10-Q 1 gar10-q_3.txt GARAN, INCORPORATED FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2002 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, NY 10118 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 563-2000 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 than 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding June 30, 2002 Common Stock (no par value) 4,524,767 shares GARAN, INCORPORATED AND SUBSIDIARIES FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Page # Item 1. Consolidated Statements of Earnings Three Months Ended June 30, 2002 and 2001 3 Consolidated Statements of Earnings Nine Months Ended June 30, 2002 and 2001 4 Consolidated Balance Sheets June 30, 2002 and September 30, 2001 5 Consolidated Statements of Cash Flows Nine Months Ended June 30, 2002 and 2001 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Qualitative and Quantitative Disclosure About Market Risk 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit Index 15 PART I. - FINANCIAL INFORMATION Item 1. GARAN, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) THREE MONTHS ENDED 6/30/02 6/30/01 ----------- ----------- Net sales $54,205,000 $55,176,000 Cost of sales 35,017,000 39,259,000 ----------- ----------- Gross margin on sales 19,188,000 15,917,000 Selling and administrative expenses 8,798,000 8,206,000 Interest on capitalized leases 11,000 19,000 Interest income (263,000) (539,000) ----------- ----------- Earnings before provision for income taxes 10,642,000 8,231,000 Provision for income taxes 4,310,000 3,375,000 ----------- ----------- Net earnings $ 6,332,000 $ 4,856,000 =========== =========== Earnings per share data (see Note 2): Earnings per share - Basic $ 1.40 $ 1.00 - Diluted $ 1.40 $ .98 Average common shares outstanding- Basic 4,507,000 5,015,000 - Diluted 4,532,000 5,051,000 Dividends paid per share $ 0.25 $ 0.25 GARAN, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) NINE MONTHS ENDED 6/30/02 6/30/01 ----------- ----------- Net sales $163,942,000 $166,914,000 Cost of sales 111,607,000 121,028,000 ----------- ----------- Gross margin on sales 52,335,000 45,886,000 Selling and administrative expenses 23,679,000 22,986,000 Interest on capitalized leases 31,000 69,000 Interest income (832,000) (1,697,000) ----------- ----------- Earnings before provision for income taxes 29,457,000 24,528,000 Provision for income taxes 11,971,000 10,057,000 ----------- ----------- Net earnings $17,486,000 $14,471,000 =========== =========== Earnings per share data (see Note 2): Earnings per share - Basic $ 3.88 $ 2.89 - Diluted $ 3.86 $ 2.86 Average common shares outstanding- Basic 4,507,000 5,015,000 - Diluted 4,532,000 5,051,000 Dividends paid per share $ 1.65 $ 1.55 GARAN, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 06/30/02 9/30/01 ASSETS ------------- ------------ (UNAUDITED) Current Assets: Cash and cash equivalents $ 33,761,000 $ 33,881,000 U.S. Government securities - short-term 17,901,000 0 Accounts receivable, less allowance for uncollectibles of $2,343,000 at 6/30/02 and $493,000 at 9/30/01 36,411,000 59,301,000 Inventories 52,651,000 41,596,000 Other current assets 7,387,000 7,092,000 ----------- ----------- Total current assets 148,111,000 141,870,000 U.S. Government securities - long-term 3,500,000 3,500,000 Property, plant and equipment, less accumulated depreciation and amortization 14,614,000 16,109,000 Other assets 6,304,000 6,554,000 ------------ ------------ TOTAL ASSETS $ 172,529,000 $ 168,033,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 9,569,000 $ 11,609,000 Accrued liabilities 23,436,000 20,573,000 Federal and state income taxes payable 3,727,000 9,945,000 Current portion of capitalized leases 200,000 220,000 ------------ ------------ Total current liabilities 36,932,000 42,347,000 ------------ ------------ Capitalized lease obligations, net of current portion 1,710,000 1,710,000 ------------ ------------ Deferred income taxes 701,000 1,412,000 ------------ ------------ Shareholders' Equity: Preferred stock ($10 par value) 500,000 shares authorized; none issued Common stock (no par value) 15,000,000 shares authorized; issued 4,524,767 at 6/30/02 and 4,491,387 at 9/30/01 2,262,000 2,246,000 Additional paid-in-capital 6,367,000 5,817,000 Retained earnings 124,557,000 114,501,000 ------------ ------------ Total shareholders' equity 133,186,000 122,564,000 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 172,529,000 $ 168,033,000 ============= ============= GARAN, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED 6/30/02 6/30/01 Cash Flows from Operating Activities: ------------- ------------ Net earnings $ 17,486,000 $ 14,471,000 Adjustments to reconcile