<PAGE>
G A R A N
1996
Annual Report
<PAGE>
Corporate Profile
Garan, Incorporated is engaged in the design, manufacture, and sale of apparel
for children, women, and men. Products include tops (shirts and sweatshirts) and
bottoms (trousers, skirts, shorts, and overalls). Generally, the fabrics are
made from cotton or polyester-cotton blends, tops are made mostly from knit
fabrics, and bottoms are made mostly from woven fabrics.
Trademarks, Tradenames, and
Licensed Names
Children's Apparel
Garanimals
Rob Roy
Team Rated
Disney Trademarks and Characters
National Football League
Major League Baseball
National Basketball Association
National Hockey League
Everlast
Women's Apparel
bobbie brooks
Men's Apparel
Long Gone
Team Rated
National Football League
Major League Baseball
National Basketball Association
National Hockey League
Everlast
<PAGE>
[LOGO]
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Financial Highlights
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
- ------------------------------------------------
Net Sales $146,491,000 $141,330,000
- ------------------------------------------------
Net Earnings $6,896,000 $5,489,000
- ------------------------------------------------
Per Common Share:
Earnings $1.36 $1.08
Cash Dividends
Paid $1.00 $1.00
- ------------------------------------------------
Working Capital $75,767,000 $68,448,000
Working Capital
Ratio 5.30 4.38
Total Assets $119,547,000 $120,431,000
- ------------------------------------------------
Shareholders' Equity $96,141,000 $94,315,000
Common Stock Issued
and Outstanding 5,069,892 5,069,892
Book Value Per
Common Share $18.96 $18.60
- ------------------------------------------------
</TABLE>
Table of Contents
<TABLE>
<C> <S> <S>
2 Report from the Chairman of the Board and the President
3 Five-Year Review
4 Management's Discussion and Analysis of Financial Condition and Results of Operations
6 Consolidated Balance Sheets
7 Consolidated Statements of Earnings and Consolidated Statements of Shareholders' Equity
8 Consolidated Statements of Cash Flows
9 Notes to Consolidated Financial Statements
14 Independent Auditors' Report and Corporate Data
15 Common Stock Information
16 Board of Directors and Officers
</TABLE>
1
<PAGE>
Report from the Chairman of the Board
and the President
- -----------------------------------------------------------
- -----------------------------------------------------------
To Our Shareholders:
We are pleased to report that the Company's net sales for fiscal year 1996 were
$146,491,000, compared to 1995 net sales of $141,330,000. Net earnings for
fiscal 1996 were $6,896,000 or $1.36 per share compared to $5,489,000 or $1.08
per share last year.
Our Sports Licensing business, which includes men's, boys and juvenile official
league products, continue to negatively impact our Company in sales and
profitability. We believe our position is best served in the juvenile and boys
segment which is beginning to stabilize and we no longer will be involved in the
men's sports licensing business.
Our Children's Disney licensed business historically has been related only to
full length animated film releases, the most recent being The Hunchback of Notre
Dame. We have signed a new license agreement in 1996 for Winnie The Pooh, a
Disney brand. Our Disney efforts for 1997 will be limited to the Winnie The Pooh
license.
Our Women's business, both private label and Bobbie Brooks, experienced growth
in 1996 and we expect this trend to continue in 1997.
During late 1996 we introduced a men's activewear line of apparel marketed with
the Everlast trademark. The Everlast merchandise is very gym inspired and has an
authentic athletic look. The Everlast brand is being supported by an aggressive
advertising and public relations campaign through 1997 and is targeted towards
department stores and specialty sports retailers.
Our Childrenswear divisions remain the largest business segment in our Company,
and in spite of extreme pricing and margin pressures, we experienced both sales
and unit growth for 1996. Our outlook for our children's business remains very
positive for 1997.
We are beginning a new level of manufacturer-retailer relationships. These
programs have various names such as "vendor managed" or "co-managed". They are
basically programs where Garan, in close relationships with certain customers,
will have a high level of involvement in the inventory and order levels of our
products at customer locations. This is the logical next step of the
replenishment programs which have become such an important part of servicing our
major retailer customers.
