-----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, K83FMnsuuVM3zu9Y0LhZQgyAoXvKqShVob5hY9LErxk0xLuPjRSjffFOs/QQWvXL T0V33UAPWk6MZA6udjSfJg== 0000912057-99-009821.txt : 19991220 0000912057-99-009821.hdr.sgml : 19991220 ACCESSION NUMBER: 0000912057-99-009821 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991217 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: 99776722 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 FORM 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, 1999 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 1, 1999 there were 7,018,393 shares of common stock outstanding. The aggregate market value of the 6,470,375 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 $79,262,094. 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 and women's apparel products including pants, shorts, suits, sportcoats, shirts, dresses, skirts, and vests. Products are offered in a wide variety of styles, fabrics, colors and sizes. The Company's products are sold primarily through approximately 10,000 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. On January 13, 1999, the Company, through its main operating subsidiary, Haggar Clothing Co., acquired Jerell, Inc. ("Jerell"), a company engaged in the design and marketing of women's apparel. The Company offers its women's apparel products under several trademarks. The Company also operates retail stores located in outlet malls throughout the United States. As of September 30, 1999, the Company had opened 63 such stores which market first quality Company products to the general public. These stores also serve as a retail-marketing laboratory for the Company. In addition, Jerell operates 3 retail stores offering second quality products to the public. 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 67.4% of total apparel sales in fiscal 1999. 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 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 Black Label-TM- are fashionable lines of coordinated coats, vests, pants and shirts designed to meet 3 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 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. JERELL. The Company's women's wear division, Jerell, markets women's sportswear including dresses, skirts, pants, and vests. These product lines are primarily sold to major department stores, including Dillards. 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- and Black Label-TM-. In 1999, the Company introduced its Stonewashed 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 55.4%, 57.4%, and 54.0% of net sales during the fiscal years ending September 30, 1999, 1998 and 1997, respectively. The Company's largest current customer, J.C. Penney Company, Inc., accounted for 24.8%, 27.9%, and 27.3% of the Company's net sales during the fiscal years ending September 30, 1999, 1998 and 1997, respectively. The Company's second largest current customer, Kohl's Department Stores, Inc., accounted for 11.2%, 10.4% and 7.1% of the Company's net sales during the fiscal years ending September 30, 1999, 1998, and 1997, 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 larger 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. 4 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 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, the Company believes its advertising campaigns promote 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 1999, approximately 9.3% 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 23.4% of the Company's foreign-made products were manufactured by facilities owned by the Company in Mexico and the Dominican Republic, with the remaining 76.6% 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 57% of the Company's fabric and trim requirements during the fiscal year ended September 30, 1999. The Company has no long-term contracts with any of its suppliers but does not anticipate substantial shortages of raw materials in 2000. TRADEMARKS. The Company owns many federal trademark registrations and has several other trademark applications pending 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- trademark. SEASONALITY. In recent history, the Company's sales have exhibited some seasonality with higher sales and income in its second and fourth quarters, which is prior to the selling season for spring and fall merchandise, respectively. (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 2,650 persons domestically and 1,600 persons in foreign countries. In 1999, approximately 2,600 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 is 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 Jerell Headquarters 121,000 Leased 2000 Dallas, Texas Jerell Warehouse & Distribution 41,000 Leased 2001 Fort Worth, Texas Warehouse & Distribution 660,000 Owned Weslaco, Texas Fabric Cutting 115,000 Owned 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 (66 locations) (2) Retail Sales 203,000 Leased 2000 - 2004
(1) 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 and is in the process of offering for sale, the Robstown facility. (2) These properties are the Company's 63 retail stores located in outlet malls throughout the United States and 3 outlet stores that sell a combination of retail and second quality products. The retail stores range in size from approximately 2,100 to 11,000 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 $2.6 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. On April 12, 1999, a jury returned an approximate $3.6 million verdict against Haggar Clothing Co. and in favor of a former employee relating to claims for wrongful discharge and common law tort. The Company believes the verdict in this lawsuit was both legally and factually incorrect. The Company presently intends to appeal the judgment. The Company does not believe that the outcome of this verdict will have a material impact on its financial statements. 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.
1999 FISCAL QUARTER ----------------------------------------------------------------------------------- 1st 2nd 3rd 4th ----------------------------------------------------------------------------------- High 14 3/8 12 3/16 13 1/2 14 1/2 Low 10 3/16 9 9/16 9 15/16 12 1/8 Dividend $0.05 $0.05 $0.05 $0.05 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
As of December 1, 1999, the Company had approximately 180 stockholders of record and approximately 3200 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, 1999, is derived from financial statements of the Company, which have been audited by Arthur Andersen LLP, independent public accountants.
