.50, which was the fair market value on the date of the reissuance. The Company accounts for the stock option plans under Accounting Principles Board Opinion No. 25, under which no compensation has been recognized. Had compensation costs for these options been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share amounts):
1998 1997 1996 ------ ------ -------- Net Income: As reported $8,024 $3,743 ($2,420) Pro Forma $6,318 $3,098 ($2,575) Primary EPS: As reported $ 0.94 $ 0.44 ($0.28) Pro Forma $ 0.74 $ 0.36 ($0.30)
33 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant of $5.96, $4.64 and $6.94 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 6.0%, 6.0% and 6.4%, respectively; expected lives of five years; expected volatility of 44.%; expected dividend rate of $0.20. 8. SUBSEQUENT EVENTS (UNAUDITED) HURRICANE GEORGES On September 22, 1998, Hurricane Georges damaged two of the Company's leased manufacturing facilities. Both facilities are insured for damage to the building, equipment, inventory, and for business interruption. Although the total assessment of damage has not been completed, the range of loss is estimated at $4.0 to $6.0 million, substantially all of which is expected to be covered by insurance. Insurance proceeds are expected to be used to repair the roofs, fix the equipment, and cover any inventory loss. The deductibles for the insurance claims are not significant. STOCK REPURCHASE In August 1998, the Board of Directors authorized the repurchase of up to two million shares of the Company's common stock. As of September 30, 1998, 516,000 shares of common stock had been purchased for approximately $5,570,000 and classified as treasury stock using the treasury stock cost method. Subsequent to September 30, 1998, the Company has purchased an additional 413,000 shares for approximately $4,350,000. ACQUISITION The Company has signed a definitive agreement to purchase all the common stock of Jerell Inc. for $37.3 million. Jerell Inc. (a Texas Corporation) is primarily engaged in the manufacturing of women's apparel products. The effective date of the Company's purchase is scheduled for January 1999. No results of operations for Jerell Inc. are included with the Company's results for the period ending September 30, 1998. 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Haggar Corp.: We have audited in accordance with generally accepted auditing standards the consolidated financial statements of Haggar Corp. (a Nevada corporation) and subsidiaries included in this Form 10-K and have issued our report thereon dated October 29, 1998. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedules I and II are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas October 29, 1998 35 SCHEDULE I Page 1 of 2 HAGGAR CORP. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAGGAR CORP. (PARENT COMPANY) BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS)
1998 1997 ---- ---- ASSETS: Investment in subsidiaries $ 66,772 $ 64,018 Note receivable from Haggar Clothing Co. 117,769 109,200 -------- -------- Total Assets $184,541 $173,218 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Dividend payable and other current liabilities $ 4,314 $ 6,359 Due to subsidiaries 14,752 2,345 -------- -------- Total current liabilities 19,066 8,704 STOCKHOLDERS' EQUITY: Common stock 857 856 Additional paid-in capital 41,860 41,641 Retained earnings 128,329 122,018 Less - treasury stock (5,571) (1) -------- -------- Total stockholders' equity 165,475 164,514 -------- -------- Total Liabilities and Stockholders Equity $184,541 $173,218 -------- -------- -------- --------
36 SCHEDULE I Page 2 of 2 HAGGAR CORP. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HAGGAR CORP. (PARENT COMPANY) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (IN THOUSANDS)
1998 1997 1996 ------- ------- ------- Equity in earnings of subsidiaries $ 2,755 $(1,526) $(7,296) Interest income 8,568 8,568 7,928 Income tax expense (3,299) (3,299) (3,052) ------- ------- ------- Net income (loss) $ 8,024 $ 3,743 $(2,420) ------- ------- ------- ------- ------- -------
37 SCHEDULE II HAGGAR CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AS OF SEPTEMBER 30, 1998, 1997 AND 1996 (IN THOUSANDS)
Balance at Charges to Balance at Beginning of Costs and Deductions End of Period Expenses Payments (1) Period ------------ ---------- -------- ---------- ---------- September 30, 1998: Allowance for doubtful accounts $ 931 $ (203) $ - $178 $ 906 Restructuring Charge - 1996 5,200 - (2,200) - 3,000 SFAS No. 109 valuation allowance 250 - - - 250 September 30, 1997: Allowance for doubtful accounts 900 (380) - 411 931 Restructuring Charge - 1996 14,000 - (8,800) - 5,200 SFAS No. 109 valuation allowance 250 - - - 250 September 30, 1996 Allowance for doubtful accounts 1,201 (686) - 385 900 Restructuring Charge - 1996 - 14,000 - - 14,000 SFAS No.109 valuation allowance 250 - - - 250