In addition to replenishment and co-managed type programs, we are continuing our
efforts to improve efficiencies and reduce the costs related to the physical
movement of goods and related record keeping and processing costs.
For the year ended September 30, 1996 the Board of Directors declared a special
dividend of $0.20 per share in addition to the regular quarterly dividend of
$0.20 per share both of which were paid in November 1996.
Sincerely,
[SEYMOUR LICHTENSTEIN SIGNATURE] [JERALD KAMIEL SIGNATURE]
Seymour Lichtenstein Jerald Kamiel
CHAIRMAN OF THE BOARD PRESIDENT
2
<PAGE>
Five-Year Review
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- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Net Sales $146,491,000 $141,330,000 $173,002,000 $189,581,000 $170,377,000
Cost of Sales 114,744,000 111,454,000 131,687,000 134,212,000 122,716,000
- --------------------------------------------------------------------------------------------------
Gross Margin on Sales 31,747,000 29,876,000 41,315,000 55,369,000 47,661,000
Selling and Administrative Expenses 22,652,000 23,270,000 27,320,000 29,319,000 25,093,000
Interest on Capitalized Leases 123,000 141,000 153,000 202,000 250,000
Interest Income (2,426,000) (2,534,000) (1,491,000) (1,592,000) (2,007,000)
- --------------------------------------------------------------------------------------------------
Earnings before Provision for Income Taxes 11,398,000 8,999,000 15,333,000 27,440,000 24,325,000
Provision for Income Taxes 4,502,000 3,510,000 5,980,000 10,591,000 9,001,000
- --------------------------------------------------------------------------------------------------
Net Earnings $6,896,000 $5,489,000 $9,353,000 $16,849,000 $15,324,000
- --------------------------------------------------------------------------------------------------
Earnings Per Share $1.36 $1.08 $1.84 $3.32 $3.03
Average Shares Outstanding 5,070,000 5,070,000 5,070,000 5,068,000 5,058,000
Dividends Paid Per Share $1.00 $1.00 $1.80 $1.80 $1.175
- --------------------------------------------------------------------------------------------------
Current Assets $87,365,000 $88,685,000 $98,896,000 $101,847,000 $94,082,000
Current Liabilities 17,626,000 20,237,000 18,519,000 21,181,000 20,902,000
- --------------------------------------------------------------------------------------------------
Working Capital 75,767,000 68,448,000 80,377,000 80,666,000 73,180,000
Working Capital Ratio 5.30 4.38 5.34 4.81 4.50
- --------------------------------------------------------------------------------------------------
Total Assets $119,547,000 $120,431,000 $118,525,000 $121,791,000 $112,863,000
- --------------------------------------------------------------------------------------------------
Long-term Obligations $2,937,000 $3,061,000 $3,620,000 $4,176,000 $4,625,000
- --------------------------------------------------------------------------------------------------
Shareholders' Equity $96,141,000 $94,315,000 $93,896,000 $93,669,000 $85,795,000
Common Stock Issued and Outstanding 5,069,892 5,069,892 5,069,892 5,069,892 5,052,132
- --------------------------------------------------------------------------------------------------
</TABLE>
NOTE: All share and per share data give effect to the two-for-one stock split on
December 7, 1992.
3
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -----------------------------------------------------------
- -----------------------------------------------------------
Net Sales
Net sales in fiscal 1996 were $146,491,000, an increase of $5,161,000 over
fiscal 1995 net sales of $141,330,000. The increase in fiscal 1996 was primarily
a result of an increase in total units shipped.
Net sales in fiscal 1995 were $141,330,000, a decrease of $31,672,000 from
fiscal 1994 net sales of $173,002,000. The sales decreases occurred primarily in
the Sports Licensing divisions due to ongoing competitive conditions in the
marketplace, in the Disney division as a result of not participating in a film
property in 1995, and in the Women's Sweater division, which ceased operations
early in fiscal 1995.