Year Ended September 30, 1999 1998 1997 1996 1995 --------- ---------- ---------- ---------- ---------- (1) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Net sales $ 434,358 $ 402,475 $ 406,030 $ 437,942 $ 448,532 Cost of goods sold 290,900 277,713 287,434 315,351 324,699 Restructuring charge (2) - - - 8,680 1,244 --------- ---------- ---------- ---------- ---------- Gross profit 143,458 124,762 118,596 113,911 122,589 Selling, general and administrative expenses (3) (128,629) (112,296) (113,061) (113,037) (110,432) Restructuring charge (2) - - - (5,320) - Gain from storm damage (4) - - - 1,140 4,807 Royalty income 3,244 2,878 2,076 2,630 3,049 --------- ---------- ---------- ---------- ---------- Operating income (loss) 18,073 15,344 7 ,611 (676) 20,013 Other income, net 1,213 1,094 1,954 1,563 786 Interest expense (3,652) (3,452) (3,525) (4,293) (4,995) --------- ---------- ---------- ---------- ---------- Income (loss) from operations before provision (benefit) for income taxes 15,634 12,986 6,040 (3,406) 15,804 Provision (benefit) for income taxes 6,236 4,962 2,297 (986) 5,995 --------- ---------- ---------- ---------- ---------- Net income (loss) $ 9,398 $ 8,024 $ 3,743 $ (2,420) $ 9,809 ========= ========== ========== ========== ========== Net income (loss) per common share on a diluted basis $ 1.26 $ 0. 94 $ 0.44 $ (0.28) $ 1.14 on a basic basis $ 1.26 $ 0. 94 $ 0.44 $ (0.28) $ 1.15 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 7,465 8,545 8,555 8,552 8,623 on a basic basis 7,437 8,530 8,551 8,552 8,549 BALANCE SHEET DATA (AT PERIOD END): Working capital $ 92,784 $ 124,499 $ 126,554 $ 136,172 $ 178,849 Total assets 263,531 251,975 262,053 278,334 315,352 Long-term debt 21,374 24,937 31,800 42,112 78,585 Stockholders' equity 164,448 165,475 164,514 162,482 166,406
(1) In January 1999, the Company purchased Jerell, Inc., a company engaged in the design and marketing of women's apparel. (2) 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. (3) During fiscal year 1999, the Company recognized a gain of $4.4 million related to insurance proceeds received in excess of losses incurred as a result of the damage caused by Hurricane Georges in September 1998 at two of the Company's leased manufacturing facilities. (4) 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, 1999, 1998 and 1997.
Year Ended September 30, 1999 1998 1997 -------- -------- -------- Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold (67.0) (69.0) (70.8) -------- -------- -------- Gross profit 33.0 31.0 29.2 Selling, general and administrative expenses (29.6) (27.9) (27.8) Royalty income 0.8 0.7 0.5 -------- -------- -------- Operating income 4.2 3.8 1.9 Other income, net 0.2 0.3 0.5 Interest expense (0.8) (0.9) (0.9) -------- -------- -------- Income from operations before provision for income taxes 3.6 3.2 1.5 Provision for taxes 1.4 1.2 0.6 -------- -------- -------- Net income 2.2 % 2.0 % 0.9 % ======== ======== ========
FISCAL 1999 COMPARED TO FISCAL 1998 Net sales increased 7.9% to $434.4 million in fiscal 1999 compared to net sales of $402.5 million in fiscal year 1998. The increase in net sales during fiscal 1999 is primarily attributable to the inclusion of Jerell's net sales since the acquisition. Excluding the impact of Jerell, unit sales increased 1.9% and the average sales price decreased 2.7%. The 2.7% decrease in average sales price is primarily attributable to certain inventory markdowns on sportcoats and shirts. Gross profit as a percent of net sales increased to 33.0% in 1999 compared to 31.0% in 1998. The increase in gross profit is primarily the result of further shifts to offshore production, inventory management, SKU reductions and new, innovative manufacturing techniques in cutting and marking. The acquisition of Jerell did not have a significant impact on the Company's gross profit as a percent of net sales. Selling, general and administrative expenses as a percent of net sales increased to 29.6% in fiscal 1999 compared to 27.9% in fiscal 1998. Actual selling, general and administrative expenses increased to $128.6 million in 1999 from $112.3 million for 1998. The $16.3 million increase in selling, general and administrative expenses during fiscal 1999 was primarily the cumulative result of an increase of approximately $3.0 million in expenses related to the opening and operations of 11 new retail stores, the start of Haggar Japan operations during fiscal 1999 of $1.2 million, severance costs of $1.7 million resulting from a reduction of 42 people from the Company's sales force and corporate personnel, the inclusion of Jerell expenses since the acquisition of $12.2 million, and an increase in legal expenses for fiscal 1999. These increases were offset by a decrease of approximately $1.3 million in shipping and labor costs resulting from increased efficiencies at the CSC and a $4.4 million gain related to insurance recoveries resulting from the Hurricane Georges damage in fiscal 1998. 11 Royalty income increased to $3.2 million in fiscal 1999 compared to $2.9 million in 1998. The increase relates primarily to stronger sales of dress shirts by a domestic licensee and sales by our international licensee in Mexico. Other income, net remained relatively flat at $1.2 million in fiscal 1999 compared to $1.1 million in fiscal 1998. 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. 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. 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. 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. INCOME TAXES. The Company's income tax provision, as a percent of income from operations before income tax, was 39.9% in fiscal 1999. Comparatively, the Company's income tax provision, as a percent of income from operations before income tax, was 38.2% and 38.0% in fiscal 1998 and 1997, respectively. The increase as a percent of income from operations before income tax in fiscal 1999 is due to the nondeductibility of goodwill amortization related to the Jerell acquisition. For fiscal 1999, 1998 and 1997, the effective income tax rates differed from the statutory rates because of state income taxes, tax credits utilized and certain permanent tax differences including non-deductible goodwill. 12 SEASONALITY. The Company's sales has exhibited some seasonality with higher sales and income in the second and fourth quarters, which are prior to and during the selling seasons for spring and fall merchandise, respectively, which reflect 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) (2) (2) Net sales 1999 $ 84,795 $ 120,263 $ 107,215 $ 122,085 1998 102,471 94,683 90,192 115,129 1997 104,157 98,608 87,996 115,269 Gross profit 1999 $ 29,656 $ 37,732 $ 35,269 $ 40,801 1998 30,913 29,414 28,615 35,820 1997 30,738 28,424 24,504 34,930 Selling general and administrative expenses (3) 1999 $ 28,773 $ 34,815 $ 32,339 $ 32,702 1998 28,931 27,258 26,687 29,420 1997 27,797 28,485 27,550 29,229 Income (loss) before income taxes 1999 $ 807 $ 3,208 $ 2,871 $ 8,748 1998 1,838 1,917 1,996 7,235 1997 2,295 746 (3,213) 6,212 Net income (loss) 1999 $ 494 $ 1,895 $ 1,825 $ 5,184 1998 1,130 1,175 1,231 4,488 1997 1,383 440 (1,926) 3,846 Net income (loss) per common share and 1999 $ 0.06 $ 0.25 $ 0.25 $ 0.70 common share equivalent 1998 0.13 0.14 0.14 0.53 on a basic and diluted basis 1997 0.16 0.06 (0.23) 0.45
