-----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, OJxLt+LouPOhKRZWuqwHr8PTWKzfdRrsHjMvh0shBQr1W+qBTrFyx4WWXRqg0TBR 8V3C3VByC0KzCKYxY5mGnw== 0000912057-99-010696.txt : 19991229 0000912057-99-010696.hdr.sgml : 19991229 ACCESSION NUMBER: 0000912057-99-010696 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GARAN INC CENTRAL INDEX KEY: 0000039917 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 135665557 STATE OF INCORPORATION: VA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04506 FILM NUMBER: 99781362 BUSINESS ADDRESS: STREET 1: 350 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10118 BUSINESS PHONE: 2125632000 MAIL ADDRESS: STREET 1: 350 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10118 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [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 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File No. 1-4506 GARAN, INCORPORATED (Exact name of registrant as specified in its charter) VIRGINIA 13-5665557 (State of incorporation) (I.R.S. Employer Identification No.) 350 Fifth Avenue, New York, New York 10118 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 212-563-2000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ------------------- Common Stock, no par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock Purchase Rights (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on December 10, 1999, was approximately $131,087,000. At December 10, 1999, 5,320,337 shares of the registrant's Common Stock, no par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant incorporates by reference in Part III of this Report specified portions of its definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2000 Annual Meeting of Shareholders ("2000 Proxy Statement"). 2 PART I Item 1. Business. (a) General development of business. (a)(1) The registrant was incorporated on December 4, 1957. During the fiscal year ended September 30, 1999, there were no material changes or developments in the business done by the registrant or its subsidiaries or in the manner in which it conducted its business during the prior five fiscal years. (a)(2) Not applicable. (b) Financial information about industry segments. The registrant produces only apparel and, accordingly, information relative to industry segments is not applicable. (c) Narrative description of business. (c)(i) The registrant is engaged in the design, manufacture, and sale of apparel for men, women, and children in cluding boys, girls, toddlers, and infants. The percentage of registrant's net sales in each of the foregoing categories in the last three fiscal years is as follows:
Percentage of Net Sales (years ended September 30) 1999 1998 1997 ---- ---- ---- Men's apparel 6% 7% 6% Women's apparel 18 16 14 Children's apparel 76 77 80
3 The registrant produces apparel primarily sold to mass merchandisers, major national chain stores, department stores, and specialty stores. Sales are made primarily by the registrant's salaried sales staff. (c)(ii) Not applicable. (c)(iii) Raw materials essential to the registrant are readily available from various alternate sources of supply. (c)(iv) The registrant distributes children's apparel under various of its own trademarks including, principally, GARANIMALS, and to a lesser extent, GARAN. Sales of branded apparel under the registrant's own trademarks accounted for approximately 43%, 22%, and 16% of the registrant's net sales in fiscal 1999, 1998, and 1997, respectively. The registrant also distributes apparel under various trademarks licensed from third parties. Since 1975, registrant has been a non-exclusive licensee of professional sports leagues and teams for activewear, including T-shirts, knit shirts, sweatshirts, and sweatpants for boys, since 1990, registrant has been a non-exclusive licensee of various colleges and universities for sweatshirts and knit shirts for boys and men, and from 1995 through 1998, the registrant was the exclusive licensee of the trademark EVERLAST for men's, boys', and girls' activewear. Sales of all such licensed apparel by registrant accounted for approximately 3%, 5%, and 10% of the registrant's net sales in fiscal 1999, 1998, and 1997, respectively. Since 1986, the registrant has been the exclusive licensee of the trademark BOBBIE BROOKS for girls' and women's apparel, and sales of apparel by registrant bearing the BOBBIE BROOKS trademark accounted for approximately 18%, 4 16%, and 14% of the registrant's net sales in fiscal 1999, 1998, and 1997, respectively. Total sales of all apparel bearing licensed trademarks and logos, some of which apparel also bears the registrant's trademarks G.T.S, TEAM RATED, and SCRIMMAGE, accounted for approximately 30%, 21%, and 26% of the registrant's net sales in fiscal 1999, 1998, and 1997, respectively. The terms of the foregoing license agreements range from 1 to 3 years, royalty rates range from 1% to 12% of net sales, each license agreement has a minimum royalty commitment, and certain license agreements impose an advertising commitment. The registrant also licenses its GARANIMALS trademark and sublicenses the BOBBIE BROOKS trademark to non-affiliates. The combined revenues from these licenses and sublicenses accounted for less than 1% of the registrant's net sales in each of the last three years. (c)(v) The registrant operates primarily on the basis of two seasons - Spring/Summer and Fall/Holiday. Shipments for the Spring/Summer season are generally made from December through July and for the Fall/Holiday season from June through December. Registrant maintains production levels relatively constant throughout the year, but because of seasonal shipping patterns, the registrant's inventory levels fluctuate during the year. (c)(vi) Not applicable. (c)(vii) Wal-Mart Stores, Inc. accounted for 89%, 80%, and 71% of the registrant's net sales during fiscal 1999, 1998, and 1997, respectively. During the same periods, J.C. Penney Company, Inc. accounted for 7%, 10%, and 12% of the registrant's net sales. The registrant has had business relationships with Wal-Mart 5 Stores, Inc. and J.C. Penney Company, Inc. for more than the past 20 years. While the registrant's sales to Wal-Mart Stores, Inc. have increased significantly in the last several years, generally these sales are on a seasonal or multi-seasonal basis, meaning that there can be no assurance that, or the extent to which, Wal-Mart Stores, Inc. will continue to do business with the registrant at any particular volume. If, for some reason, there should be a substantial reduction in the amount of business from this customer, the effect would be significant. However, as evidenced by the growth in sales, management believes that the working relationship with Wal-Mart Stores, Inc. is very good and sees no reason for any significant change in that relationship. The balance of the registrant's sales are made to approximately 900 accounts, none of which is responsible for more than 10% of the registrant's net sales. (c)(viii) The registrant plans its production based upon retailer commitments for long range programs permitting the registrant to maintain production levels relatively constant throughout the year. In view of the registrant's reliance on such commitments and emphasis on replenishment programs and EDI order placement, purchase orders are not significant to an understanding of registrant's business. (c)(ix) Not applicable. (c)(x) The men's, women's, and children's apparel business in the United States is highly competitive primarily in price, style, and delivery and consists of many domes tic and foreign manufacturers, importers, and distributors. The registrant does not compete solely on a price basis; the registrant competes by relying on style, delivery, replenishment, and vendor-managed programs as well as price. No single enterprise sells more 6 than a small portion of the total apparel sold in the United States, and there are no reliable figures available from which the registrant's relative position in the United States apparel industry can be determined or from which the effect of foreign competition can be assessed. (c)(xi) No material expenditures are made by the registrant for research activities relating to the development of new services or products or the improvement of existing services or products. (c)(xii) The registrant's compliance with Federal, state, and local environmental laws and regulations had no material effect upon its capital expenditures, earnings, or competi tive position during the fiscal year ended September 30, 1999. The registrant does not anticipate any material capital expenditures for environmental control in either its present or succeeding fiscal years. (c)(xiii) The registrant employed approximately 3,800 persons at September 30, 1999. (d) Financial information about foreign and domestic operations and export sales. The registrant has operated a manufacturing facility in Costa Rica since 1984. In fiscal 1995, it began operating manufacturing facilities in El Salvador, and in 1998 it began operating manufacturing facilities in Honduras. As of September 30, 1999, 1998, and 1997, the registrant had $5,795,000, $3,178,000, and $1,989,000, respectively, in aggregate fixed assets located in Central America. While the registrant knows of no risks associated with its Central American operations, political instability or other events of a local nature could disrupt the 7 registrant's operations and its ability to transport goods to and from the region, which would cause the registrant to divert production to its domestic operations and to contractors. The registrant was not otherwise engaged in business within any foreign country during the fiscal year ended September 30, 1999. During fiscal 1999, 1998, and 1997, export sales by registrant amounted to less than 1% of total sales and are not considered to be significant to an understanding of registrant's business. 8 Item 2. Properties.