Gross Margin
Gross margin in fiscal 1996 was $31,747,000, or 22% of net sales, as compared to
$29,876,000, or 21% of net sales, in fiscal 1995. The increase in gross margin
was the result of improved absorption of manufacturing expenses as a result of
the volume increase.
Gross margin for fiscal 1995 was $29,876,000, or 21% of net sales, as compared
to $41,315,000, or 24% of net sales, in fiscal 1994. The decline in gross margin
from year to year primarily resulted from (a) reduced volume in the Sports
Licensing divisions, which historically maintain higher gross margins than the
other divisions (the gross margin for the Sports Licensing divisions is higher
than for other divisions, but net sales of these divisions are subject to a
royalty expense which is included in selling and administrative expenses), which
affected product mix, and (b) from customer orders taken at lower margins to
maintain market share.
Selling and Administrative Expenses; Interest Income
Selling and administrative expenses in fiscal 1996 were $22,652,000, or 15% of
net sales, as compared to $23,270,000, or 16% of net sales, in fiscal 1995. The
decrease, both in absolute dollars and as a percentage of net sales, was the
result of reduced general overhead expenses offset by increased advertising in
the Everlast division.
Selling and administrative expenses in fiscal 1995 were $23,270,000, or 16% of
net sales, as compared to $27,320,000, or 16% of net sales, in fiscal 1994. The
decrease in dollar amount resulted primarily from reduced royalty and commission
expenses associated with the reduced sales volume in the Sports Licensing
divisions.
4
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations (Con't)
- -----------------------------------------------------------
- -----------------------------------------------------------
Interest income of $2,426,000 in fiscal 1996 decreased slightly from $2,534,000
in fiscal 1995 due to a decline in interest rates on investments.
Interest income in fiscal 1995 was $2,534,000, an increase from $1,491,000 in
the previous year. The increase from 1994 to 1995 was the result of more
favorable rates of return throughout the year and higher levels of investments.
Liquidity and Capital Resources
The Company's financial position remained strong throughout fiscal 1996. At
September 30, 1996 working capital was $75,767,000, an increase of $7,319,000
from September 30, 1995 working capital of $68,448,000. As is noted in footnote
1, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), which requires that investments held to maturity be classified based upon
contractual maturities. As such, at September 30, 1996, $6,028,000 of
investments were reclassified as short-term.
The Company's primary source of cash during the three years ended September 30,
1996 has been its operating activities. In 1996, 1995, and 1994, operating
activities provided $20,453,000, $6,727,000, and $17,113,000, respectively.
The primary uses of cash during the three year period ended September 30, 1996,
have been payment of dividends, additions to property, plant, and equipment, and
repayment of capitalized lease obligations.
In fiscal 1996 the Company continued its year end special dividend payment which
it initiated in fiscal 1988.
At September 30, 1996, shareholders' equity was $96,141,000 or $18.96 per share,
up from $94,315,000, or $18.60 per share, at September 30, 1995. At September
30, 1994 shareholders' equity was $93,896,000, or $18.52 per share.
Management believes that the Company has sufficient working capital to finance
its operations and projected growth. There were no short-term borrowings
outstanding during fiscal years 1996, 1995 and 1994, and management does not
anticipate the need for any such borrowings. If necessary, the Company has the
ability to obtain funds from a number of sources to meet its seasonal and
long-term requirements.