(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) In the second quarter of fiscal 1999, the Company acquired Jerell, Inc., a company engaged in designing and marketing women's apparel. The Company's consolidated financial statements have incorporated Jerell's operating results from the effective date of the acquisition. (3) During fiscal year 1999, the company recognized a gain of $4.4 million related to insurance proceeds received in excess of losses incurred as a result of the damage caused by Hurricane Georges in September 1998 at two of the company's leased manufacturing facilities. Of the $4.4 million gain, $2.0 million was recorded in the third quarter and $2.4 million was recorded in the fourth quarter of 1999. 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 conditions and establishes an allowance for doubtful accounts based upon factors related to the credit risk of specific customers, historical trends and other information. In addition, the Company has a factoring agreement with Bank of America for the purposes of providing credit administration for Jerell's trade accounts receivable. Under the factoring agreement, Bank of America purchases substantially all of Jerell's trade accounts receivable without recourse. Inventories at the end of fiscal 1999 decreased to $86.0 million from $92.2 million at the end of fiscal 1998, even with the purchase of Jerell in January 1999. The reduction in inventory levels reflects the Company's ongoing efforts to manage inventory through enhanced forecasting systems and a state of the art distribution center capable of effectively monitoring 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 1999, the Company amended the Facility to extend the expiration date to June 30, 2002. As of September 30, 1999, the Company had no outstanding balance under the Facility and had a borrowing capacity of $90.0 million. As of September 30, 1998, the Company's UK subsidiary, Haggar Apparel, Ltd., maintained a $4.2 million line of credit with a bank in the United Kingdom to fund its operating activities. This line of credit was paid and closed in the second quarter of fiscal 1999. 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, 1999, of $52.9 million (net of effects from the purchase of Jerell, Inc.). The cash provided is primarily a result of the reduction in inventory of $15.5 million, the reduction of accounts receivable and due from factor of $5.8 million, and an increase in accounts payable and accrued liabilities of $11.6 million. The Company used cash in investing activities of $49.0 million during fiscal 1999, the result of purchases of property, plant, and equipment of $10.4 million primarily in conjunction with the opening of retail stores during the fiscal year and the acquisition of Jerell, Inc. for $39.3 million. Cash flows used in financing activities of $17.7 million for the 1999 fiscal year were primarily the result of a net reduction in long-term debt of $3.8 million, the $3.5 million payment of short-term borrowings for the UK subsidiary and the purchase of $9.0 million in treasury stock. By comparison, the Company provided cash from operating activities of $37.0 million for the fiscal year ended September 30, 1998, 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. 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 1999, 1998, or 1997. 14 NEW ACCOUNTING STANDARDS. The Company adopted 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. In fiscal 1999, the Company had no additional disclosure requirements under the provisions of SFAS No. 131. 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 2001. 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, 1999, 1998, and 1997. Year 2000. GENERAL. The Year 2000 issue concerns the inability of some computerized systems to properly process date-sensitive information on and after January 1, 2000, because of the use of only the last two digits to identify a year. The Company has a full-time project manager coordinating the assessment and remediation of Year 2000 issues affecting the Company. The project manager and team leaders from various areas within the Company implemented the remediation necessary to prepare the Company for the Year 2000. The Year 2000 steering committee, composed of members from various functional groups, provided oversight by reviewing and evaluating the progress of the Year 2000 program. The Company believes that all of its core operations and essential functions are ready for the Year 2000 transition. STATE OF READINESS. The Company's Year 2000 program classified all of its computerized systems into the following categories: BUSINESS SYSTEMS: This category consists of computer programs that run the Company's primary business functions (e.g., manufacturing, order processing, inventory control and accounting). HARDWARE/PC SOFTWARE: This category consists of all computer hardware and operating systems (including networking, telecommunications and other PC-based software applications). ENGINEERING SYSTEMS: This category consists of manufacturing, distribution and laboratory equipment (including sewing equipment, cutters, conveyors and scanners) that control the manufacturing process. FACILITIES SYSTEMS: This category consists of systems that support the physical infrastructure of the Company's facilities (including forklifts, ovens, boilers, HVAC and security systems). In order to establish priorities for assessment and remediation of Year 2000 issues, each of the systems within these categories was further classified as follows: CRITICAL: These are systems without which the Company's business would be severely adversely affected (e.g., manufacturing, distribution and retail point of sale). PRIORITY: These are systems that the Company could do without for only a few days without materially adversely affecting operations (e.g., telecommunications and energy management). 