to net cash provided by operating activities: Deferred compensation 3,073,000 Depreciation and amortization 4,124,000 5,252,000 Deferred income taxes (711,000) (101,000) Provision for bad debts 1,850,000 Changes in assets and liabilities: U.S. Government securities - Short-term (17,901,000) 6,436,000 Accounts receivable 21,040,000 10,936,000 Inventories (11,055,000) (18,358,000) Other current assets (295,000) 287,000 Accounts payable (2,040,000) 1,066,000 Accrued liabilities 2,863,000 (3,500,000) Income taxes payable (6,218,000) (2,000) Other assets 250,000 (195,000) Net Cash Provided by Operating ------------ ------------ Activities 9,393,000 19,365,000 ------------ ------------ Cash Flows from Investing Activities: Sale of U.S. Government securities - long-term 7,710,000 Purchase of U.S. Government securities - long-term (3,563,000) Additions to property, plant, and equipment (2,629,000) (3,396,000) ------------ ------------ Net Cash Used for (Provided by) Investing Activities (2,629,000) 751,000 ------------ ------------ Cash Flows From Financing Activities: Stock repurchase (17,887,000) Payment of dividends (7,430,000) (7,876,000) Repayment of capitalized lease obligations (20,000) (20,000) Proceeds from exercised stock options 566,000 221,000 ------------ ------------ Net Cash Used for Financing Activities (6,884,000) (25,562,000) ------------ ------------ Net decrease in Cash and Cash Equivalents (120,000) (5,446,000) Cash and Cash Equivalents at Beginning of Period 33,881,000 14,580,000 ------------ ------------ Cash and Cash Equivalents at End of Period $ 33,761,000 $ 9,134,000 ============ ============ Supplemental Cash Flow Disclosures Cash Paid During the Period for: Interest $ 31,000 $ 69,000 Income taxes 18,238,000 9,745,000 ============ ============ GARAN, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (UNAUDITED) 1. In the opinion of management, all adjustments necessary for a fair statement of the results of operations have been reflected. 2. Basic and diluted earnings per share for the nine months ended June 30, 2002 and 2001, are calculated on the basis of the weighted average number of common shares outstanding during such nine-month periods in accordance with the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128") as follows: Nine Months Ended Nine Months Ended June 30, 2002 June 30,2001 ------------------------------- ------------------------------- Income Shares Per Share Income Shares Per Share ----------- --------- --------- ----------- ---------- --------- Basic EPS $17,486,000 4,507,000 $ 3.88 $14,471,000 5,015,000 $2.89 ========= ========= Effect of dilutive options 25,000 36,000 ----------- --------- ------------ --------- $17,486,000 4,532,000 $ 3.86 $14,471,000 5,051,000 $2.86 =========== ========= ========= ============ ========= =========
Basic and diluted earnings per share for the three months ended June 30, 2002 and 2001, are based on earnings per share for the corresponding nine- month period less earnings per share for the six months ended March 31, 2002, and March 31, 2001, respectively. Basic and diluted earnings per share for the three months ended June 30, 2002 and 2001, were calculated in accordance with SFAS No. 128 as follows: Three Months Ended Three Months Ended June 30, 2002 June 30,2001 ------------------------------ ------------------------------- Income Shares Per Share Income Shares Per Share ---------- --------- --------- --------- ---------- --------- Basic EPS $6,332,000 4,507,000 $ 1.40 $4,856,000 5,015,000 $1.00 ========= ========= Effect of dilutive options 25,000 36,000 ---------- --------- ----------- --------- $6,332,000 4,532,000 $ 1.40 $4,856,000 5,051,000 $0.98 ========== ========= ========= =========== ========= =========
3. Inventories consist of the following: 06/30/02 09/30/01 ----------- ----------- (UNAUDITED) Raw Materials $10,625,000 $ 6,627,000 Work in Process 7,043,000 6,070,000 Finished Goods 34,983,000 28,899,000 ----------- ----------- $52,651,000 $41,596,000 =========== =========== 4. Fees Expense Selling and administrative expenses includes an accrual for fees in the three months ended June 30, 2002, related to the pending acquisition of the Company by Berkshire Hathaway Inc. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Events." ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Some of the information presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors including, but not limited to, uncertainties regarding continued market acceptance of the Company's products, competition, the Company's relationship with its principal customer, the consistent availability of raw materials, and risks associated with the Company's Central American operations. These as well as other factors which could affect the Company's business are discussed under the caption "Risk Factors" and elsewhere in the Company's amended Annual Report on Form 10-K for the fiscal year ended September 30, 2001. The forward-looking statements in this report are made as of the date of this report, and the Company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. Results of Operations -- Three and Nine-Month Periods Ended June 30, 2002, and June 30, 2001: Net Sales Net sales for the three months ended June 30, 2002, were $54,205,000 compared to $55,176,000 for the three months ended June 30, 2001. Net sales for the nine months ended June 30, 2002, were $163,942,000 compared to $166,914,000 for the nine months ended June 30, 2001. The decrease in sales in both the three and nine-month periods was the result of lower average selling prices offset in part by increased units shipped. The lower selling prices were due primarily to lower unit prices, product mix, and the liquidation of inventory in connection with the closing of the Company's licensing division. Net earnings for the three months ended June 30, 2002, were $6,332,000, or $1.40 per share, compared to $4,856,000, or $1.00 per share, for the three months ended June 30, 2001. Net earnings for the nine months ended June 30, 2002, were $17,486,000, or $3.88 per share, compared to $14,471,000, or $2.89 per share, for the nine months ended June 30, 2001. The increase in net earnings per share for the three months ended June 30, 2002, was primarily due to cost reductions described below under the caption "-Gross Margin." In addition, the increases in net earnings per share for the three and nine months ended June 30, 2002, as compared to the prior fiscal year periods, are affected by the Company's repurchase of 596,250 of its shares in June, 2001. Earnings per share for the same period for fiscal 2001 were based on the shares outstanding at that time. Gross Margin Gross margin for the three months ended June 30, 2002, was $19,188,000, or 35.4% of net sales, compared to $15,917,000, or 28.8% of net sales, for the three months ended June 30, 2001. Gross margin for the nine months ended June 30, 2002, was $52,335,000, or 31.9% of net sales, compared to $45,886,000, or 27.5% of net sales, for the nine months ended June 30, 2001. The gross margin increase in both periods was due to a number of factors including (a) lower costs of production as a result of shifting more production offshore, (b) lower costs associated with improved manufacturing efficiencies, (c) lower costs obtained by better sourcing of raw materials used in production, and (d) duty savings as a result of lower effective duty rates on a portion of the Company's Caribbean Basin production. The Company is a beneficiary of the Trade and Development Act of 2000 pursuant to which a portion of its garments produced in the Caribbean Basin are imported free of duty subject to annual quotas. Selling and Administrative Expenses; Interest Income Selling and administrative expenses for the three months ended June 30, 2002, were $8,798,000, or 16.2% of net sales, as compared to $8,206,000, or 14.9% of net sales, for the three months ended June 30, 2001. Selling and administrative expenses for the nine months ended June 30, 2002, were $23,679,000, or 14.4% of net sales, as compared to $22,986,000, or 13.8% of net sales, for the nine months ended June 30, 2001. The increase in absolute dollars in selling and administrative expenses for the three months ended June 30, 2002, was due primarily to the accrual of $1,000,000 for fees in connection with the pending acquisition of the Company by Berkshire Hathaway Inc. The increase in selling and administrative expenses for the nine months ended June 30, 2002, was due primarily to an increase in premiums on insurance policies renewed after September 11, 2001, in addition to the previously mentioned accrual of fees in connection with the pending acquisition of the Company by Berkshire Hathaway Inc., partially offset by decreases in both royalties and advertising expenses. See "- Recent Events." Selling and administrative expenses include shipping and handling costs of $1,389,000 and $1,368,000, or approximately 2% and 2% of net sales, for the three months ended June 30, 2002 and 2001, respectively, and $3,840,000 and $3,602,000, or 2% and 2% of net sales, for the nine months ended June 30, 2002 and 2001, respectively. Interest income for the three months ended June 30, 2002, decreased to $263,000 from $539,000 for the three months ended June 30, 2001. Interest income for the nine months ended June 30, 2002, was $832,000 as