5
<PAGE>
Consolidated Balance Sheets
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- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets September 30, 1996 September 30, 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 20,587,000 $ 8,649,000
U.S. Government securities--short-term 12,568,000 20,424,000
Accounts receivable, less estimated
uncollectibles:
1996 and 1995, $514,000 26,041,000 25,746,000
Inventories 28,639,000 29,454,000
Other current assets 5,558,000 4,412,000
- -------------------------------------------------------------------------------------------
Total Current Assets 93,393,000 88,685,000
- -------------------------------------------------------------------------------------------
U.S. Government Securities--long-term 7,003,000 12,015,000
Property, Plant and Equipment, net 14,915,000 15,069,000
Other Assets 4,236,000 4,662,000
- -------------------------------------------------------------------------------------------
Total $119,547,000 $120,431,000
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Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 4,609,000 $ 6,851,000
Accrued liabilities 11,321,000 11,005,000
Income taxes payable 1,572,000 2,227,000
Current portion of capitalized lease obligations 124,000 154,000
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Total Current Liabilities 17,626,000 20,237,000
- -------------------------------------------------------------------------------------------
Capitalized Lease Obligations, net of current
portion 2,937,000 3,061,000
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Deferred Income Taxes 2,843,000 2,818,000
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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: 5,069,892 at 1996
and 1995 2,535,000 2,535,000
Additional paid-in capital 5,821,000 5,821,000
Retained earnings 87,785,000 85,959,000
- -------------------------------------------------------------------------------------------
Total Shareholders' Equity 96,141,000 94,315,000
- -------------------------------------------------------------------------------------------
Total $119,547,000 $120,431,000
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</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
Consolidated Statements of Earnings
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- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Years Ended September 30,
----------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------
Net Sales $146,491,000 $141,330,000 $173,002,000
Cost of sales 114,744,000 111,454,000 131,687,000
- --------------------------------------------------------------------------------------------
Gross margin on sales 31,747,000 29,876,000 41,315,000
Selling and administrative expenses 22,652,000 23,270,000 27,320,000
Interest on capitalized leases 123,000 141,000 153,000
Interest income (2,426,000) (2,534,000) (1,491,000)
- --------------------------------------------------------------------------------------------
Earnings before provision for income taxes 11,398,000 8,999,000 15,333,000
Provision for income taxes 4,502,000 3,510,000 5,980,000
- --------------------------------------------------------------------------------------------
Net Earnings $ 6,896,000 $ 5,489,000 $ 9,353,000
- --------------------------------------------------------------------------------------------
Earnings per share $ 1.36 $ 1.08 $ 1.84
Average shares outstanding 5,070,000 5,070,000 5,070,000
- --------------------------------------------------------------------------------------------
</TABLE>
Consolidated Statements of Shareholders' Equity
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- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Additional
Common Paid-in Retained
Years Ended 1994, 1995 and 1996 Stock Capital Earnings Total
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Balance at September 30, 1993 $2,535,000 $5,821,000 $85,313,000 $93,669,000
- ------------------------------------------------------------------------------------------
Net earnings 9,353,000 9,353,000
Dividends paid--$1.80 per share (9,126,000) (9,126,000)
- ------------------------------------------------------------------------------------------
Balance at September 30, 1994 $2,535,000 $5,821,000 $85,540,000 $93,896,000
- ------------------------------------------------------------------------------------------
Net earnings 5,489,000 5,489,000
Dividends paid--$1.00 per share (5,070,000) (5,070,000)
- ------------------------------------------------------------------------------------------
Balance at September 30, 1995 $2,535,000 $5,821,000 $85,959,000 $94,315,000
- ------------------------------------------------------------------------------------------
Net earnings 6,896,000 6,896,000
Dividends paid--$1.00 per share (5,070,000) (5,070,000)
- ------------------------------------------------------------------------------------------
Balance at September 30, 1996 $2,535,000 $5,821,000 $87,785,000 $96,141,000
- ------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
Consolidated Statements of Cash Flows
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- ------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Years Ended September 30,
--------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net earnings $ 6,896,000 $ 5,489,000 $ 9,353,000
Adjustments to reconcile net earnings to
net
cash flows from operating activities:
Depreciation and amortization 3,426,000 3,591,000 3,647,000
Provision for losses on accounts
receivable 43,000 112,000 170,000
Deferred income taxes 25,000 (537,000) 480,000
Changes in assets and liabilities:
U.S. Government Securities--short-term 12,887,000 (14,880,000)
Accounts receivable (338,000) 13,849,000 1,443,000
Inventories 815,000 (1,573,000) 5,992,000
Other current assets (1,146,000) (514,000) 208,000
Accounts payable (2,242,000) 305,000 (71,000)
Accrued liabilities 316,000 (4,000) (1,113,000)
Income taxes payable (655,000) 1,466,000 (1,710,000)
Other assets 426,000 (577,000) (1,286,000)
- ---------------------------------------------------------------------------------------
Net Cash Flows From Operating
Activities 20,453,000 6,727,000 17,113,000
- ---------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Sale of U.S. Government
Securities--long-term 997,000 3,000,000 25,924,000
Purchase of U.S. Government
Securities--long-term (1,016,000) (27,149,000)
Additions to property, plant and equipment (3,557,000) (3,284,000) (2,535,000)
Proceeds from sales of property, plant and
equipment 285,000 168,000 489,000
- ---------------------------------------------------------------------------------------
Net Cash Flows From Investing
Activities (3,291,000) (116,000) (3,271,000)
- ---------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Payment of dividends (5,070,000) (5,070,000) (9,126,000)
Repayment of capitalized lease obligations (154,000) (556,000) (854,000)
- ---------------------------------------------------------------------------------------
Net Cash Flows From Financing
Activities (5,224,000) (5,626,000) (9,980,000)
- ---------------------------------------------------------------------------------------
Increase in Cash 11,938,000 985,000 3,862,000
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Cash and Cash Equivalents At Beginning of
Year 8,649,000 7,664,000 3,802,000
- ---------------------------------------------------------------------------------------
Cash and Cash Equivalents At End of Year $ 20,587,000 $ 8,649,000 $ 7,664,000
- ---------------------------------------------------------------------------------------
Supplemental Disclosures
Cash Paid During The Year For:
Interest $ 123,000 $ 141,000 $ 153,000
Income taxes 5,120,000 2,167,000 7,211,000
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</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
Notes to Consolidated Financial Statements
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- -----------------------------------------------------------
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 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 year.
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.
Effective December 31, 1994, the Company adopted Statement of Financial
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115), under which 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. In accordance with
SFAS 115, prior years' financial statements have not been restated to reflect
the change in accounting method. There was no cumulative effect as a result of
adopting SFAS 115 and the impact on net earnings for the year ended September
30, 1995 was not material.
9
<PAGE>
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- -----------------------------------------------------------
Note 2--Investments
Investments in the trading category amounted to $6,540,000 at September 30, 1996
and consisted of U.S. Treasury Bills maturing from November 1996 through
December 1996. Gross unrealized holding gains at September 30, 1996 were
approximately $43,000.
Investments in the held-to-maturity category amounted to $13,031,000 at
September 30, 1996 and consisted of U.S. Treasury Notes with contractual
maturities as follows:
<TABLE>
<S> <C>
1997 (included in U.S. Government securities --
short-term)............................................ $ 6,028,000
1998..................................................... 6,051,000
1999..................................................... 952,000
------------
$ 13,031,000
------------
------------
</TABLE>
The estimated fair value of investments approximates the amortized cost, and,
therefore, there are no unrealized gains or losses as at September 30, 1996.
Note 3--Inventories
INVENTORIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Raw materials......................................... $ 3,115,000 $ 5,135,000
Work in process....................................... 6,837,000 9,374,000
Finished goods........................................ 18,687,000 14,945,000
----------- -----------
$28,639,000 $29,454,000
----------- -----------
----------- -----------
</TABLE>
Note 4--Property, Plant and Equipment
PROPERTY, PLANT AND EQUIPMENT CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Capitalized leased manufacturing plants............... $11,545,000 $12,626,000
Machinery and equipment............................... 16,075,000 14,711,000
Leasehold improvements................................ 3,753,000 3,689,000
Transportation equipment.............................. 1,882,000 1,788,000
----------- -----------
33,255,000 32,814,000
Less accumulated depreciation and amortization........ 18,340,000 17,745,000
----------- -----------
$14,915,000 $15,069,000
----------- -----------
----------- -----------
</TABLE>
The net book value of the capitalized leased manufacturing plants was $4,025,000
at September 30, 1996 and $4,716,000 at September 30, 1995.