15 REQUIRED: These are systems needed to remain competitive or in compliance with regulatory requirements (e.g., voice mail and executive information systems). DESIRABLE: These systems enable employees to work more efficiently (e.g., pagers, fax machines and postage meters). As of November 30, 1999, the Company had completed the assessment, remediation and testing of all of its computerized systems. The Company believes that all such systems are now Year 2000 compliant. CUSTOMERS AND VENDORS. In addition to its internal Year 2000 compliance program, the Company requested information from a majority of its customers and vendors concerning their Year 2000 compliance. Responses have been received from most key customers indicating that they do not presently anticipate any significant Year 2000 problems. The Company received responses from most of its key vendors indicating that they do not presently anticipate any significant Year 2000 problems. The Company intends to continue to communicate with its key customers and vendors as more information becomes available in order to further evaluate potential risks to the Company's business operations. COSTS TO ADDRESS YEAR 2000 ISSUES. The Company executed its Year 2000 program primarily with existing internal resources. The principal costs associated with these internal resources were payroll and employee benefits of the information systems group. The Company did not separately track the internal costs attributable to the Year 2000 program. The Company also incurred costs for contract programmers and systems upgrades in connection with its Year 2000 program. As a result of Year 2000 issues, the Company elected to upgrade its accounting, order processing, manufacturing, and electronic data interchange software; retail store systems; distribution conveyor systems; and most PC hardware and software systems. No other significant projects were accelerated or deferred due to Year 2000 issues. The costs of these programmers and upgrades were not material to the results of operations or the financial condition of the Company. All costs of Year 2000 compliance were recorded in the period incurred. RISKS OF YEAR 2000 ISSUES. Although the Company believes that it has adequately addressed the Year 2000 issue, there can be no assurance that Year 2000 problems will not have a material adverse affect on its business, financial condition or results of operations. In addition, disruptions in the economy generally resulting from Year 2000 failures or the public's perceptions of failures could have a material adverse effect on the Company. CONTINGENCY PLANS. The Company has developed contingency plans for potential risks such as interruptions in supply chain, transportation delays and communications breakdowns with foreign vendors. The Company generated risk analysis reports from the testing of systems and the responses received from customers and vendors. The reports were divided between internal and external risks. The internal risks relate to the Company's systems and facilities. The Company conducted extensive testing to assure the Company that date changes will not affect its systems before, during or after January 1, 2000. Although the Company does not anticipate any problems with its systems, there will be increased MIS staff coverage from December 30, 1999, to January 15, 2000, and longer, if necessary. In addition, facilities staff will be on site during the January 1 weekend to confirm that building and mechanical systems are operating as expected. The external risk categories covered in the reports are customers, importers, piece goods and trim suppliers, manufacturing contractors, licensees, transportation and utility vendors. The Company's senior managers used risk analysis reports to develop contingency plans where necessary. A summary of the plans follows: CUSTOMERS: All of the Company's major customers have indicated that they will be ready for the Year 2000. Year 2000 testing has confirmed that the Company can accept orders into the year 2000 in the formats used by all EDI trading partners. As a result, the Company has not developed a contingency plan related to customers. 16 IMPORTERS: The majority of the Company's importers have indicated that they will be ready for the Year 2000. A review of the Company's normal processes indicates no need for a contingency plan. PIECE GOODS AND TRIM SUPPLIERS: The majority of the Company's key suppliers have indicated that they will be ready for the Year 2000. A review of the Company's normal processes indicates no need for a contingency plan. MANUFACTURING CONTRACTORS: All of the contractors have replied that they will be ready for the Year 2000. Ordinarily the Company's plants are closed at the end of December for the holidays; however, arrangements have been made to work throughout December. LICENSEES: All of the Company's licensees that replied indicated that they will be ready for the Year 2000. Those that have not replied either have immaterial volumes or are close enough geographically that the Company could supply the licensee's customers if necessary. TRANSPORTATION: 90% of the Company's freight is handled by carriers that have advised the Company that they are or will be compliant before December 31, 1999. Plans have been made regarding alternative shipping for customers that request a specific carrier if that carrier is unable to transport a shipment when needed. UTILITIES: The utility companies for the Company's U.S. facilities have responded that they will be ready, although they will not guarantee 100% compliance. The fuel storage tanks at both of the Dominican Republic plants and the Company-owned Mexico plant will be filled before December 20, 1999. The Company has developed a detailed back-up plan for handling activities normally accomplished by data transmission in case there is a disruption in international telecommunications service. 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). The Board of Directors has authorized the Company to repurchase up to three million shares of the Company's common stock (the Stock Repurchase Plan). Subsequent to September 30, 1999, the Company purchased an additional 212,000 shares for approximately $2.6 million, increasing the total number of shares purchased by the Company pursuant to the Stock Repurchase Plan to 1,594,351 shares. Subsequent to September 30, 1999, the Board of Directors authorized an increase in the number of shares available for issuance under the long-term incentive stock option plan from 1,400,000 shares to 1,750,000 shares. 17 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas, October 29, 1999 19 HAGGAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 --------- --------- --------- Net sales $ 434,358 $ 402,475 $ 406,030 Cost of goods sold 290,900 277,713 287,434 --------- --------- --------- Gross profit 143,458 124,762 118,596 Selling, general and administrative expenses (128,629) (112,296) (113,061) Royalty income 3,244 2,878 2,076 --------- --------- --------- Operating income 18,073 15,344 7,611 Other income, net 1,213 1,094 1,954 Interest expense (3,652) (3,452) (3,525) --------- --------- --------- Income from operations before provision for income taxes 15,634 12,986 6,040 Provision for income taxes 6,236 4,962 2,297 --------- --------- --------- Net income $ 9,398 $ 8,024 $ 3,743 ========= ========= ========= Net income per share on a basic and diluted basis $ 1.26 $ 0.94 $ 0.44 ========= ========= ========= Weighted average number of common shares outstanding - Basic 7,437 8,530 8,551 Weighted average number of common shares and common share-equivalents outstanding - Diluted 7,465 8,545 8,555