Expiration Location Use Sq. Ft. Estate Date - -------- --- ------- ------ ---------- Adamsville, Tennessee Manufacturing 100,000 Fee Manufacturing 60,080 Lease 2000(1) Carthage, Mississippi Manufacturing 105,300 Lease (1)(2) Church Point, Louisiana Manufacturing 73,000 Lease 2014(1) Clinton, Kentucky Manufacturing 52,000 Fee Corinth, Mississippi Manufacturing 76,000 Fee Eupora, Mississippi Manufacturing 96,742 Lease (1)(3) Jemison, Alabama Manufacturing 20,800 Lease 2001(1) Jena, Louisiana Warehouse 258,179 Fee Kaplan, Louisiana Manufacturing 87,900 Lease (1)(4) 43,900 Fee (4) Marksville, Louisiana Manufacturing 75,000 Lease 2014(1) Oak Grove, Louisiana Manufacturing 38,000 Lease 2004(1) New York, New York Showroom and Office 38,500 Lease 2011 Ozark, Arkansas Manufacturing 75,000 Lease 2002(1) Philadelphia, Mississippi Manufacturing 107,920 Lease (1)(5) Rainsville, Alabama Manufacturing 53,000 Fee San Jose, Costa Rica Manufacturing 33,258 Fee
9
Expiration Location Use Sq. Ft. Estate Date - -------- --- ------- ------ ---------- San Pedro Sula, Honduras Manufacturing 26,000 Lease 2003(1) San Pedro Sula, Honduras Manufacturing 79,856 Lease 2004(1) San Pedro Sula, Honduras Manufacturing 73,628 Lease 2000(1) San Salvador, El Salvador Manufacturing 41,047 Lease 2000 San Salvador, El Salvador Manufacturing 24,200 Lease 2001 San Salvador, El Salvador Manufacturing 16,937 Lease 2001 San Salvador, El Salvador Manufacturing 30,896 Lease 2002 San Salvador, El Salvador Manufacturing 38,470 Lease 2004 Starkville, Mississippi Manufacturing and Office 90,000 Lease 2003(1)
(1) The registrant or a wholly-owned subsidiary of the registrant has the option to purchase the facilities and/or to renew each of the current leases for terms which vary between 2 and 79 years. (2) One continuous building consisting of a 63,000 square foot section leased to 2004, a 22,500 square foot section leased to 2002, and a 19,800 square foot section leased to 2004. (3) One continuous building consisting of a 15,000 square foot section leased to 2004, a 21,000 square foot section leased to 2003, a 41,000 square foot section leased to 2000, and a 19,742 square foot section leased to 2004. 10 (4) One continuous building consisting of a 72,000 square foot section leased to 2000 and a 15,900 square foot section leased to 2005, which was expanded by a 43,000 square foot section owned by a wholly-owned subsidiary of the registrant and financed with the proceeds of Industrial Revenue Bonds issued in September, 1990. The entire building is located on land owned by a wholly-owned subsidi ary of the registrant. (5) One continuous building consisting of a 78,000 square foot section leased to 2000 and a 29,920 square foot section leased to 2004. The registrant believes that its facilities are suitable and adequate for its foreseeable needs, and each was fully utilized during fiscal 1999. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a), (b), and (c) Market information, Holders, and Dividends. The registrant's common stock is listed and traded on the American Stock Exchange under the symbol GAN. The high and low sales prices during each quarterly period for fiscal years 1999 and 1998 are set forth in the table below:
SALES PRICE OF COMMON STOCK ------------------------------------------ 1999 1998 ---- ---- QUARTERS HIGH LOW HIGH LOW - -------- ---- --- ---- --- First . . . . . . . . . . . . $29 3/4 $23 3/8 $26 1/8 $22 1/8 Second . . . . . . . . . . . 29 24 1/8 28 21 1/2 Third . . . . . . . . . . . . 32 1/8 24 5/8 28 26 1/2 Fourth . . . . . . . . . . . . 32 7/8 31 3/8 29 23 3/8
Dividends paid during the last two fiscal years were as follows:
Dividends Paid per Share QUARTERS 1999 1998 - -------- ----- ----- First -Regular . . . . . . . $ .20 $ .20 -Special . . . . . . . .70 .40 Second -Regular . . . . . . . .25 .20 Third -Regular . . . . . . . .25 .20 Fourth -Regular . . . . . . . .25 .20 ----- ---- Total . . . . . . . . . $1.65 $1.20 ===== =====
As at December 10, 1999, there were 402 shareholders of record in cluding Cede & Company in its capacity as nominee for the Depository Trust Company. 12 FIVE-YEAR REVIEW - -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- NET SALES $228,845,000 $194,197,000 $153,250,000 $146,491,000 $141,330,000 COST OF SALES 170,981,000 148,382,000 116,833,000 114,744,000 111,454,000 - --------------------------------------------------------------------------------------------------------------- GROSS MARGIN ON SALES 57,864,000 45,815,000 36,417,000 31,747,000 29,876,000 SELLING AND ADMINISTRATIVE EXPENSES 29,318,000 25,126,000 22,915,000 22,652,000 23,270,000 INTEREST ON CAPITALIZED LEASES 89,000 111,000 119,000 123,000 141,000 INTEREST INCOME (2,513,000) (2,960,000) (2,773,000) (2,426,000) (2,534,000) - --------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE PROVISION FOR INCOME TAXES 30,970,000 23,538,000 16,156,000 11,398,000 8,999,000 PROVISION FOR INCOME TAXES 12,630,000 9,501,000 6,441,000 4,502,000 3,510,000 - --------------------------------------------------------------------------------------------------------------- NET EARNINGS $18,340,000 $14,037,000 $9,715,000 $6,896,000 $5,489,000 - --------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE--BASIC $3.52 $2.75 $1.92 $1.36 $1.08 --DILUTED $3.49 $2.73 $1.92 $1.36 $1.08 AVERAGE SHARES OUTSTANDING--BASIC 5,210,000 5,109,000 5,070,000 5,070,000 5,070,000 --DILUTED 5,257,000 5,150,000 5,070,000 5,070,000 5,070,000 DIVIDENDS PAID PER SHARE $1.65 $1.20 $1.00 $1.00 $1.00 - --------------------------------------------------------------------------------------------------------------- CURRENT ASSETS $116,372,000 $112,116,000 $94,014,000 $93,393,000 $88,685,000 CURRENT LIABILITIES 38,970,000 31,267,000 25,607,000 17,626,000 20,237,000 - --------------------------------------------------------------------------------------------------------------- WORKING CAPITAL 77,402,000 80,849,000 68,407,000 75,767,000 68,448,000 WORKING CAPITAL RATIO 2.99 3.59 3.67 5.30 4.38 - --------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $163,692,000 $146,173,000 $132,386,000 $119,547,000 $120,431,000 - --------------------------------------------------------------------------------------------------------------- LONG-TERM OBLIGATIONS $2,150,000 $2,170,000 $2,807,000 $2,937,000 $3,061,000 - --------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY $120,127,000 $109,707,000 $100,786,000 $96,141,000 $94,315,000 COMMON STOCK ISSUED AND OUTSTANDING 5,305,737 5,128,719 5,069,892 5,069,892 5,069,892 - ---------------------------------------------------------------------------------------------------------------
13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Certain statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report contain "forward-looking statements" based upon management's expectations and beliefs concerning future events impacting the registrant. Actual results of operations or financial condition may differ because of business conditions in the apparel industry generally, risks associated with the registrant's Central American operations, competition, the potential impact of a reduction in sales to the registrant's largest customer, the addition or loss of significant personnel, the timing of orders placed by the registrant's customers, and such other risk factors as may be identified from time to time in the registrant's filings with the Securities and Exchange Commission. NET SALES Net sales in fiscal 1999 were $228,845,000, an increase of $34,648,000, or 18%, over fiscal 1998 net sales of $194,197,000. The 1999 sales increase was a result of increased unit demand mainly in the registrant's Childrenswear and Women's Divisions. Net sales in fiscal 1998 were $194,197,000, an increase of $40,947,000 over fiscal 1997 net sales of $153,250,000. The 1998 sales increase was primarily a result of an increase in total units shipped in the registrant's Childrenswear Division. The increase in units shipped in both fiscal 1999 and 1998 over the prior periods was primarily the result of increased demand from Wal-Mart Stores, Inc., the registrant's largest customer. GROSS MARGIN Gross margin in fiscal 1999 was $57,864,000 or 25% of net sales, as compared to $45,815,000, or 24% of net sales, in fiscal 1998. The gross margin increase in dollars was a result of increased sales volume. The gross margin increase as a percentage of sales was due primarily to improvements in absorption of manufacturing expenses. Gross margin in fiscal 1998 was $45,815,000, or 24% of net sales, as compared to $36,417,000, or 24% of net sales, in fiscal 1997. The gross margin was comparable as a percentage of sales to the prior fiscal year. The gross margin increase in dollars was a result of the increased sales volume. Selling and administrative expenses in fiscal 1999 were $29,318,000, or 13% of net sales, as compared to $25,126,000, or 13% of net sales, in fiscal 1998. Spending for advertising, an increase in shipping expense related to the volume increase, and continued investment in and upgrading of computer systems accounted for most of the dollar increase. Selling and administrative expenses in fiscal 1998 were $25,126,000, or 13% of net sales, as compared to $22,915,000, or 15% of net sales, in fiscal 1997. The dollar increase in the amount of expenditures was due to additional shipping expense related to volume, increased advertising expense, and continued investment in and upgrading of computer systems. The decrease as a percentage of sales was attributable to increased sales volume. Interest income in fiscal 1999 was $2,513,000, a decrease from $2,960,000 in the previous year. The decrease in interest income was due primarily to a reduction in overall interest rates as certain of the Company's higher-yielding, longer-term U.S. Government obligations matured and the proceeds were reinvested in lower-yielding, shorter-term U.S. Government obligations and, to a lesser extent, to a reduction in the level of investment. Interest income in fiscal 1998 was $2,960,000, an increase from $2,773,000 in the previous year. The increase from 1997 to 1998 was the result of higher levels of investments. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, working capital was $77,402,000, a decrease of $3,447,000 from September 30, 1998, working capital of $80,849,000. The decrease in working capital was due primarily to a reduction in U.S. Government obligations maturing in less than one year, offset by an increase in inventory. At September 30, 1999, accounts receivable was $59,381,000, an increase of $16,818,000 from September 30, 1998 of $42,563,000. The increase in the receivable balance was primarily due to increased shipping during the fourth quarter of fiscal 1999. At September 30, 1999, inventory was $37,333,000, an increase of $4,557,000 from September 30, 1998 of $32,776,000. The inventory increase was due primarily to additional inventory required to support its accelerated delivery requests in the registrant's replenishment programs. Shareholders' equity at September 30, 1999 was $120,127,000 or $22.64 book value per share, as compared to $109,707,000 or $21.39 book value per share, at September 30, 1998. In fiscal 1999 the registrant continued its year end special dividend payment which it initiated in fiscal 1998. The special dividend generally is paid in November, after the balance sheet date. Management believes that the registrant has sufficient working capital to finance its operations and projected growth. There were no short-term borrowings outstanding during fiscal years 1999, 1998, 1997, and management does not anticipate the need for any such borrowings. If necessary, the registrant has the ability to obtain funds from a number of sources to meet its seasonal and long-term requirements. 14 - ------------------------------------------------------------------------------- YEAR 2000 "Year 2000" or "Y2k" compliance means the ability to process and receive, with retained functionality, date and time data for periods before and after the turn of the century. Certain time-sensitive computer programs written using only two digits to define a year may recognize a date using "00" as the year 1900 or some other year than year 2000, which could result in miscalculations and system failures. In 1996, in recognition of the potential impact of such computer program problems, the registrant assigned resources to prepare for Y2k, and efforts have been underway since then to minimize the risk of potential disruption to business operations. The registrant recognized that its Y2k problems also could potentially extend to non-IT (information technology) systems such as time clocks, security systems, telephone systems, as well as other items, Y2k failures on the part of the suppliers, distributors, licensees, and contractors, and potential failures in public and private infrastructure services, including electricity, water, gas, transportation, and communications. The registrant established a Year 2000 plan according to a six step process that included (1) an inventory of all computer hardware, software, and communication systems plus critical non-IT systems, (2) risk assessment, (3) a research and strategy program, (4) remediation, (5) testing and certification, and (6) contingency planning. 1. Inventory. The registrant performed a complete review of all software, hardware, and communication components of its systems as well as key non-IT systems such as telephone systems, security systems, and time clocks. This review involved over 100 employees, visits to all facilities, and required several thousand hours to complete. 2. Risk Assessment. The registrant assigned risks to approximately 60 categories which were used as the basis for developing priorities and schedules. 3. Research and Strategy. Each issue was reviewed for potential solutions. As a result of this process, the registrant decided it was more cost effective to replace most of its software components to improve overall system functionality and resolve the Y2k readiness issue at the same time. The registrant used the replacement opportunity to move from a decentralized structure to a centralized structure to allow real-time updating and access to information from all domestic and offshore plants. The centralized strategy also will position the registrant to conduct business more collaboratively with key customers who have developed sophisticated systems. 4. Remediation. The registrant selected new software packages for financials, electronic data interchange ("EDI"), customer order processing, distribution, warehousing, and manufacturing. Computer hardware and communication plans were developed to support the implementation of new software packages. To date, the registrant has implemented new financial software, including general ledger, accounts payable, and fixed assets. These systems were implemented at the beginning of the 1999 fiscal year. The registrant also has installed a new distribution system to be implemented at all shipping facilities. To date this centralized distribution system has been installed at all shipping facilities, including a new warehouse and distribution facility. New EDI and customer order processing systems have been implemented together in phases designated by customers. The first two major customers were implemented as of the end of April, 1999. Implementation of the 3rd major customer and all other customers was completed by the end of August, 1999. Implementation of the new accounts receivable system was completed by the end of the 1999 fiscal year. A new payroll system for domestic manufacturing employees was selected and has been implemented. All systems related to recording production, transfer, and movement of inventory are Y2k compliant. 5. Testing and Certification. Test environments have been established for all systems, and functional specialists have been reviewing the results for correctness. The registrant has tested and certified all critical and important IT systems, including all EDI systems with suppliers; test of customer EDI systems have been completed. The registrant has purchased software tools to audit and insure software compliance as well as developed plans for test runs of various dates crossing century boundaries. The outcome of these tests will identify any non-compliant components needing adjustment. 6. Contingency Planning. The registrant does not have any contingency plans in place regarding systems that are not expected to be Y2k compliant because all critical systems have been tested and found to be Y2k compliant. While the primary thrust behind the replacement of existing software with new systems has been improved functionality, the impact of Y2k readiness issues accelerated implementation of plans. Total costs are approximately $2,500,000 including capital outlays for the software, services, hardware, and communication components of the plans, all but approximately $200,000 of which has been expended to date. The source of funds has been current working capital. Based upon its efforts to date, the registrant believes that substantially all of both its IT and its non-IT systems, including all critical and important systems, will function properly after January 1, 2000. The registrant has jointly tested all EDI systems with both customers and suppliers. Through this process any non-compliant components have been adjusted or workarounds developed. The registrant also has continued its efforts to confirm that major third-party businesses and its public and private providers of infrastructure services, such as utilities, communications services, and transportation also will be prepared for the Year 2000. Accordingly, the registrant does not currently anticipate that internal systems failures will result in any material adverse effect to its operations or financial conditions. At this time, the registrant believes that the most likely "worst-case" scenario involves potential disruptions in areas in which the registrant's operations must rely on third parties whose systems may not work properly after January 1, 2000, including failures impacting on the registrant's Central American operations. While such failures could affect important operations of the registrant, either directly or indirectly, the registrant cannot at present estimate either the likelihood or the potential cost of such failures. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK The registrant does not believe it is exposed to market risks with respect to any of its investments; the registrant does not utilize market rate sensitive instruments for trading or other purposes. The registrant's investments consist primarily of U.S. Government obligations with maturities of four years or less. 15 CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------- ASSETS SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 12,952,000 $ 9,599,000 U.S. Government securities--short-term 22,216,000 Accounts receivable, less estimated uncollectibles of $512,000 at 1999 and $517,000 at 1998 59,381,000 42,563,000 Inventories 37,333,000 32,776,000 Other current assets 6,706,000 4,962,000 - -------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 116,372,000 112,116,000 - -------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES--LONG-TERM 25,435,000 15,315,000 PROPERTY, PLANT AND EQUIPMENT, NET 15,393,000 13,345,000 OTHER ASSETS 6,492,000 5,397,000 - -------------------------------------------------------------------------------------------------------- TOTAL $ 163,692,000 $ 146,173,000 - -------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 9,959,000 $ 8,555,000 Accrued liabilities 22,495,000 18,575,000 Income taxes payable 6,496,000 4,000,000 Current portion of capitalized lease obligations 20,000 137,000 - -------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 38,970,000 31,267,000 - -------------------------------------------------------------------------------------------------------- CAPITALIZED LEASE OBLIGATIONS, NET OF CURRENT PORTION 2,150,000 2,170,000 - -------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES 2,445,000 3,029,000 - -------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock ($10 par value), 500,000 shares authorized; none issued Common stock (no par value), 15,000,000 shares authorized; shares issued: 5,305,737 at 1999 and 5,128,719 at 1998 2,653,000 2,564,000 Additional paid-in capital 11,272,000 6,792,000 Unamortized value of restricted stock (3,925,000) Retained earnings 110,127,000 100,351,000 - -------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 120,127,000 109,707,000 - -------------------------------------------------------------------------------------------------------- TOTAL $ 163,692,000 $ 146,173,000 - --------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 CONSOLIDATED STATEMENTS OF EARNINGS
- -------------------------------------------------------------------------------------------------------------- YEARS ENDED SEPTEMBER 30, ----------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- NET SALES $228,845,000 $194,197,000 $153,250,000 Cost of sales 170,981,000 148,382,000 116,833,000 - -------------------------------------------------------------------------------------------------------------- Gross margin on sales 57,864,000 45,815,000 36,417,000 Selling and administrative expenses 29,318,000 25,126,000 22,915,000 Interest on capitalized leases 89,000 111,000 119,000 Interest income (2,513,000) (2,960,000) (2,773,000) - -------------------------------------------------------------------------------------------------------------- Earnings before provision for income taxes 30,970,000 23,538,000 16,156,000 Provision for income taxes 12,630,000 9,501,000 6,441,000 - -------------------------------------------------------------------------------------------------------------- NET EARNINGS $ 18,340,000 $ 14,037,000 $ 9,715,000 - -------------------------------------------------------------------------------------------------------------- Earnings per share--Basic $3.52 $2.75 $1.92 --Diluted $3.49 $2.73 $1.92 Average shares outstanding--Basic 5,210,000 5,109,000 5,070,000 --Diluted 5,257,000 5,150,000 5,070,000 - --------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------- UNAMORTIZED ADDITIONAL VALUE OF COMMON PAID-IN RESTRICTED RETAINED YEARS ENDED 1997, 1998 AND 1999 STOCK CAPITAL STOCK EARNINGS TOTAL - ----------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 $2,535,000 $ 5,821,000 $ 87,785,000 $ 96,141,000 - ----------------------------------------------------------------------------------------------------------- Net earnings 9,715,000 9,715,000 Dividends paid--$1.00 per share (5,070,000) (5,070,000) - ----------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1997 $2,535,000 $ 5,821,000 $ 92,430,000 $100,786,000 - ----------------------------------------------------------------------------------------------------------- Net earnings 14,037,000 14,037,000 Exercise of stock options 29,000 971,000 1,000,000 Dividends paid--$1.20 per share (6,116,000) (6,116,000) - ----------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1998 $2,564,000 $ 6,792,000 $100,351,000 $109,707,000 - ----------------------------------------------------------------------------------------------------------- Net earnings 18,340,000 18,340,000 Issuance of restricted stock 80,000 4,200,000 (4,280,000) Amortization of restricted stock 355,000 355,000 Exercise of stock options 9,000 280,000 289,000 Dividends paid--$1.65 per share (8,564,000) (8,564,000) - ----------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1999 $2,653,000 $11,272,000 $ (3,925,000) $110,127,000 $120,127,000 - -----------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 17 CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------- YEARS ENDED SEPTEMBER 30, ------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET EARNINGS $18,340,000 $14,037,000 $9,715,000 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Deferred compensation 355,000 Depreciation and amortization 3,913,000 3,835,000 2,932,000 Provision for losses on accounts receivable (15,000) 62,000 Deferred income taxes (2,114,000) (706,000) (325,000) Changes in assets and liabilities: U.S. Government securities--short-term 5,434,000 733,000 373,000 Accounts receivable (16,818,000) (11,456,000) (5,113,000) Inventories (4,557,000) 955,000 (5,092,000) Other current assets (171,000) (163,000) 1,759,000 Accounts payable 1,404,000 1,966,000 1,980,000 Accrued liabilities 3,920,000 2,141,000 5,113,000 Income taxes payable 2,453,000 1,604,000 1,041,000 Other assets (1,095,000) (348,000) (813,000) - ------------------------------------------------------------------------------------------------------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 11,064,000 12,583,000 11,632,000 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of U.S. Government securities--long-term 23,456,000 22,840,000 6,028,000 Purchase of U.S. Government securities--long-term (16,794,000) (25,028,000) (22,906,000) Additions to property, plant and equipment (5,961,000) (3,710,000) (1,622,000) Proceeds from sales of property, plant and equipment 135,000 - ------------------------------------------------------------------------------------------------------- NET CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES 701,000 (5,898,000) (18,365,000) - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (8,564,000) (6,116,000) (5,070,000) Repayment of capitalized lease obligations (137,000) (630,000) (124,000) Proceeds from exercised stock options 289,000 1,000,000 - ------------------------------------------------------------------------------------------------------- NET CASH FLOWS USED FOR FINANCING ACTIVITIES (8,412,000) (5,746,000) (5,194,000) - ------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,353,000 939,000 (11,927,000) - ------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,599,000 8,660,000 20,587,000 - ------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $12,952,000 $9,599,000 $8,660,000 - ------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES CASH PAID DURING THE YEAR FOR: Interest $ 89,000 $ 111,000 $ 119,000 Income taxes 12,404,000 8,711,000 5,819,000 - -------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation. b. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. c. REVENUE RECOGNITION Sales are recognized upon shipment of merchandise. The Company does not provide for allowances or return of goods except for cause. When an allowance or return occurs, it is accounted for as a reduction of sales. Sales allowances or returns are not significant to the operations of the Company. d. INVENTORIES Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market. e. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Depreciation and amortization for financial accounting purposes are provided by using the straight line method over the estimated useful lives of the assets. Leases of manufacturing facilities which are in substance financing arrangements have been capitalized, with the corresponding liability included in capitalized lease obligations. f. INCOME TAXES Deferred income taxes are provided to reflect the tax effect of timing differences in reporting income and deductions for tax and financial statement purposes under SFAS 109 which provides for accounting for deferred income taxes using the liability method. g. EARNINGS PER SHARE Earnings per share are calculated on the basis of the weighted average number of common shares outstanding during the period in accordance with the provisions of Statement of Financial Accounting Standards No. 128. Diluted earnings per share considers the effect of potential common shares such as stock options. The dilution for the years ended September 30, 1999 and 1998 is due to the net incremental effect of outstanding stock options of 48,000 and 41,000 shares, respectively. h. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. i. INVESTMENTS Financial instruments, which potentially subject the Company to concentration of risk, consist of cash and investments. The Company places its investments in US Treasury obligations which limits the amount of credit exposure. 19 - ------------------------------------------------------------------------------- The Company's investments are designated as trading or held-to-maturity. Trading securities are reported at fair value, with changes in fair value included in earnings. When the Company has the intent and ability to hold the securities to maturity they are classified as held-to-maturity securities and reported at amortized cost. NOTE 2--INVESTMENTS Investments in the held-to-maturity category amounted to $25,435,000 at September 30, 1999 and consisted of U.S. Treasury Notes with contractual maturities as follows: 2001........................................................ $17,963,000 2002........................................................ 7,472,000 ----------- $25,435,000 ===========