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, 1996 are as follows:
<TABLE>
<S> <C>
1997...................................................... $ 227,000
1998...................................................... 226,000
1999...................................................... 262,000
2000...................................................... 165,000
2001...................................................... 367,000
Later years............................................... 2,731,000
------------
3,978,000
Less interest--4.0% to 8.0%............................... (917,000)
------------
Total minimum lease payments.............................. 3,061,000
Less amounts due within one year.......................... (124,000)
------------
$ 2,937,000
------------
------------
</TABLE>
10
<PAGE>
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Note 6--Income Taxes
The difference between the total statutory Federal income tax and the actual
income tax expense is accounted for as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
------------------------- ------------------------- -------------------------
<CAPTION>
Percent of Percent of Percent of
Pre-Tax Pre-Tax Pre-Tax
Amount Earnings Amount Earnings Amount Earnings
<S> <C> <C> <C> <C> <C> <C>
------------------------- ------------------------- -------------------------
Federal statutory tax expense................ $3,989,000 35.0% $3,150,000 35.0% $5,367,000 35.0%
State and local income tax expense, net of
Federal income tax benefit................... 513,000 4.5 360,000 4.0 613,000 4.0
---------- --- ---------- --- ---------- ---
Income tax expense........................... $4,502,000 39.5% $3,510,000 39.0% $5,980,000 39.0%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
Income tax expense consists of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current....................................... $4,477,000 $4,047,000 $5,500,000
Deferred...................................... 25,000 (537,000) 480,000
---------- ---------- ----------
$4,502,000 $3,510,000 $5,980,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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, 1996 and 1995 is $1,504,000
and $1,478,000, respectively, of current deferred income tax debits, and
included in Income Taxes Payable at September 30, 1996 and 1995 is $506,000 and
$863,000, 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:
<TABLE>
<S> <C>
1997....................................................... $1,225,000
1998....................................................... 1,225,000
1999....................................................... 1,225,000
2000....................................................... 1,153,000
2001....................................................... 1,153,000
2002-2005.................................................. 3,392,000
</TABLE>
Total rental expense charged to operations in 1996, 1995 and 1994 amounted to
$1,501,000, $2,474,000, and $2,421,000, respectively.
The Company is obligated under various licensing agreements for annual minimum
royalty expense commitments, amounting to approximately $1,800,000, $1,400,000
and $200,000 for 1997, 1998 and 1999, respectively.
Total royalty expense charged to operations in 1996, 1995 and 1994 amounted to
$3,433,000, $3,336,000, and $5,309,000, respectively.
Note 8--Stock Option Plan
In 1989, the Company adopted a plan for granting stock options to employees to
purchase common stock at a price equal to its fair market value at the
respective date of grant. Options expire five years after the respective date of
grant.
For the years ended September 30, 1994, 1995 and 1996, there were 200,000
options available for grant, and there were no unexercised options for these
respective periods.
11
<PAGE>
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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 $606,385 in 1996, $391,055 in 1995 and $549,587 in 1994. Net
pension costs under FASB No. 87 included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Service cost-benefits earned during the
period.................................. $ 626,204 $ 562,230 $ 620,643
Interest cost on projected benefit
obligation.............................. 1,072,436 980,101 1,056,531
Actual return on plan assets loss
(gain).................................. (1,711,145) (1,797,953) 253,612
Net amortization and deferral............ 398,651 640,469 (1,381,199)
------------ ------------ ------------
Net periodic pension cost before
settlement.............................. 386,146 384,847 549,587
Settlement gain.......................... 220,239 6,208
------------ ------------ ------------
Net periodic pension cost after
settlement.............................. $ 606,385 $ 391,055 $ 549,587
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The following table sets forth the funded status for the Company's defined
benefit pension plans:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligation
Vested benefit obligation........................... $(11,947,688) $(11,651,126)
Nonvested benefit obligation........................ (431,473) (465,500)
------------ ------------
Accumulated benefit obligation...................... (12,379,161) (12,116,626)
Excess of projected benefit obligation over
accumulated benefit obligation..................... (1,276,116) (1,409,543)
------------ ------------
Projected benefit obligation........................ (13,655,277) (13,526,169)
Actual plan assets at fair value.................... 17,131,256 15,774,026
------------ ------------
Projected benefit obligation less than plan
assets............................................. 3,475,979 2,247,857
Unrecognized net (gain)............................. (793,060) (105,711)
Unrecognized prior service cost..................... 455,558 535,719
Unrecognized net transition obligation at September
30,................................................ 629,800 655,568
------------ ------------
Prepaid pension cost at September 30,............... $ 3,768,277 $ 3,333,433
------------ ------------
------------ ------------
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation for the Company's plans was 8.0% in 1996, 7.0% in 1995 and 7.5% in
1994. The expected long-term rate of return on assets used for the Company's
plans was 9.5% in 1996 and 7.5% in 1995 and 9.5% in 1994.