The accompanying notes are an integral part of these consolidated financial statements. 20 HAGGAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
September 30, ------------------------ 1999 1998 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $ 6,380 $ 20,280 Accounts receivable, net 59,488 63,613 Due from factor 4,034 - Inventories 85,985 92,244 Deferred tax benefit 12,100 7,623 Other current assets 1,639 1,557 ---------- ---------- Total current assets 169,626 185,317 Property, plant, and equipment, net 61,897 64,424 Goodwill, net 28,751 - Other assets 3,257 2,234 ---------- ---------- Total assets $ 263,531 $ 251,975 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 33,030 $ 22,995 Accrued liabilities 27,954 19,554 Accrued wages and other employee compensation 7,014 6,398 Accrued workers' compensation 4,775 4,564 Short-term borrowings - 3,453 Current portion of long-term debt 4,069 3,854 ---------- ---------- Total current liabilities 76,842 60,818 Deferred income taxes 867 745 Long-term debt 21,374 24,937 ---------- ---------- Total liabilities 99,083 86,500 Commitments and contingencies Stockholders' equity: Common stock - par value $0.10 per share; 25,000,000 shares authorized and 8,576,998 shares issued at September 30, 1999 and 1998 857 857 Additional paid-in capital 41,860 41,860 Retained earnings 136,267 128,329 ---------- ---------- 178,984 171,046 Less - Treasury stock, 1,391,605 and 525,254 shares at cost at September 30, 1999 and 1998, respectively (14,536) (5,571) ---------- ---------- Total stockholders' equity 164,448 165,475 ---------- ---------- Total liabilities and stockholders' equity $ 263,531 $ 251,975 ========== ==========
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 --------------- Additional Total $0.10 Par Value Paid-In Retained Treasury Stockholders' Shares $ Capital Earnings Stock Equity --------------- ---- ---------- -------- --------- ------------- 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 Common stock dividends declared ($0.20 per share) -- -- -- (1,460) -- (1,460) Purchase of Treasury Stock -- -- -- -- (8,965) (8,965) Net income -- -- -- 9,398 -- 9,398 --------- ---- ------- -------- -------- -------- BALANCE, September 30, 1999 8,576,998 $857 $41,860 $136,267 $(14,536) $164,448 ========= ==== ======= ======== ======== ========
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, ------------------------------------ 1999 1998 1997 --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,398 $ 8,024 $ 3,743 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,110 12,857 11,447 Gain on disposal of property, plant, and equipment (577) (205) (480) Changes in assets and liabilities, net of effects from the purchase of Jerell, Inc.: Accounts receivable, net 4,020 7,356 3,587 Due from factor 1,796 -- -- Inventories, net 15,463 12,998 11,114 Current deferred tax benefit (4,174) 2,450 2,337 Other current assets 288 2,276 (187) Accounts payable 5,847 (8,876) 3,883 Accrued liabilities 5,743 (3,193) (11,115) Accrued wages and other employee compensation 616 2,917 34 Accrued workers' compensation expense 211 (384) (947) Deferred long-term income tax liability 122 745 -- --------- -------- -------- Net cash provided by operating activities 52,863 36,965 23,416 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant, and equipment, net (10,376) (10,179) (14,989) Purchase of Jerell, Inc. (39,317) -- -- Proceeds from sale of property, plant, and equipment, net 1,653 1,861 1,085 (Increase) decrease in other assets (1,009) (1,232) 1,599 --------- -------- -------- Net cash used in investing activities (49,049) (9,550) (12,305) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds (payments) from short-term borrowings (3,453) 1,091 295 Purchases of treasury stock at cost (8,965) (5,570) -- Proceeds from issuance of long-term debt 114,000 18,000 61,000 Proceeds from issuance of common stock -- 220 -- Payments on long-term debt (117,836) (21,339) (71,463) Payments of cash dividends (1,460) (1,713) (1,711) --------- -------- -------- Net cash used in financing activities (17,714) (9,311) (11,879) --------- -------- -------- Increase (decrease) in cash and cash equivalents (13,900) 18,104 (768) Cash and cash equivalents, beginning of period 20,280 2,176 2,944 --------- -------- -------- Cash and cash equivalents, end of period $ 6,380 $ 20,280 $ 2,176 ========= ======== ========= Supplemental disclosure of cash flow information Cash paid (received) for: Income taxes, net $ 8,708 $ (2,221) $ (589) Interest, net of amounts capitalized $ 3,866 $ 3,554 $ 3,806
The accompanying notes are an integral part of these consolidated financial statements. 23 HAGGAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999, 1998 AND 1997 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, shirts, and women's sportswear and dresses. 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 men's 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 Jerell subsidiary that was acquired on January 13, 1999, offers women's apparel under various brand names such as Stonebridge-Registered Trademark-, Stephanie Thomas-Registered Trademark-, Selena-Registered Trademark-, Ali Miles-Registered Trademark- and others. 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, Ltd., Haggar Canada Co., Haggar Japan Co., Ltd., which markets the Company's branded products in Europe, Canada and Japan, respectively. Additionally, the Company derives royalty income from the use of its 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, Ltd., Jerell, Inc., Haggar Japan Co., Ltd., Haggar Canada Co. 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 $1,736,000 and $906,000 at September 30, 1999 and 1998, 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 24.8%, 27.9% and 27.3% of the Company's net sales during the years ended September 30, 1999, 1998 and 1997, respectively. The next largest customer accounted for 11.2%, 10.4% and 7.1% of the Company's net sales during 1999, 1998 and 1997, respectively. No other customer accounted for more than 10% of consolidated revenues. The loss of the business 24 of one or more of the Company's larger 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. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market and consisted of the following at September 30, 1999 and 1998 (in thousands):
1999 1998 ---------- ---------- Piece goods $ 10,001 $ 9,438 Trimming and supplies 2,651 2,669 Work-in-process 17,443 11,390 Finished garments 55,890 68,747 ---------- ---------- $ 85,985 $ 92,244 ========== ==========