The estimated fair value of investments approximates the amortized cost, and, therefore, there are no unrealized gains or losses as at September 30, 1999. NOTE 3--INVENTORIES INVENTORIES CONSIST OF THE FOLLOWING:
1999 1998 ---- ---- Raw materials............................................... $6,997,000 $7,305,000 Work in process............................................. 6,932,000 5,560,000 Finished goods.............................................. 23,404,000 19,911,000 ----------- ----------- $37,333,000 $32,776,000 =========== ===========
NOTE 4--PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND EQUIPMENT CONSIST OF THE FOLLOWING:
1999 1998 ---- ---- Capitalized leased manufacturing plants..................... $12,023,000 $11,373,000 Machinery and equipment..................................... 19,847,000 16,018,000 Leasehold improvements...................................... 5,122,000 3,912,000 Transportation equipment.................................... 2,118,000 1,880,000 ----------- ----------- 39,110,000 33,183,000 Less accumulated depreciation and amortization.............. 23,717,000 19,838,000 ----------- ----------- $15,393,000 $13,345,000 =========== ===========
The net book value of the capitalized leased manufacturing plants was $3,482,000 at September 30, 1999 and $2,933,000 at September 30, 1998. NOTE 5--CAPITALIZED LEASES Substantially all of the Company's leases of manufacturing facilities have been capitalized. Future minimum lease payments of principal and interest under leases capitalized at September 30, 1999 are as follows: 2000........................................................ $ 99,000 2001........................................................ 309,000 2002........................................................ 300,000 2003........................................................ 430,000 2004........................................................ 262,000 Later years................................................. 1,151,000 ----------- 2,551,000 Less interest--3.90% to 6.0%................................ (381,000) ----------- Total minimum lease payments................................ 2,170,000 Less amounts due within one year............................ (20,000) ----------- $ 2,150,000 ===========
20 - ------------------------------------------------------------------------------- NOTE 6--INCOME TAXES The difference between the total statutory Federal income tax and the actual income tax expense is accounted for as follows:
1999 1998 1997 ------------------------ ----------------------- ----------------------- Percent of Percent of Percent of Pre-tax Pre-Tax Pre-Tax Amount Earnings Amount Earnings Amount Earnings ------------------------ ----------------------- ----------------------- Federal statutory tax expense...... $10,839,000 35.0% $8,238,000 35.0% $5,655,000 35.0% State and local income tax expense, net of Federal income tax benefit............................ 1,791,000 5.8 1,263,000 5.4 786,000 4.9 ----------- ---- ---------- ---- ---------- ---- Income tax expense................. $12,630,000 40.8% $9,501,000 40.4% $6,441,000 39.9% =========== ==== ========== ==== ========== ====
Income tax expense consists of the following components:
1999 1998 1997 ---- ---- ---- Current..................................................... $14,744,000 $10,207,000 $6,766,000 Deferred.................................................... (2,114,000) (706,000) (325,000) ----------- ----------- ---------- $12,630,000 $ 9,501,000 $6,441,000 =========== =========== ==========
Deferred income taxes are provided to reflect the tax effect of timing differences in reporting income and deductions for tax and financial statement purposes, principally depreciation, pension, employee benefits, deferred compensation and inventory. Included in Other Current Assets at September 30, 1999 and 1998 is $4,077,000 and $2,504,000, respectively, of current deferred income tax debits, and included in Income Taxes Payable at September 30, 1999 and 1998 is $332,000 and $289,000, respectively, of current deferred income tax credits. NOTE 7--COMMITMENTS The Company is obligated under certain long-term leases which do not meet the criteria for capitalization. The annual minimum rental commitments (excluding escalation) of these leases are: 2000........................................................ $1,988,000 2001........................................................ 1,746,000 2002........................................................ 1,647,000 2003........................................................ 1,511,000 2004........................................................ 1,222,000 2005 and thereafter......................................... 7,080,000
Total rental expense charged to operations in 1999, 1998 and 1997 amounted to $2,138,000, $1,952,000 and $1,591,000, respectively. The Company is obligated under various licensing agreements for annual minimum royalty expense commitments, amounting to approximately $865,000 in 2000. Total royalty expense charged to operations in 1999, 1998 and 1997 amounted to $1,188,000, $1,868,000 and $2,444,000, respectively. NOTE 8--STOCK OPTION PLAN In 1989, the Company adopted a plan ("1989 Plan") for granting stock options to employees to purchase common stock at a price not lower than its fair market value at the respective date of grant, and 200,000 shares (as adjusted) were reserved for issuance under the 1989 plan. On November 6, 1996, options to purchase a total of 177,500 shares of the Company's Common Stock at an exercise price of $17 per share were granted to certain employees. The options are exercisable until ten years from date of grant subject to certain conditions. The last day options may be granted pursuant to the 1989 plan passed during the last fiscal year, and at September 30, 1999, no further options were available for grant under the 1989 Plan. In 1998, the Company adopted a plan ("1998 Plan") for granting stock options to employees pursuant to equivalent terms and conditions as the 1989 Plan, and 200,000 shares were reserved for issuance. No options have been granted pursuant to the 1998 Plan, and at September 30, 1999, 200,000 options were available for grant thereunder. During fiscal 1999, 17,018 options were exercised for a total of $289,306. At September 30, 1999, there were 101,655 options outstanding of which 97,493 options were exercisable. 21 - ------------------------------------------------------------------------------- The Company applies Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees) and related interpretations in accounting for its stock options plans. Accordingly, no compensation expense is recognized when options are granted. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 (Accounting for Stock-Based Compensation) which became effective for the Company during the current year. Had compensation expense been determined based on the fair value methodology prescribed in this statement, net earnings and earnings per share for the current year would have been reduced by approximately $248,000 or $.05 per share for options granted in fiscal 1997. The fair value of the options granted during fiscal 1997 was estimated at $2.33 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield 6%, volatility 19%, risk-free interest rate of 6.5% and an expected life of 6 years. NOTE 9--PENSION AND RETIREMENT PLANS The Company contributes to defined benefit pension plans which cover all eligible employees. Pension costs are generally funded currently. Pension expense amounted to $253,899 in 1999, $37,595 in 1998 and $249,721 in 1997. Pension information under FASB No. 132 is as follows:
1999 1998 ----------- ----------- CHANGE IN BENEFIT OBLIGATIONS Benefit obligation at beginning of year $14,755,787 $12,743,244 Service cost 631,223 535,555 Interest cost 1,097,255 1,027,095 Amendments 415,024 Actuarial loss 391,817 1,266,228 Benefits paid (260,468) (259,077) Settlements (924,004) (972,282) ----------- ----------- Benefit obligation at end of year $15,691,610 $14,755,787 ----------- ----------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $18,556,352 $16,255,283 Actual return on plan assets 1,480,991 2,771,223 Employer contribution 776,423 761,205 Benefits paid (260,468) (259,077) Settlements (924,004) (972,282) ----------- ----------- Fair value of plan assets at end of year $19,629,294 $18,556,352 ----------- ----------- RECONCILIATION OF FUNDED STATUS Funded status $ 3,937,684 $ 3,800,565 First Quarter Contribution 784,081 321,422 Unrecognized net transition obligation 447,901 510,901 Unrecognized prior service cost 796,088 982,510 Unrecognized net actuarial (gain) or loss 83,018 (551,810) ----------- ----------- Prepaid benefit cost, September 30 $ 6,048,772 $ 5,063,588 =========== =========== WEIGHTED-AVERAGE ASSUMPTIONS Discount rate Beginning of year 7.50% 8.00% End of year 7.50% 7.50% Expected return on plan assets 9.50% 9.50% Rate of compensation increase 5.30% 5.30% COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 631,223 $ 535,555 Interest cost 1,097,255 1,027,095 Expected return on plan assets (1,788,449) (1,561,879) Amortization of net transition obligation 72,425 70,069 Amortization of prior service cost 186,422 162,942 Amortization of net actuarial loss 5,728 Settlement (gain) or loss 55,023 (201,915) ----------- ----------- Net periodic benefit cost $ 253,899 $ 37,595 =========== ===========
