<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
-------------
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
OR
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER: 0-20850
HAGGAR CORP.
(Exact name of the registrant as specified in the charter)
NEVADA 75-2187001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6113 LEMMON AVENUE
DALLAS, TEXAS 75209
(Address of principal executive offices)
TELEPHONE NUMBER (214) 352-8481
(Registrant's telephone number including area code)
Indicate by a 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 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
--- ---
As of February 9, 1999, there were 7,638,693 shares of the Registrant's Common
Stock outstanding.
<PAGE>
HAGGAR CORP. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<S> <C>
Consolidated Statements of Operations
(Three months ended December 31, 1998 and 1997) 3
Consolidated Balance Sheets
(As of December 31, 1998 and September 30, 1998) 4
Consolidated Statements of Cash Flows
(Three months ended December 31, 1998 and 1997) 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Part II. Other Information.
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
</TABLE>
2
<PAGE>
HAGGAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 84,795 $ 102,471
Cost of goods sold 55,139 71,558
----------- -----------
Gross profit 29,656 30,913
Selling, general and administrative expenses (28,773) (28,931)
Royalty income, net 341 525
----------- -----------
Operating income 1,224 2,507
Other income, net 356 203
Interest expense (773) (872)
------------ -----------
Income from operations before provision
for income taxes 807 1,838
Provision for income taxes 313 708
----------- -----------
Net income $ 494 $ 1,130
=========== ===========
Net income per share - Basic and Diluted $ 0.06 $ 0.13
=========== ===========
Weighted average shares outstanding - Basic 7,716 8,551
=========== ===========
Weighted average shares outstanding - Diluted 7,732 8,597
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
HAGGAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
1998 September 30,
(unaudited) 1998
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,491 $ 20,280
Accounts receivable, net 39,834 63,613
Inventories 95,705 92,244
Deferred tax benefit 8,946 7,623
Other current assets 1,697 1,557
----------- -----------
Total current assets 166,673 185,317
Property, plant, and equipment, net 63,103 64,424
Other assets 2,388 2,234
----------- -----------
Total Assets $ 232,164 $ 251,975
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,556 $ 22,995
Accrued liabilities 21,860 20,299
Accrued wages and other employee compensation 1,731 6,398
Accrued workers' compensation expense 4,529 4,564
Short-term borrowings 4,132 3,453
Current portion of long-term debt 3,854 3,854
----------- -----------
Total current liabilities 49,662 61,563
Long-term debt 21,266 24,937
----------- -----------
Total Liabilities 70,928 86,500
STOCKHOLDERS' EQUITY
Commonstock - par value $0.10 per share; 25,000,000
shares authorized and 8,576,998 shares issued at
December 31, 1998 and September 30, 1998. 857 857
Additional paid-in capital 41,860 41,860
Retained earnings 128,442 128,329
----------- -----------
171,159 171,046
Less - Treasury stock, 938,305 and 525,254 shares at cost at
December 31, 1998 and September 30, 1998 (9,923) (5,571)
------------ -----------
Total stockholders' equity 161,236 165,475
----------- -----------
Total Liabilities and Stockholders' Equity $ 232,164 $ 251,975
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
HAGGAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 494 $ 1,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,203 3,209
Gain on disposal of property, plant, and equipment (117) -
Changes in assets and liabilities-
Accounts receivable, net 23,779 20,178
Inventories (3,461) 2,695
Deferred tax benefit (1,323) -
Other current assets (140) 158
Accounts payable (9,439) (8,747)
Accrued liabilities 1,561 716
Accrued wages, workers' compensation and other employee benefits (4,702) (911)
----------- -----------
Net cash provided by operating activities 9,855 18,428
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment, net (2,050) (2,057)
Proceeds from sale of property, plant, and equipment, net 285 -
Increase in other assets (154) (1,505)
----------- -----------
Net cash used in investing activities (1,919) (3,562)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 679 645
Proceeds from issuance of long-term debt - 18,000
Purchase of treasury stock at cost (4,352) -
Payments on long-term debt (3,671) (21,054)
Payments of cash dividends (381) (428)
----------- -----------
Net cash used in financing activities (7,725) (2,837)
Increase in cash and cash equivalents 211 12,029
Cash and cash equivalents, beginning of period 20,280 2,176
----------- -----------
Cash and cash equivalents, end of period $ 20,491 $ 14,205
=========== ===========
Supplemental disclosure of cash flow information Cash paid for:
Interest $ 1,247 $ 1,431
Income taxes $ 19 $ 19
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
HAGGAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated balance sheet as of December 31, 1998, and the consolidated
statements of operations and cash flows for the three months ended December 31,
1998 and 1997, have been prepared by Haggar Corp. (the "Company") without audit.