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, 1999 and 1998 (in thousands):
1999 1998 ---------- ---------- Land $ 3,060 $ 2,923 Buildings 29,104 28,855 Furniture, fixtures and equipment 85,871 77,504 Leasehold improvements 22,674 19,504 Construction in progress 3,952 2,154 ---------- ---------- Total 144,661 130,940 Less: Accumulated depreciation and amortization (82,764) (66,516) ---------- ---------- Net property, plant, and equipment $ 61,897 $ 64,424 ========== ==========
DEPRECIATION AND AMORTIZATION The Company provides for depreciation and amortization using accelerated and straight-line methods by charges to operations in amounts that allocate the cost of the assets over their estimated useful lives, which are shown below: Estimated Asset Classification Useful Life -------------------- ----------- Buildings 15-40 Furniture, fixtures, and equipment 3-7 Leasehold improvements Life of Lease
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. 25 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 1999, 1998, and 1997, total advertising expense was $23.0 million, $23.1 million and $22.9 million, respectively. OTHER INCOME Other income consisted of the following for the years ended September 30, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 --------- --------- --------- Gain on sale of assets, net $ 577 $ 205 $ 480 Interest income 228 495 218 Dissolution of Haggar UK joint venture - - 1,050 Other 408 394 206 --------- --------- --------- Total other income, net $ 1,213 $ 1,094 $ 1,954 ========= ========= =========
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 adopted 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. In fiscal 1999, the Company had no additional disclosure requirements under the provisions of SFAS No. 131. 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 2001. 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, 1999, 1998, and 1997. 26 2. ACQUISITION On January 13, 1999, the Company, through its main operating subsidiary Haggar Clothing Co., acquired Jerell, Inc., a company engaged in the design and marketing of women's apparel, for an aggregate acquisition cost of $43.6 million. The acquisition cost consists of $36.9 million paid to the shareholders of Jerell, $0.4 million as consideration for a covenant not to compete to an executive officer, $4.7 million paid to a third party factor, and $1.6 million in expenses attributable to the acquisition. In conjunction with the acquisition, the Company received payments of notes receivable due from former stockholders of Jerell, Inc. of $2.8 million and payments of $.07 million from former stockholders of Jerell, Inc. for tax withholdings, resulting in a net acquisition cost of $40.1 million. The acquisition was accounted for under the purchase method. Based on current estimates, which may be revised at a later date, the excess consideration paid over the estimated fair value of net assets acquired of approximately $29.8 million was recorded as goodwill and is being amortized on a straight-line basis over its estimated useful life of 20 years. The Company's consolidated financial statements have incorporated Jerell's operating results from the effective date of the acquisition. The following unaudited pro forma financial information combines the results of operations of the Company and Jerell, Inc. as if the acquisition had taken place at the beginning of fiscal 1998. These results are not intended to be a projection of future results.
TWELVE MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30, --------- --------- 1999 1998 --------- --------- Net sales $ 448,542 $ 468,277 Net income 8,828 8,229 Net Income per share - Basic and Diluted $ 1.18 $ 0.96 In conjunction with the acquisition, liabilities were assumed as follows (in thousands): Fair value of assets acquired $ 46,665 Net cash paid for Jerell, Inc. 39,317 -------- Liabilities assumed $ 7,348 ========
3. NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENT 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 held by employees to purchase 826,865 common shares at prices ranging from $12.13 to $23.00 were not dilutive and were outstanding for the twelve months ended September 30, 1999. Options held by employees 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. There were 243,999 options held by employees 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, 1997. These shares for the aforementioned periods were not included in the diluted 27 earnings per share calculation because the options' exercise prices were greater than the average market price of the common shares. Diluted earnings per share were calculated as follows (in thousands, except per share data):
TWELVE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 1999 1998 1997 --------- --------- --------- Net income to common stockholders $ 9,398 $ 8,024 $ 3,743 Weighted average common shares outstanding 7,437 8,530 8,551 Share equivalents, due to stock options 28 15 4 --------- --------- --------- 7,465 8,545 8,555 ========= ========= ========= Net Income per share - Diluted $ 1.26 $ 0.94 $ 0.44 ========= ========= =========
4. DUE FROM FACTOR The Company has a factoring agreement with Bank of America for the purposes of providing credit administration for the Company. Under the terms of the factoring agreement, Bank of America purchases substantially all of Jerell's specialty store accounts receivable without recourse. 28 5. INCOME TAXES The components of the provision for income taxes are as follows for the years ended September 30, 1999, 1998 and 1997 (in thousands):
1999 1998 1997 --------- --------- --------- Current federal income tax $ 8,611 $ 2,648 $ (116) Deferred federal income tax (2,922) 1,905 2,366 State income tax 547 409 47 ---------- --------- --------- Provision for income taxes $ 6,236 $ 4,962 $ 2,297 ========== ========= =========
Temporary differences and carryforwards, which give rise to a significant portion of net deferred income tax, are as follows (in thousands):
1999 1998 ------------- ------------- Deferred income tax assets: Workers' compensation accrual $ 1,676 $ 1,597 Inventory cost capitalization and valuation 4,546 4,856 Allowances for accounts receivable 1,005 317 Health and life insurance accrual 638 354 Reserve for reorganization 280 759 Accrued wages and other employee compensation 1,064 773 Other 3,219 212 ------------- ------------- 12,428 8,868 Less - Valuation allowance (291) (250) ------------- ------------- 12,137 8,618 Deferred income tax liability: Property, plant, and equipment, net (764) (1,585) Prepaid insurance (140) (155) ------------- ------------ Net deferred income tax asset 11,233 6,878 Less - Current deferred tax benefit (12,100) (7,623) ------------- ------------- Long-term deferred tax liability $ (867) $ (745) ============= =============