22 - ------------------------------------------------------------------------------- The Board of Directors adopted on April 1, 1989 a Supplemental Executive Retirement Plan for certain executive employees to restore pension benefits which had been reduced by legislative action. The Company purchased annuity contracts to fund its obligation for the four participants (three officers-directors and one employee-director of the Company) under such plan and reimbursed the participants for the current tax recognition resulting from such purchases. The respective costs were amortized over the remaining estimated employment lives of the participants. In 1999 and 1998 there were no expenses for the plan, and in 1997 the expense was $436,000. The plan was terminated in May, 1999. See note 14. The Board of Directors adopted on January 1, 1995, a Supplemental Benefit Restoration Plan for certain employees not covered by the Supplemental Executive Retirement Plan to restore certain pension benefits which had been reduced by legislative action. The Company is currently funding its obligations under the Plan and the 1999, 1998 and 1997 expense for such plan was $180,000, $146,000 and $81,000, respectively. NOTE 10--MAJOR CUSTOMERS The Company operates within one industry segment--the manufacture of apparel. Sales to one mass merchandiser accounted for approximately 89% of the Company's net sales in 1999, 80% in 1998 and 71% in 1997. In addition a national retail chain accounted for approximately 7%, 10% and 12% of the Company's net sales in 1999, 1998 and 1997, respectively. No other customer accounted for more than 10% of the Company's net sales in any of the three years. The Company routinely assesses the financial strength of its customers and, as a consequence, generally does not require collateral or other security to support customer receivables. Historically, the Company has not experienced significant losses related to receivables and management believes that its trade receivable credit risk exposure is limited. NOTE 11--SHAREHOLDERS' EQUITY Pursuant to the Company's Rights Plan, each shareholder holds one right for each share of common stock, and in the event any person acquires 20% of the Company's common stock, each right will give the holder the option to purchase one share of the Company's common stock for $90, subject to adjustment. The rights expire May 16, 2003, and may be redeemed by the Company for $.01 per right. As of September 30, 1999, 5,305,737 shares of the Company's common stock were reserved for issuance under the Company's Rights Plan. NOTE 12--EMPLOYMENT AGREEMENTS The Company maintains employment agreements with four directors, three of whom are also officers of the Company. The employment agreements contain provisions that would entitle each of the four directors to receive up to 2.99 times his five year average annual compensation plus continuation of certain benefits if there is a change in control in the Company (as defined) and his employment terminates. The maximum contingent liability under these agreements in such event is approximately $10,629,000. The employment agreements also provide for severance benefits, disability and death benefits and, as to one officer-director, consulting services under certain circumstances. 23 - ------------------------------------------------------------------------------- NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED) Financial data for the interim periods of 1999 and 1998 were as follows:
EARNINGS PER SHARE NET GROSS NET ------------------- SALES MARGINS EARNINGS BASIC DILUTED ----- ------- -------- ----- ------- (In thousands, except per share amounts) Fiscal Year 1999 Quarters - -------- First.................................................... $39,037 $10,113 $3,048 $ .59 $ .58 Second................................................... 58,656 14,929 5,186 1.01 1.01 Third.................................................... 45,836 11,837 3,676 .70 .69 Fourth................................................... 85,316 20,985 6,430 1.22 1.21 -------- ------- ------- ----- ----- Total................................................. $228,845 $57,864 $18,340 $3.52 $3.49 ======== ======= ======= ===== ===== Fiscal Year 1998 Quarters - -------- First.................................................... $37,711 $8,817 $2,474 $ .49 $ .48 Second................................................... 41,098 9,901 3,022 .59 .59 Third.................................................... 43,706 10,439 3,071 .60 .60 Fourth................................................... 71,682 16,658 5,470 1.07 1.06 -------- ------- ------- ----- ----- Total................................................. $194,197 $45,815 $14,037 $2.75 $2.73 ======== ======= ======= ===== =====
NOTE 14--RESTRICTED STOCK PLAN In May, 1999, the Company terminated the Supplemental Executive Retirement Plan ("SERP"). In lieu of the SERP, the Company adopted a 1999 Restricted Stock Plan ("Restricted Stock Plan") for the benefit of the same individuals covered under the SERP and issued 160,000 shares of Common Stock thereunder. The shares issued pursuant to the Restricted Stock Plan are subject to restrictions on transfer and certain other conditions. During the restriction period, plan participants are entitled to vote and receive dividends on such shares. Upon issuance of the 160,000 shares pursuant to the Restricted Stock Plan, an unamortized compensation expense equivalent to the market value of the shares on the date of grant was charged to shareholders' equity and will be amortized over the five year restriction period. The compensation expense taken with respect to the restricted shares during the year ended September 30, 1999, was $355,000. 24 INDEPENDENT AUDITORS' REPORT - ------------------------------------------------------------------------------- Board of Directors and Shareholders Garan, Incorporated We have audited the accompanying consolidated balance sheets of Garan, Incorporated and its subsidiaries as at September 30, 1999 and 1998 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three fiscal 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 aforementioned financial statements present fairly, in all material respects, the consolidated financial position of Garan, Incorporated and its subsidiaries as at September 30, 1999 and 1998, and the results of consolidated operations, changes in shareholders' equity and cash flows for each of the three fiscal years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. Citrin Cooperman & Company, LLP New York, New York November 10, 1999 25 PART III Item 10. Directors and Executive Officers of the Registrant. The information required to be set forth in this Item will be contained in registrant's 2000 Proxy Statement under the caption "Election of Directors" and is incorporated by reference into this Report. Item 11. Executive Compensation. The information required to be set forth in this Item will be contained in registrant's 2000 Proxy Statement under the caption "Executive Compensation" and is incorporated by reference into this Report. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required to be set forth in this Item will be contained in registrant's 2000 Proxy Statement under the caption "Election of Directors; Security Ownership of Certain Beneficial Owners and Management" and is incorporated by reference into this Report. Item 13. Certain Relationships and Related Transactions. The information required to be set forth in this Item will be contained in registrant's 2000 Proxy Statement under the caption "Transactions with Management" and is incorporated by reference into this Report. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules. Page ---- (1) Consolidated Financial Statements. Included in Part II, Item 8 of this Report: Consolidated Balance Sheets as at September 30, 1999, and September 30, 1998. Consolidated Statements of Earnings - - years ended September 30, 1999, September 30, 1998, and September 30, 1997. Consolidated Statements of Shareholders' Equity - years ended September 30, 1999, September 30, 1998, and September 30, 1997. Consolidated Statements of Cash Flows - years ended September 30, 1999, September 30, 1998, and September 30, 1997. Notes to Consolidated Financial Statements for the years ended September 30, 1999, September 30, 1998, and September 30, 1997. Page ---- Independent Auditors' Report dated November 10, 1999. (2) Consolidated Financial Statement Schedules. Independent Auditors' Report on Schedules dated November 10, 1999, and Consent of Independent Certified Public Accountants dated December 28, 1999. F-1 Supplemental Notes to Consolidated Financial Statements for the years ended September 30, 1999, September 30, 1998, and September 30, 1997. F-2 Schedules other than those listed above are omitted for the reason that they are not required, are not applicable, or the required information is shown in the Consolidated Financial Statements or Notes thereto. Individual financial statements of the registrant and its subsidiaries are omitted because all subsidiaries included in the Consolidated Financial Statements are 100% owned. (b) No reports on Form 8-K have been filed by the registrant during the last quarter of the period covered by this Report. Page ---- (c) Exhibits filed as part of this Report. (3) Articles of Incorporation and by-laws. (i) Restated Articles of Incorporation.