In the opinion of management, all adjustments necessary (which include only
normal recurring adjustments) to present fairly the consolidated financial
position, results of operations, and cash flows of the Company at December 31,
1998, and for all other periods presented, have been made. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been omitted.
These financial statements should be read in conjunction with the financial
statements and accompanying footnotes in the Company's Annual Report on Form
10-K for the year ended September 30, 1998.
CONCENTRATIONS OF CREDIT RISK.
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 105, "Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit Risk,"
consist primarily of trade accounts receivable. The Company's customers are not
concentrated in any specific geographic region but are concentrated in the
apparel industry. The Company's largest current customer, J.C. Penney Company,
Inc., accounted for 29.3% and 31.3% of the Company's net sales for the three
months ended December 31, 1998 and 1997, respectively. The Company's second
largest current customer, Kohl's Department Stores, Inc., accounted for 10.8%
and 7.7% of the Company's net sales for the three months ended December 31, 1998
and 1997, respectively. No other customer accounted for more than 10% of the
Company's net sales. The Company performs ongoing credit evaluations of its
customers' financial condition and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends, and other information.
INVENTORIES.
Inventories are stated at the lower of cost (first-in, first-out) or market and
consisted of the following at December 31, 1998, and September 30, 1998 (in
thousands):
<TABLE>
<CAPTION> December 31, September 30,
1998 1998
---------------- ---------------
<S> <C> <C>
Piece goods $ 10,875 $ 9,438
Trimmings & supplies 2,824 2,669
Work-in-process 12,001 11,390
Finished garments 70,005 68,747
---------------- ---------------
$ 95,705 $ 92,244
================ ===============
</TABLE>
Work-in-process and finished garments inventories consisted of materials, labor
and manufacturing overhead.
6
<PAGE>
LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998, and September
30, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------- -------------
<S> <C> <C>
Industrial Development Revenue
Bonds with interest at a rate equal
to that of high-quality, short-term,
tax-exempt obligations, as defined
(3.85% at December 31, 1998),
payable in annual installments of
$100 to $200 and a final payment of
$2,000 in 2005, secured by
certain buildings and equipment $ 2,600 $ 2,700
Allstate notes 21,429 25,000
Other 1,091 1,091
------------- -------------
25,120 28,791
Less - Current portion 3,854 3,854
------------- -------------
$ 21,266 $ 24,937
============= =============
</TABLE>
Net assets mortgaged or subject to lien under the Industrial Development Revenue
Bonds totaled approximately $1,047,146 at December 31, 1998.
As of December 31, 1998, the Company had a revolving credit line agreement
(the "Agreement") with certain banks. During the quarter, the Company amended
the Agreement to accommodate the anticipated acquisition of a new subsidiary
during the second quarter. As of December 31, 1998, the Company had
additional available borrowing capacity of approximately $84,000,000. The
Company incurred approximately $45,000 in commitment fees related to the
available borrowing capacity during the quarter ended December 31, 1998. The
interest rates for the quarter ended December 31, 1998 ranged from 5.68% to
7.0%. The facility will mature June 30, 2001, with a one year renewal at the
option of the banks and is unsecured, except that the Company is prohibited
from pledging its accounts receivable and inventories during the term of the
Agreement. The Agreement contains limitations on incurring additional
indebtedness and requires the maintenance of certain financial ratios. In
addition, the agreement requires the Company and Haggar Clothing Co., the
Company's main operating subsidiary, to maintain tangible net worth, as
defined, in excess of $145,000,000 and $55,000,000, respectively, as of
December 31, 1998. For fiscal years after 1998, the Agreement requires the
Company to maintain a tangible net worth in excess of the tangible net worth
of the preceding fiscal year plus 50% of the Company's consolidated net
income. The Agreement prohibits the payment of any dividend if a default
exists.