The provision 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):
1999 1998 1997 --------- --------- --------- Tax computed at the statutory rate $ 5,316 $ 4,415 $ 2,053 State income taxes 547 409 47 Tax credits utilized (341) (260) (186) Non-deductible goodwill 367 - - Other 347 398 383 --------- --------- --------- $ 6,236 $ 4,962 $ 2,297 ========= ========= =========
29 6. LONG-TERM DEBT Long-term debt consisted of the following at September 30, 1999 and 1998 (in thousands):
1999 1998 ------------- ------------- 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, 1999), payable in annual installments of $100 to $200, and a final payment of $2,000 in 2005, secured by certain buildings and equipment $ 2,600 $ 2,700 Allstate notes 21,429 25,000 Other 1,414 1,091 ------------- ------------- Total Debt 25,443 28,791 Less - Current portion 4,069 3,854 ------------- ------------- Long-Term Debt $ 21,374 $ 24,937 ============= =============
Net assets mortgaged or subject to lien under the Industrial Development Revenue Bonds totaled approximately $900,000 at September 30, 1999. As of September 30, 1999, the Company had a revolving credit line agreement (the "Agreement") with certain banks subject to certain borrowing base limitations. During 1999, the Agreement was amended to extend the maturity date to June 30, 2002. The Company had additional available borrowing capacity of approximately $90,000,000 under this Agreement at September 30, 1999. The Company incurred approximately $167,600 in commitment fees related to the available borrowing capacity during the year ended September 30, 1999. The interest rates for the year ended September 30, 1999, ranged from 5.625% to 8.25%. The facility will mature June 30, 2002, unless renewed and is unsecured. The Agreement prohibits the Company from pledging its accounts receivables and inventories, 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 $149,474,000 and $55,000,000, respectively, as of September 30, 1999. For fiscal years after 1999, 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 (the "Allstate notes"). Proceeds from the Allstate notes were used to partially fund the construction of the Company's Customer Service Center ("CSC"). Significant terms of the Allstate 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 Allstate notes is fixed at 8.49%. The terms and conditions of the note purchase agreement governing the Allstate 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 -------------------------- ----------- 2000 $ 4,069 2001 4,030 2002 4,010 2003 3,992 2004 3,671 Thereafter 5,671 ----------- $ 25,443 ===========
7. 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, 1999 (in thousands):
YEARS ENDING SEPTEMBER 30, AMOUNT -------------------------- ----------- 2000 $ 6,440 2001 5,102 2002 3,580 2003 2,391 2004 1,828 Thereafter 1,705 ----------- $ 21,046 ===========
Rental expense was $7,657,000, $7,802,000 and $6,910,000 in the years ended September 30, 1999, 1998, and 1997, respectively. COMMITMENTS AND CONTINGENCIES The Company had approximately $13,700,000 in outstanding letters of credit at September 30, 1999, primarily in connection with certain self-insurance agreements and certain inventory purchases of the Company. On April 12, 1999, a jury returned an approximate $3.6 million verdict against Haggar Clothing Co. and in favor of a former employee relating to claims for wrongful discharge and common law tort. The Company believes the verdict in this lawsuit was both legally and factually incorrect. The Company does not believe that the outcome of this verdict will have a material impact on its financial statements. The Company is involved in various other 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. 31 8. RESTRUCTURING CHARGES In 1999, the Company charged $1.7 million to selling, general and Administrative expense for severance costs resulting from the termination in fiscal 1999 of 42 people from the Company's sales force and corporate personnel. The $1.7 million liability as of September 30, 1999 is expected to be principally paid by September 30, 2000. 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 $14.0 million. The consolidation of the three Texas sewing operations was completed in 1997. The Company paid restructuring charges of $1.4 million, $2.2 million and $8.8 million in fiscal 1999, 1998, and 1997, respectively. The remaining restructuring reserve of approximately $1.6 million relates to legal issues resulting from the restructuring and is expected to be paid by September 30, 2000. 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. 9. 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 15% of their compensation to the Plan under Internal Revenue Code Section 401(k) ("401(k) Contributions"). The Company may make discretionary matching 401(k) 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% vested 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, $1,233,000 and $800,000 for each of the years ended September 30, 1999, 1998 and 1997, 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 $5,481,000, $5,397,000 and $7,785,000 to the Trust for the years ended September 30, 1999, 1998 and 1997, 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, 1999, 1998 and 1997. 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 1,400,000 shares to be granted. Subsequent to September 30, 1999, the Board of Directors authorized an increase in the number of shares available for issuance under the long-term incentive stock option plan from 1,400,000 shares to 1,750,000 shares. The following table summarizes the changes in common stock options in fiscal 1999, 1998 and 1997:
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- Options outstanding as of September 30, 1996 966,468 $18.38 Options granted 514,938 13.51 Options canceled (734,468) 18.15 -------- ----- Options outstanding as of September 30, 1997 746,938 15.32 Options granted 757,231 12.72 Options exercised (16,362) 13.50 Options canceled (276,986) 17.68 --------- ----- Options outstanding as of September 30, 1998 1,210,821 13.18 Options granted 37,000 11.50 Options canceled (52,456) 15.14 ----------- ----- Options outstanding as of September 30, 1999 1,195,365 13.05 Options available for grant as of September 30, 1999 163,742 Options exercisable as of September 30, 1999 761,468 13.30
The range of option prices for the options outstanding as of September 30, 1999, was $11.00 to $23.00 with a weighted average remaining contractual life of approximately 6.5 years. The number of options exercisable in fiscal 1998 and 1997 were 577,344 and 196,932. The weighted average exercise price of these exercisable options was $13.72 and $18.73, for 1998 and 1997. 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. 33 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):