The Board of Directors adopted on April 1, 1989 a Supplemental Executive
Retirement Plan for certain executive employees to restore pension benefits
which have been reduced by legislative action. The Company purchases annuity
contracts to fund its obligation for the four participants (three
officers-directors and one employee-director of the Company) under such plan and
reimburses the participants for the current tax recognition resulting from such
purchases. The respective costs are being amortized over the remaining estimated
employment lives of the participants. The 1996, 1995 and 1994 expense for such
plan was $705,000, $705,000 and $736,000, respectively.
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 have been reduced by
legislative action. The Company is currently funding its obligations to the five
participants, and the 1996 and 1995 expense for such plan was $68,000 and
$75,000, respectively.
Note 10--Major Customers
The Company operates within one industry segment - the manufacture of apparel.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral or
12
<PAGE>
- -----------------------------------------------------------
- -----------------------------------------------------------
other security to support customer receivables. Sales to one national retail
chain accounted for approximately 66% of the Company's net sales in 1996, 63% in
1995 and 62% in 1994. Another national retail chain accounted for approximately
15%, 20% and 18% of the Company's net sales in 1996, 1995 and 1994,
respectively. No other customer accounted for more than 10% of the Company's net
sales in each of the three years ended 1996. The Company routinely assesses the
financial strength of its customers and, as a consequence, management believes
that its trade receivable credit risk exposure is limited. Historically, the
Company has not experienced significant losses related to receivables.
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, 1995, 5,069,892 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 change in
control provisions that would entitle each of the four directors to receive up
to 2.99 times his five year average annual salary plus continuation of certain
benefits if there is a change in control in the Company (as defined) and a
termination of his employment. The maximum contingent liability under these
agreements in such event is approximately $6,500,000. The employment agreements
also provide for severance benefits, disability and death benefits and, as to
one officer-director, consulting services under certain circumstances.
Note 13--Quarterly Financial Data (Unaudited)
Financial data for the interim periods of 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Fiscal Year 1996 Net Gross Net Earnings
Quarters Sales Margins Earnings Per Share
- ---------------------------------------------- --------- ----------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
First......................................... $ 33,024 $ 6,474 $ 1,341 $ .26
Second........................................ 26,882 5,975 1,002 .20
Third......................................... 37,218 9,133 2,067 .41
Fourth........................................ 49,367 10,165 2,486 .49
--------- ----------- ----------- -----------
Total...................................... $ 146,491 $ 31,747 $ 6,896 $ 1.36
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Fiscal Year 1995
Quarters
- ----------------------------------------------
First......................................... $ 38,668 $ 7,404 $ 1,122 $ .22
Second........................................ 28,380 6,588 1,052 .21
Third......................................... 33,040 7,092 1,404 .28
Fourth........................................ 41,242 8,792 1,911 .37
--------- ----------- ----------- -----------
Total...................................... $ 141,330 $ 29,876 $ 5,489 $ 1.08
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
13
<PAGE>
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, 1996 and 1995 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, 1996. 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, 1996 and 1995, 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, 1996 in conformity
with generally accepted accounting principles.