CONTINGENCIES
On September 22, 1998, Hurricane Georges damaged two of the Company's leased
manufacturing facilities. Both facilities are insured for damage to the
building, equipment, inventory, and for business interruption. Although the
total assessment of damage has not been completed, the range of loss is
estimated at $4.0 to $6.0 million, substantially all of which is expected to be
covered by insurance. Insurance proceeds are expected to be used to repair the
roofs, fix the equipment, and cover any inventory loss. The deductibles for the
insurance claims are not considered significant.
7
<PAGE>
NET INCOME PER COMMON SHARE - BASIC AND DILUTED
Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the sum
of the weighted-average number of common shares outstanding for the period and
the number of equivalent shares assumed outstanding under the Company's stock
based compensation plans.
Options to purchase 874,683 common shares at prices ranging from $12.13 to
$23.00 were not dilutive and were outstanding for the three months ended
December 31, 1998. Options to purchase 510,695 common shares at prices ranging
from $18.25 to $37.88 were not dilutive and were outstanding for the three
months ended December 31, 1997. These shares for the aforementioned periods were
not included in the diluted earnings per share calculation because the options'
exercise prices were greater than the average market price of the common shares.
Diluted earnings per share was calculated as follows (unaudited, in thousands,
except per share data):
<TABLE>
<CAPTION>
Three Months Ended
December 31, December 31
1998 1997
--------------- ----------------
<S> <C> <C>
Net income $494 $1,130
Weighted average common shares outstanding 7,716 8,551
Shares equivalents, due to stock options 16 46
--------------- ----------------
7,732 8,597
=============== ================
Net income per share - Diluted $0.06 $0.13
=============== ================
</TABLE>
8
<PAGE>
SUBSEQUENT EVENTS
DIVIDEND DECLARED
On January 20, 1999, the Company declared a cash dividend of $0.05 per share
payable to the stockholders of record on February 1, 1999. The dividend of
approximately $381,000 will be paid on February 15, 1999.
MERGER
On January 13, 1999, Haggar Clothing Co. ("Haggar"), a wholly-owned
subsidiary of the registrant, Haggar Corp., completed the previously
announced acquisition of Jerell, Inc. ("Old Jerell"), a Texas corporation
engaged in the design and marketing of women's apparel. Pursuant to an
Agreement and Plan of Merger dated December 17, 1998 (the "Agreement"), Old
Jerell was merged into a Texas corporation recently formed as a wholly-owned
subsidiary of Haggar. Immediately thereafter, the Texas subsidiary was merged
into a newly formed Nevada corporation which is also a wholly-owned
subsidiary of Haggar, and the name of the surviving Nevada subsidiary was
changed to Jerell, Inc. ("New Jerell").
The purchase price for the acquisition was determined by arm's-length
negotiation among the parties. In connection with the merger, Haggar paid
cash consideration of $36.9 million to the shareholders of Old Jerell, all of
whom were directors, officers, employees or previous employees (or affiliates
thereof) of Old Jerell. The total cash consideration is subject to certain
post-closing adjustments related to Old Jerell as of the closing date. In
order to facilitate these post-closing adjustments and provide a source of
recovery for any breaches of representations by Old Jerell, the shareholders
of Old Jerell have deposited $2.0 million in escrow with Chase Bank of Texas
to be held until January 13, 2000. In addition, a shareholder of Old Jerell
also deposited $1.5 million with Chase Bank of Texas of which various amounts
will be distributed to the shareholder in annual installments through January
13, 2002.
Pursuant to the Agreement, Haggar also paid $0.4 million to a certain
executive officer of Old Jerell in consideration for a covenant not to
compete with New Jerell. Immediately subsequent to the acquisition, Haggar
repaid $4.7 million in indebtedness incurred by Old Jerell pursuant to a
third party factoring agreement. In addition, Haggar incurred approximately
$0.2 million in expenses attributable to the acquisition. Of the $42.2
million aggregate acquisition cost, Haggar borrowed $20.0 million under its
existing credit facility with Chase Bank of Texas, received $2.8 million from
the repayment of loans from certain shareholders of Old Jerell, and funded
the balance from working capital.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
consolidated financial statements and the notes thereto and with the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1998.
RESULTS OF OPERATIONS
The Company's first quarter fiscal 1999 net income of $0.5 million compares to a
net income of $1.1 million in the first quarter fiscal 1998. The decrease in net
income is primarily due to a decrease in net sales.