compared to $1,697,000 for the nine months ended June 30, 2001. Interest income decreased for both periods despite an increase in the level of investments, due to declines in interest rates. Financial Position, Capital Resources, and Liquidity - June 30, 2002, and June 30, 2001: At June 30, 2002, working capital was $111,179,000, an increase of $11,656,000 from working capital at September 30, 2001, of $99,523,000. The increase in working capital was due to increased net earnings less dividends paid. In the period from September 30, 2001 to June 30, 2002, there were net decreases in both accounts payable and income taxes payable. Accounts payable decreased primarily as a result of the Company using more letters of credit and payments on sight for offshore raw materials, as opposed to usual payment terms. Income taxes payable decreased from $9,945,000 at September 30, 2001, to $3,727,000 at June 30, 2002. The amount payable at September 30, 2001, reflected a change in the law which permitted the Company to make its final tax payment for the 2001 fiscal year in October 2001. Shareholders' equity at June 30, 2002, was $133,186,000 or $29.43 book value per share as compared to $122,564,000, or $27.29 book value per share at September 30, 2001. Net accounts receivable were $36,411,000 at June 30, 2002, a decrease of $22,890,000 over the balance at September 30, 2001. Because the Company's business is seasonal, it believes that it is more meaningful to compare the receivable balance at June 30, 2002, to the balance of $42,796,000 at June 30, 2001, rather than the September 30, 2001, fiscal year-end balance. The decrease at June 30, 2002, from June 30, 2001, was primarily due to decreased net sales and a $1,850,000 increase in the allowance for uncollectible accounts to provide for approximately 69% of the amount due from Kmart Corp. as of the date of its bankruptcy filing. The Company's accounts receivable balance due from Wal-Mart Stores, Inc. was $33,089,000 and $34,753,000, or approximately 91% and 81% of total accounts receivable, at June 30, 2002 and 2001, respectively. The Company's accounts receivable balance at September 30, 2001, due from Wal-Mart Stores Inc. was $54,920,000, or approximately 93% of total accounts receivable. Wal-Mart Stores, Inc. is a public company that is subject to the periodic reporting requirements of the U.S. Securities and Exchange Commission. Inventory increased to $52,651,000 at June 30, 2002, from $41,596,000 at September 30, 2001. Because the Company's business is seasonal, the Company believes that it is more meaningful to compare inventory at June 30, 2002, to the balance at June 30, 2001, rather than the September 30, 2001, fiscal year-end balance. The decrease in inventory from $66,115,000 at June 30, 2001, to $52,651,000 at June 30, 2002, was due to several factors including (a) the June 30, 2001, inventory included accelerated production for the 2001 fall season which did not occur in 2002, (b) a lower amount of dozens in inventory at June 30, 2002, due to the closing of the licensing division, and (c) lower inventory valuation resulting from lower cost of raw materials, labor, and overhead. Recent Events On July 2, 2002, the Company agreed to be acquired by Berkshire Hathaway Inc. at a price of $60 per share payable in cash. A Special Shareholders Meeting has been scheduled for 10:00 a.m. on Wednesday, September 4, 2002, at The Shelburne Murray Hill Hotel in New York City to consider approval of the transaction. Shareholders of record of August 1, 2002, will be entitled to vote at the Meeting. The proxy statement was mailed to shareholders on August 6, 2002. Item 3. Qualitative and Quantitative Disclosure About Market Risk The Company does not believe it is exposed to market risks with respect to any of its investments; the Company does not utilize market rate sensitive instruments for trading or other purposes. The Company's investments consist primarily of U.S. Government securities with maturities of two years or less. PART II. - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. a. Exhibits Exhibit Description ------- ----------- 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 b. Reports on Form 8-K No reports have been filed on Form 8-K during the quarter ended June 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GARAN, INCORPORATED BY:/s/Seymour Lichtenstein ----------------------------- Seymour Lichtenstein Principal Executive Officer BY:/s/William J. Wilson ----------------------------- William J. Wilson Principal Financial Officer DATE: August 14, 2002 Exhibit Index Exhibit Description ------- ----------- 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002