(1) (ii) Articles of Amendment of the Restated Articles of Incorporation.(1) (iii) Articles of Amendment of the Restated Articles of Incorporation.(2) (iv) By-laws, as amended through April 21, 1993.(3) (4) Instruments defining the rights of security holders, including indentures. (i) Amended and Restated Rights Agreement dated as of April 21, 1993, between the registrant and Chemical Bank (now known as Chase Manhattan Bank).(3) (10) Material Contracts. (i) 1989 Stock Option Plan.(4) (ii) 1998 Stock Option Plan.(5) (iii) 1999 Restricted Stock Plan (iv) Employment and Consulting Agreement amended and restated as of October 1, 1996, between the registrant and Seymour Lichtenstein.(6) (v) Employment Agreement amended and restated as of October 1, 1996, between the registrant and Jerald Kamiel.(6) (vi) Employment Agreement amended and restated as of October 1, 1996, between the registrant and William J. Wilson.(6) (vii) Employment Agreement amended and restated as of October 1, 1996, between the registrant and Rodney Faver.(6) (viii) Amendment to Employment Agreement dated November 9, 1998, between the registrant and Rodney Faver.(7) (ix) Form of Indemnity Agreement dated August 9, 1993, between the registrant and each of its directors.(8) (x) Indemnity Agreement dated August 9, 1993, between the registrant and Alexander J. Sistarenik.(8) (21) Schedule of Subsidiaries of registrant. (27) Financial Data Schedule. Exhibits not included in this filing are hereby incorporated by reference from the following reports and registration statements previously filed by the registrant: (1) Annual Report on Form 10-K for the fiscal year ended September 30, 1988. (2) Annual Report on Form 10-K for the fiscal year ended September 30, 1992. (3) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1993. (4) Registration Statement on Form S-8 (File No. 33-29054) filed May 31, 1989. (5) Registration Statement on Form S-8 (File No. 333-66009) filed October 22, 1998. (6) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. (7) Annual Report on Form 10-K for the fiscal year ended September 30, 1998. (8) Annual Report on Form 10-K for the fiscal year ended September 30, 1993. (d) The Consolidated Financial Statement Schedules Specified in Item 14(a)(2) are annexed. SIGNATURES Pursuant to the requirements of Section 13 of 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. GARAN, INCORPORATED December 28, 1999 By: /s/ WILLIAM J. WILSON ---------------------------------- William J. Wilson, Vice President Finance and Administration 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. December 28, 1999 /s/ SEYMOUR LICHTENSTEIN ------------------------------------- Seymour Lichtenstein Principal Executive Officer, Director December 28, 1999 /s/ WILLIAM J. WILSON ------------------------------------- William J. Wilson Principal Financial Officer, Director December 28, 1999 /s/ ALEXANDER J. SISTARENIK ------------------------------------- Alexander J. Sistarenik, Principal Accounting Officer December 28, 1999 /s/ STEPHEN J. DONOHUE ------------------------------------- Stephen J. Donohue, Director December 28, 1999 /s/ RODNEY FAVER ------------------------------------- Rodney Faver, Director December 28, 1999 /s/ MARVIN S. ROBINSON ------------------------------------- Marvin S. Robinson, Director INDEPENDENT AUDITORS' REPORT ON SCHEDULES Board of Directors and Shareholders Garan, Incorporated In connection with our audit of the Consolidated Financial Statements of Garan, Incorporated for the year ended September 30, 1999, incorporated into this Annual Report on Form 10-K in Part II, Item 8, we also have audited the supporting Consolidated Financial Statement Schedules listed in Item 14(a)(2) of this Report. In our opinion, those Consolidated Financial Statement Schedules present fairly, when read in conjunction with the related Consolidated Financial Statements, the financial data required to be set forth therein. CITRIN COOPERMAN & COMPANY, LLP November 10, 1999 New York, New York CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report dated November 10, 1999, included in, or incorporated by reference in, Registration Statement Nos. 2-72544, 33-29054, and 333-66009 on Form S-8 and the related Prospectuses. CITRIN COOPERMAN & COMPANY, LLP December 28, 1999 New York, New York F-1 GARAN, INCORPORATED AND SUBSIDIARIES SUPPLEMENTAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14 - INTEREST INCOME Interest income is comprised of the following components:
1999 1998 1997 ---- ---- ---- Investments $2,259,000 $2,494,000 $2,262,000 Other 254,000 466,000 511,000 ---------- ---------- ---------- $2,513,000 $2,960,000 $2,773,000 ========== ========== ==========
Note 15 - ACCRUED LIABILITIES Accrued liabilities as at September 30, 1999, and September 30, 1998, consist of the following:
1999 1998 ---- ---- Payroll/Bonus $ 7,199,000 $ 5,606,000 Payroll Taxes 108,000 141,000 Accrued Expenses 15,188,000 12,828,000 ----------- ----------- $22,495,000 $18,575,000 =========== ===========
F-2 EX-10.(III) 2 EXHIBIT 10.(III) GARAN, INCORPORATED 1999 RESTRICTED STOCK PLAN SECTION I Establishment, Purpose, and Duration 1.1. Garan, Incorporated hereby establishes an incentive compensation plan known as the Garan, Incorporated 1999 Restricted Stock Plan to permit the grant of restricted stock to certain selected employees of Garan, Incorporated and its subsidiaries. 1.2. The purpose of the Garan, Incorporated 1999 Restricted Stock Plan is to provide an increased incentive for the participating employees to contribute to the future success and prosperity of Garan, Incorporated, to link the personal interest of the participating employees with the Garan, Incorporated shareholders so that the value of the Garan, Incorporated Common Stock is enhanced for the benefit of its shareholders, and to increase the ability of Garan, Incorporated and its subsidiaries to retain individuals of exceptional skill. 1.3. The Garan, Incorporated 1999 Restricted Stock Plan shall be effective on May 7, 1999, and remain effective until all shares of Common Stock subject to it shall have been granted and fully vested. SECTION II Definitions and Construction 2.1. The following terms used in this 1999 Restricted Stock Plan shall have the respective meanings set forth in this Section. Board shall mean the Board of Directors of Garan. Cause shall mean, with respect to a Grantee, the commission by the Grantee of one or more acts which constitute an indictable crime under Federal, state, or local law, each as may be determined in good faith by written resolution adopted by a majority of the members of the Board at a meeting duly called and held for that purpose after reasonable notice to the Grantee and opportunity for the Grantee and his or her counsel to be heard. Change in Control shall mean: (a) Continuing Directors no longer constitute at least a majority of the Board; (b) any person or group of persons (as defined in Rule 13d-5 under the Exchange Act), together with its affiliates, become the beneficial owner, directly or indirectly, of at least 40% of Garan's then outstanding Common Stock; (c) the approval by Garan's shareholders of the merger or consolidation of Garan with any other corporation, the sale of substantially all of the assets of Garan, or the liquidation or dissolution of Garan unless, in the case of a merger or consolidation, the Continuing Directors in office immediately prior to such merger or consolidation will constitute at least a majority of directors of the surviving corporation of such merger or consolidation and any parent (as such terms is defined in Rule 12b-2 under the Exchange Act) of such corporation, and such surviving corporation (and such parent, if any) shall have at least five directors; or (d) at least a majority of the Continuing Directors in office immediately prior to any other action proposed to be taken by Garan's shareholders or by the Board determines that such proposed action, if taken, would constitute a change of control of Garan and such proposed action is thereafter taken. Committee shall mean the Compensation Committee appointed by the Board. Common Stock shall mean the Common Stock, no par value, of Garan. Company shall mean Garan, Incorporated and its Subsidiaries. Continuing Director shall mean any individual who is a member of the Board on May 7, 1999, or is designated after such date (before such person's initial election as a director) as a Continuing Director by a majority of the then Continuing Directors. Disabled shall mean that a Grantee, in the reasonable opinion of the Committee, has been unable for a period of 90 consecutive days or for an aggregate of 120 days during any period of 360 consecutive days to substantially carry out the duties customarily performed by him or her for the Company because of psychological, emotional, or physical reasons. Exchange Act shall mean the Securities Exchange Act of 1934, as amended. Fair Market Value shall mean with respect to a share of Common Stock granted as a Stock Award, the reported closing price of the Common Stock on the trading day prior to the date on which the Stock Award was granted or, if there was no reported sale of Common Stock on that day, than the reported closing price on the next preceding trading day on which there was such a sale. Garan shall mean Garan, Incorporated Grantee shall mean an individual who has been granted a Stock Award. Parent Corporation shall mean a parent corporation, as defined in Section 424(e) of the Code. Plan shall mean this Garan, Incorporated 1999 Restricted Stock Plan. Restricted Stock Award Agreement shall mean an agreement between Garan and each Grantee setting forth the terms and provisions applicable to his or her Stock Award. Restriction Period shall mean the period beginning on the date of a Stock Award and ending on the earlier of (a) the day prior to the fifth anniversary of the date of the Stock Award, (b) the date of death of the Grantee if such death occurs while the Grantee is in the employ of the Company, (c) the date that the Grantee becomes Disabled if such event occurs while the Grantee is in the employ of the Company, or (d) the date of a Change in Control. Stock Award shall mean shares of Common Stock awarded to a Grantee in accordance with Section 5.1. Subsidiary shall mean a subsidiary corporation, as defined in Section 424(f) of the Code. 2 Termination of Employment shall mean the voluntary termination, including retirement, by a Grantee of his or her employment or consulting relationship with the Company or a termination by the Company of a Grantee's employment without Cause but shall exclude a change from employee to consultant status. Termination With Cause shall mean a termination by the Company of a Grantee's employment for Cause. 