(1) Amounts deemed uncollectible and recoveries of previously reserved amounts. 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Part III, Item 10 is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by Part III, Item 11 is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Part III, Item 12 is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Part III, Item 13 is incorporated by reference from the Registrant's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS Pages Report of Independent Public Accountants. 19 Consolidated Statements of Operations, Years Ended September 30, 1998, 1997 and 1996. 20 Consolidated Balance Sheets, at September 30, 1998 and 1997. 21 Consolidated Statements of Stockholders' Equity, Years Ended September 30, 1998, 1997 and 1996. 22 Consolidated Statements of Cash Flows, Years Ended September 30, 1998, 1997, and 1996. 23 Notes to Consolidated Financial Statements. 24-34 (2) FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants. 35 Schedule I - Condensed Financial Information of Registrant - Haggar Corp. (Parent Company). 36-37 Schedule II - Valuation and Qualifying Accounts. 38 Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits 3(a) Third Amended and Fully Restated Articles of Incorporation. (Incorporated by reference from Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 [File No. 0-20850].) 3(b) Bylaws of the Company, as amended. (Incorporated by reference from Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 [File No. 0-20850].) 4(a) Specimen Certificate evidencing Common Stock (and Preferred Stock Purchase Right). (Incorporated by reference from Exhibit 4(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 [File No. 0-20850].) 4(b) Form of Stockholders' Rights Agreement. (Incorporated by reference from Exhibit 4(b) to the Company's Pre-Effective Amendment No. 1 to Form S-1, filed with the Security and Exchange Commission on November 16, 1992 [Registration No. 33-52704].) 4(c) Note Purchase Agreement dated December 22, 1994, among Haggar Apparel Company, Haggar Corp. and Allstate Life Insurance Company. (Incorporated by reference from Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 [File No. 0-20850].) 40 4(d) Note No. 1 dated December 22, 1994, in original principal amount of $10,500,000 executed by Haggar Apparel Company, as maker, and Haggar Corp., as guarantor, payable to Allstate Life Insurance Company. (Incorporated by reference from Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 [File No. 0-20850].) 4(e) Note No. 2 dated December 22, 1994, in original principal amount of $6,500,000 executed by Haggar Apparel Company, as maker, and Haggar Corp., as guarantor, payable to Allstate Life Insurance Company. (Incorporated by reference from Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 [File No. 0-20850].) 4(f) Note No. 3 dated December 22, 1994, in original principal amount of $4,800,000 executed by Haggar Apparel Company, as maker, and Haggar Corp., as guarantor, payable to Allstate Life Insurance Company. (Incorporated by reference from Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 [File No. 0-20850].) 4(g) Note No. 4 dated December 22, 1994, in original principal amount of $2,200,000 executed by Haggar Apparel Company, as maker, and Haggar Corp., as guarantor, payable to Allstate Life Insurance Company. (Incorporated by reference from Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 [File No. 0-20850].) 4(h) Note No. 5 dated December 22, 1994, in original principal amount of $1,000,000 executed by Haggar Apparel Company, as maker, and Haggar Corp., as guarantor, payable to Allstate Life Insurance Company. (Incorporated by reference from Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1994 [File No. 0-20850].) 10(a) 1992 Long Term Incentive Plan. (Incorporated by reference from Exhibit 10(a) to the Company's Pre-Effective Amendment No. 1 to Form S-1, filed with the Security and Exchange Commission on November 16, 1992 [Registration No. 33-52704].) 10(b) Management Incentive Plan. (Incorporated by reference from Exhibit 10(b) to the Company's Registration Statement on Form S-1, filed with the Security and Exchange Commission on October 1, 1992 [Registration No. 33-52704].) 