Robbins, Greene, Horowitz, Lester & Co., LLP
New York, New York
November 15, 1996
Corporate Data
- -----------------------------------------------------------
- -----------------------------------------------------------
Notice of Annual Meeting
The Annual Meeting of Shareholders will be held on February 28, 1997 at 2 P.M.
at the Hyatt Regency Crystal City, 2799 Jefferson Davis Highway, Arlington,
Virginia.
Annual Report and Form 10-K
Additional copies of this report and copies of the Garan, Incorporated Form 10-K
annual report to the Securities and Exchange Commission are available at no
charge. Shareholders should make such requests by writing to our corporate
headquarters at 350 Fifth Avenue, New York, New York 10118 or by telephone at
(212) 563-2000.
Shareholder Records
Inquiries relating to shareholder records, stock transfer, change of ownership,
and change of address should be directed to the transfer agent listed below.
Shareholders requiring additional assistance may contact Mr. Alexander J.
Sistarenik, Treasurer, Garan, Incorporated at the address shown above or by
telephone at (212) 563-2000.
Investor Inquiries
Security analysts and investors seeking information about the Company may
contact Mr. William J. Wilson, Vice President - Finance at the address shown
above or by telephone at (212) 563-2000.
14
<PAGE>
Common Stock Information
- -----------------------------------------------------------
- -----------------------------------------------------------
On November 8, 1996, the Board of Directors declared a regular quarterly cash
dividend of $.20 per share and a special dividend of $.20 per share which were
paid on November 27, 1996 to shareholders of record on November 18, 1996.
Garan'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 1996 and 1995 are set forth in the table below:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
<S> <C> <C> <C> <C>
Quarters High Low High Low
- ---------------------------------------------- --------- --------- --------- ---------
First ........................................ $19 3/8 $16 3/8 $18 1/4 $15 1/2
Second ....................................... 17 15 1/8 18 14 7/8
Third ........................................ 17 1/2 16 3/8 18 1/4 15 5/8
Fourth ....................................... 18 16 3/8 17 3/4 15 7/8
</TABLE>
Dividends paid during the last two fiscal years were as follows:
<TABLE>
<CAPTION>
Dividends Paid per Share
------------------------------------
<S> <C> <C> <C>
Quarters 1996 1995
- --------------------------------------------------- ----------------- -----------------
First - Regular .............................. $ .20 $ .20
-Special ............................... .20 .20
Second -Regular ............................... .20 .20
Third -Regular ............................... .20 .20
Fourth -Regular ............................... .20 .20
------ ------
Total ......................................... $ 1.00 $ 1.00
------ ------
------ ------
</TABLE>
As at December 1, 1996 there were approximately 483 shareholders of record.
Registrar and Transfer Agent
Wachovia Bank of North Carolina, N.A.
Corporate Trust Department
Post Office Box 3001
Winston-Salem, NC 27102
(800) 633-4236
15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Board of Directors
Stephen J. Donohue
Rodney Faver
Jerald Kamiel
Richard A. Lichtenstein
Seymour Lichtenstein
Frank Martucci
Perry Mullen
Marvin S. Robinson
William J. Wilson
Officers
Chairman of the Board
Seymour Lichtenstein
President
Jerald Kamiel
Vice President--Finance and
Administration
William J. Wilson
Vice President--General Counsel,
Secretary*
Marvin S. Robinson
Treasurer
Alexander J. Sistarenik
Executive Offices
350 Fifth Avenue, New York, New York
Counsel
Tannenbaum Dubin & Robinson, LLP
New York, New York
Auditors
Robbins, Greene, Horowitz, Lester &
Co., LLP
New York, New York
Registrar and Transfer Agent
Wachovia Bank of North Carolina, N.A.
Winston-Salem, NC
*Partner--Tannenbaum Dubin & Robinson, LLP
[LOGO] Entire Document Printed On Recycled Paper
16
<PAGE>
G A R A N
350 Fifth Avenue
New York, NY 10118