1999 1998 1997 ---- ---- ---- Net Income: As reported $9,398 $8,024 $3,743 Pro Forma $7,799 $6,318 $3,098 Primary EPS: As reported $ 1.26 $ 0.94 $ 0.44 Pro Forma $ 1.05 $ 0.74 $ 0.36
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to October l, 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 $6.13, $5.96 and $4.64 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 6.2%, 6.0% and 6.4%, respectively; expected lives of five years; expected volatility of 45.0%; expected dividend rate of $0.20. 10. HURRICANE GEORGES On September 22, 1998, Hurricane Georges damaged two of the Company's leased manufacturing facilities. Both facilities were insured for damage to the building, equipment, inventory, and for business interruption. Insurance proceeds were used to repair the roofs, fix the equipment, and cover any inventory loss. Insurance proceeds were received in excess of our losses, and therefore the Company recorded a gain of $4.4 million in selling, general and administration expenses in fiscal 1999. 11. SUBSEQUENT EVENTS (UNAUDITED). The Board of Directors has authorized the Company to repurchase up to three million shares of the Company's common stock (the Stock Repurchase Plan). Subsequent to September 30, 1999, the Company purchased an additional 212,000 shares for approximately $2.6 million, increasing the total number of shares purchased by the Company pursuant to the Stock Repurchase Plan to 1,594,351 shares. Subsequent to September 30, 1999, the Board of Directors authorized an increase in the number of shares available for issuance under the long-term incentive stock option plan from 1,400,000 shares to 1,750,000 shares. 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, 1999. 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, 1999 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, 1999 AND 1998 (IN THOUSANDS)
1999 1998 ---- ---- ASSETS: Investment in subsidiaries $ 69,154 $ 66,772 Note receivable from Haggar Clothing Co. 128,693 117,769 ----------- ----------- Total Assets $ 197,847 $ 184,541 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Dividend payable and other current liabilities $ 359 $ 4,314 Due to subsidiaries 33,040 14,752 ----------- ----------- Total current liabilities 33,399 19,066 STOCKHOLDERS' EQUITY: Common stock 857 857 Additional paid-in capital 41,860 41,860 Retained earnings 136,267 128,329 Less - treasury stock (14,536) (5,571) ----------- ----------- Total stockholders' equity 164,448 165,475 ----------- ----------- Total Liabilities and Stockholders Equity $ 197,847 $ 184,541 =========== ===========
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, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 --------- --------- --------- Equity in earnings of subsidiaries $ 2,380 $ 2,755 $ (1,526) Interest income 10,925 8,568 8,568 Income tax expense (3,907) (3,299) (3,299) ----------- ---------- ----------- Net income $ 9,398 $ 8,024 $ 3,743 =========== ========== ===========
37 SCHEDULE II HAGGAR CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AS OF SEPTEMBER 30, 1999, 1998 AND 1997 (IN THOUSANDS)
Balance at Charges to Balance at Beginning of Costs and Deductions End of Period Expenses (2) Payments (1) Period ------------ ------------ -------- ---------- ---------- September 30, 1999: Allowance for doubtful accounts $ 906 $ 1,018 $ -- $ (188) $ 1,736 Restructuring Charge - 1999 -- 1,700 -- -- 1,700 Restructuring Charge - 1996 3,000 -- (1,434) -- 1,566 SFAS No. 109 valuation allowance 250 41 -- -- 291 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
(1) Amounts deemed uncollectible and recoveries of previously reserved amounts. (2) September 30, 1999, includes Jerell, Inc. allowance for doubtful accounts of $480. 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, 1999, 1998 and 1997. 20 Consolidated Balance Sheets, at September 30, 1999 and 1998. 21 Consolidated Statements of Stockholders' Equity, Years Ended September 30, 1999, 1998 and 1997. 22 Consolidated Statements of Cash Flows, Years Ended September 30, 1999, 1998, and 1997. 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].) 10(i) Fifth Amendment to First Amended and Restated Credit Agreement dated December 29, 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 December 31, 1998. [File No. 0-20850].) 10(j) Sixth Amendment to First Amended and Restated Credit Agreement dated May 28, 1999, 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, 1999. [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, 1998. (b) REPORTS ON FORM 8-K On January 28, 1999, a report on Form 8-K was filed concerning the Company's acquisition of Jerell, Inc. ("Jerell") on January 13, 1999. Jerell is engaged in the design and marketing of women's apparel. Jerell's audited financial statements for the year ended October 31, 1998, and the Company's unaudited condensed pro forma consolidated balance sheet as of September 30, 1998 and unaudited condensed pro forma consolidated statement of operations for the year ending September 30, 1998, were filed as a part of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998. There were no other reports on Form 8-K filed with the Commission during of fiscal 1999 other than the 8-K noted above. 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 16, 1999 (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 16, 1999 - ------------------------------ Chief Executive Officer J. M. Haggar, III (Principal Executive Officer) /s/ FRANK D. BRACKEN Director, President and December 16, 1999 - ------------------------------ Chief Operating Officer Frank D. Bracken /s/ DAVID M. TEHLE Senior Vice President December 16, 1999 - ------------------------------ and Chief Financial Officer (Principal David M. Tehle Financial and Accounting Officer) /s/ JOHN C. TOLLESON Director December 16, 1999 - ------------------------------ John C. Tolleson /s/ RICHARD W. HEATH Director December 16, 1999 - ------------------------------ 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, 1998 45 EX-21 2 EXHIBIT 21 EXHIBIT 21 SIGNIFICANT SUBSIDIARY OF THE COMPANY
Name of Subsidiary Jurisdiction of Incorporation ------------------ ----------------------------- Haggar Clothing Co. Nevada
45 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 16, 1999 46 EX-27.1 4 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILES AS PART OF SUCH FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 6,380 0 65,258 1,736 85,985 169,626 144,661 82,764 263,531 76,842 0 0 0 857 163,591 263,531 434,358 434,358 290,900 125,385 (1,213) 0 3,652 15,634 6,236 9,398 0 0 0 9,398 1.26 1.26 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 EXHIBIT 27.2
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. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 20,280 0 64,519 906 92,244 185,317 130,940 66,516 251,975 60,818 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.
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