10(c) First Amendment to the 1992 Long-term Incentive Plan. (Incorporated by reference from Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 [File No. 0-20850].) 10(d) First Amended and Restated Credit Agreement between the Company and Texas Commerce Bank, as agent for a bank syndicate. (Incorporated by reference from Exhibit 10(k) to the Company's Annual Report on Form 10-K for the year ended September 30, 1996 [File No. 0-20850].) 10(e) First Amendment to First Amended and Restated Credit Agreement dated December 31, 1996, between the Company and Texas Commerce Bank, as agent for a bank syndicate. (Incorporated by reference from Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 [File No. 0-20850].) 41 10(f) Second Amendment to First Amended and Restated Credit Agreement dated June 30, 1997, between the Company and Texas Commerce Bank, as agent for a bank syndicate. (Incorporated by reference from Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 [File No. 0-20850].) 10(g) Third Amendment to First Amended and Restated Credit Agreement dated December 15, 1997, between the Company and Texas Commerce Bank, as agent for a bank syndicate. (Incorporated by reference from Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended September 30, 1997 [File No. 0-20850].) 10(h) Fourth Amendment to First Amended and Restated Credit Agreement dated June 30, 1998, between the company and Chase Bank of Texas, as agent for a bank syndicate. (Incorporated by reference from Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. [File No. 0-20850]) 21 Significant subsidiary of the company. 23 Consent of independent public accountants. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedule for the period ended September 30, 1997.
(b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed with the Commission during the fourth quarter of fiscal 1998. 42 THIS PAGE INTENTIONALLY LEFT BLANK. 43 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. HAGGAR CORP. (Registrant) By: /s/ DAVID M. TEHLE ------------------------------------------------ David M. Tehle, December 18, 1998 (SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER) 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 and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ J. M. HAGGAR, III Chairman and December 18, 1998 - -------------------------------- Chief Executive Officer J. M. Haggar, III (Principal Executive Officer) /s/ FRANK D. BRACKEN Director, President and December 18, 1998 - -------------------------------- Chief Operating Officer Frank D. Bracken /s/ DAVID M. TEHLE Senior Vice President December 18, 1998 - -------------------------------- and Chief Financial Officer (Principal David M. Tehle Financial and Accounting Officer) /s/ NORMAN E. BRINKER Director December 18, 1998 - -------------------------------- Norman E. Brinker /s/ RICHARD W. HEATH Director December 18, 1998 - -------------------------------- Richard W. Heath
44 HAGGAR CORP. AND SUBSIDIARIES INDEX TO ATTACHED EXHIBITS EXHIBIT 21 Significant Subsidiary of the Company 23 Consent of Independent Public Accountants 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule for the period ended September 30, 1997 45 EX-21 2 EXHIBIT 21 EXHIBIT 21 SIGNIFICANT SUBSIDIARY OF THE COMPANY NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION ------------------ ----------------------------- Haggar Clothing Company Nevada 46 EX-23 3 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8 File No. 33-75676. Arthur Andersen LLP Dallas, Texas December 18, 1998 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILE AS PART OF SUCH FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000892533 HAGGAR CORP 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 20,280 0 64,519 906 92,244 185,317 130,939 66,515 251,975 61,563 0 0 0 857 164,618 251,975 402,475 402,475 277,713 109,418 (1,094) 0 3,452 12,986 4,962 8,024 0 0 0 8,024 .94 .94 THE EARNINGS PER SHARE INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128, AND BASIC AND DILUTED EARNINGS PER SHARE HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY DILUTED RESPECTIVELY.
EX-27.2 5 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1997 OCT-01-1996 SEP-30-1997 2,176 0 71,900 931 105,242 192,293 126,969 58,211 262,053 65,739 0 0 0 856 163,658 262,053 406,030 406,030 287,434 110,985 (1,954) 0 3,525 6,040 2,297 3,743 0 0 0 3,743 .44 .44 THE EARNINGS PER SHARE INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO. 128, AND BASIC AND DILUTED EARNINGS PER SHARE HAVE BEEN ENTERED IN PLACE OF PRIMARY AND FULLY DILUTED RESPECTIVELY.
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