2.2. When used in this Plan, unless the context clearly indicates to the contrary, (a) the singular shall include the plural and (b) if a defined term is intended, it shall be capitalized. SECTION III Administration 3.1. Except as otherwise provided in the Plan, and subject to Section 3.2, the Committee shall administer the Plan and shall have full power to grant Stock Awards in such amounts as the Committee may determine, to determine whether a Grantee shall forfeit any portion of his or her stock grant if the Grantee incurs a Termination of Employment during the Restriction Period, construe and interpret the Plan, establish and amend rules and regulations for administration of the Plan, and perform all other acts relating to the Plan including the delegation of administrative responsibilities which the Committee believes reasonable and proper. 3.2. Subject to the provisions of the Plan and the right of the Board to give specific direction, the Committee shall establish the policies and criteria pursuant to which it shall grant Stock Awards and administer the Plan and, in its discretion, shall determine which employees of the Company shall be granted Stock Awards, the number of shares covered by any such Stock Awards, and the terms and conditions of the Stock Awards. 3.3. Any decision made, or action taken, by the Committee or the Board arising out of or in connection with the interpretation and administration of the Plan shall be final and conclusive. SECTION IV Shares Subject to the Plan 4.1. The total number of shares of Common Stock available for awards of Stock Grants under the Plan shall be 160,000, subject to adjustment in accordance with Section VII. These shares may be either authorized and unissued or reacquired shares of Common Stock. If any portion of a Stock Award shall be forfeited, the forfeited shares covered by such Stock Award shall be available for future grants of Stock Awards. SECTION V Eligibility 5.1. Stock Awards may be granted by the Committee to employees of the Company who contribute to the management, direction, and/or overall success of the Company. 3 SECTION VI Terms of Stock Awards 6.1. Each Stock Award shall be evidenced by a Restricted Stock Award Agreement that shall contain the following terms and provisions and such other terms and provisions as the Committee or Board shall determine: 6.1.a. The number of shares of Common Stock granted. 6.1.b. The applicable Restriction Period. 6.1.c. During the Restriction Period (i) a Grantee may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares granted pursuant to a Stock Award, (ii) Garan shall retain custody of the certificates evidencing shares granted pursuant to a Stock Award, and (iii) the Grantee will deliver to Garan a stock power, endorsed in blank, with respect to each Stock Award. 6.1.d. If a Grantee during the Restriction Period incurs a Termination With Cause, all shares granted under his or her Stock Award shall be forfeited. 6.1.e. The Stock Award shall have an initial value equal to Fair Market Value. 6.1.f. Unless the shares of Common Stock granted by the Stock Award are registered on the date of grant of the Stock Award under the Securities Act of 1933, as amended, if counsel to Garan advises that the same is required prior to delivery of the shares granted, the Grantee shall agree to hold such shares for investment only and not with a view to resale or distribution of such shares to the public, and such Grantee shall deliver to Garan a letter to that effect in a form specified by counsel to Garan together with any additional documents specified by counsel, and, in the event that issuance of shares of Common Stock pursuant to a Stock Award is subject to laws, rules, and/or regulations of a jurisdiction other than the United States of America, the Grantee simultaneously shall comply with requirements of counsel to Garan to satisfy the same. 6.2. During the Restriction Period (as set forth in the applicable Restricted Stock Award Agreement), a Grantee will have all rights of a shareholder with respect to all shares of Common Stock granted to him or her as a Stock Award which have not been forfeited, including the right to receive dividends and vote the shares. 6.3. The limitations set forth in Section 6.1.c shall not apply after the Restriction Period to shares granted as a Stock Award; shares of Common Stock granted as a Stock Award shall become freely transferable by the Grantee (subject to the provisions of Section 6.1.f) after the last day of the applicable Restriction Period and the certificates evidencing the shares granted shall be delivered to the Grantee. 4 SECTION VII Adjustments 7.1. If (a) Garan shall at any time be involved in a transaction to which Section 424(a) of the Internal Revenue Code of 1986, as amended, is applicable, (b) Garan shall declare a dividend payable in, or shall subdivide or combine, its Common Stock, or (c) any other event shall occur which in the judgment of the Committee necessitates action by way of adjusting the terms of the outstanding Stock Awards, the Committee may take any such action as in its judgment shall be necessary to preserve the Grantee's rights substantially proportionate to the rights existing prior to such event and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock subject to outstanding Stock Awards, the number of shares available under Section IV shall be increased or decreased, as the case may be, proportionately. The judgment of the Committee with respect to any matter referred to in this Section VII shall be conclusive and binding upon each Grantee. SECTION VIII Amendment and Termination of Plan 8.1. The Board may at any time, or from time to time, suspend or terminate the Plan in whole or in part or amend it in such respects as the Board may deem appropriate. 8.2. No amendment, suspension, or termination of this Plan, without a Grantee's consent, shall alter or impair any of the rights or obligations under any Stock Award theretofore granted under the Plan. SECTION IX Government and Other Regulations 9.1. The obligation of Garan to issue, or transfer and deliver, shares for Stock Awards granted under the Plan shall be subject to all applicable laws, regulations, rules, orders, and approvals which shall then be in effect and required by governmental entities and any stock exchanges on which the Common Stock may be traded. SECTION X Miscellaneous Provisions 10.1. The right of the Company to terminate (whether by a Termination With Cause, a Termination Without Cause, or retirement) the Grantee's employment at any time at will or as otherwise provided by any agreement between the Company and the Grantee is specifically reserved. 10.2. All expenses of administering the Plan shall be borne by Garan. 10.3. In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Board and the Committee shall be indemnified by Garan against all costs and expenses reasonably incurred by them in connection with any action, suit, or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Stock Award granted under the Plan, and against all 5 amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by Garan) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding, except a judgment based upon a finding of bad faith, provided that upon the institution of any such action, suit, or proceeding, a Committee or Board member, in writing, shall give Garan notice thereof and an opportunity, at its own expense, to handle and defend the same before such Committee or Board member undertakes to handle and defend it on such member's own behalf. 6 EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Name of Corporation State of Incorporation ------------------- ---------------------- Garan Central America Corp. Virginia Garan Export Corp. New York Garan Manufacturing Corp. Virginia Garan Services Corp. Delaware Garan de El Salvador, S.A. de C.V. El Salvador Garan de Honduras, S.A. de C.V. Honduras EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF EARNINGS AND BALANCE SHEETS OF GARAN, INCORPORATED ANNEXED HERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 12,952,000 0 59,893,000 512,000 37,333,000 116,372,000 39,110,000 23,717,000 163,692,000 38,970,000 2,150,000 0 0 2,653,000 117,474,000 163,692,000 228,845,000 228,845,000 170,981,000 170,981,000 0 0 89,000 30,970,000 12,630,000 0 0 0 0 18,340,000 3.52 3.49
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