Net sales for the first quarter of fiscal 1999 decreased 17.2% to $84.8 million
from $102.5 million for the first quarter of fiscal 1998. Net sales for the
first quarter of fiscal 1999 decreased 17.3% to $84.8 million from $102.5
million for the first quarter of fiscal 1998. Net sales decreased for the
first quarter of fiscal 1999 primarily due to fewer units being sold as compared
to the same period last year as a result of sluggish retail sales for the
Company's customers.
Gross profit as a percentage of net sales increased to 35.0% in the first
quarter of fiscal 1999 compared to 30.2% in the first quarter of the prior
fiscal year. This increase in gross profit percentage is primarily the result
of moving domestic manufacturing offshore and fewer inventory markdowns.
Selling, general and administrative expenses as a percentage of net sales
increased to 33.9% in the first quarter of fiscal 1999 compared to 28.2% in
the first quarter of fiscal 1998. However, actual selling, general and
administrative expenses remained relatively stable at $28.8 million for the
first quarter of fiscal 1999 compared to $28.9 million for first quarter of
fiscal 1998. Changes in selling, general and administrative expenses during
the first quarter of fiscal 1999 compared to fiscal 1998 include a $2.5
million increase in advertising expense and a $1.0 million increase in
expenses related to the opening and operating of new retail stores. These
increases are offset by $2.1 million in lower selling and administrative
expenses and $1.1 million in lower costs for product distribution. At the end
of the first quarter of fiscal 1999, 60 retail stores were open and
operational, as compared to 47 retail stores at the end of the same period
one year ago.
CONTINGENCIES
On September 22, 1998, Hurricane Georges damaged two of the Company's leased
manufacturing facilities. Both facilities are insured for damage to the
building, equipment, inventory, and for business interruption. Although the
total assessment of damage has not been completed, the range of loss is
estimated at $4.0 to $6.0 million, substantially all of which is expected to be
covered by insurance. Insurance proceeds are expected to be used to repair the
roofs, fix the equipment, and cover any inventory loss. The deductibles for the
insurance claims are not considered significant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's trade accounts receivable potentially expose the Company to
concentrations of credit risks as most of its customers are in the retail
apparel industry. The Company performs ongoing credit evaluations of its
customers' financial condition and establishes an allowance for doubtful
accounts based upon the factors related to the credit risk of specific
customers, historical trends and other information. The Company's trade accounts
receivable decreased approximately $23.8 million to $39.8 million at December
31, 1998, from $63.6 million at September 30, 1998. This decrease in trade
accounts receivable is primarily the result of reduced sales due to sluggish
retail sales for the Company's customers.
Inventories as of December 31, 1998, increased to $95.7 million from $92.2
million at September 30, 1998. The increase in inventory levels during the
first quarter of fiscal 1999 is mainly due to the timing of certain
deliveries of seasonal products.
10
<PAGE>
As of December 31, 1998, the Company had a revolving credit line facility
with certain banks. During the quarter, the Company amended the credit
agreement to accommodate the anticipated acquisition of a new subsidiary
during the second quarter. As of December 31, 1998, the Company had
additional available borrowing capacity of approximately $84.0 million. The
Company incurred approximately $45,000 in commitment fees related to the
available borrowing capacity during the quarter ended December 31, 1998.
The interest rates for the quarter ended December 31, 1998 ranged from
5.68% to 7.0%. The facility will mature June 30, 2001, with a one year
renewal at the option of the banks.
The Company's UK subsidiary, Haggar Apparel, Limited, maintains a $4.2
million line of credit with a bank in the United Kingdom to fund its
operating activities. As of December 31, 1998, the subsidiary had
approximately $4.1 million outstanding under this line of credit. The line of
credit has been collateralized by a letter of credit for approximately $4.2
million from the Company and is payable upon demand. Interest under the line
of credit is payable at 1% above the bank's base rate.
The Company provided cash from operating activities for the three months
ended December 31, 1998, of $9.9 million, primarily as a result of the
reduction in accounts receivable of $23.8 million, offset by reductions in
accounts payable of $9.4 million and an increase in inventories of $3.5
million. The Company used cash in investing activities of $1.9 million during
the first three months of fiscal 1999, the result of purchases of property,
plant, and equipment of $2.1 million, primarily in conjunction with the
opening of retail stores in the first quarter of fiscal 1999. Cash flows used
in financing activities of $7.7 million for the three months ended December
31, 1998, were primarily the result of a net reduction in long-term debt of
$3.7 million and the purchase of $4.4 million in treasury stock.
Comparatively, the Company provided cash from operating activities of $18.4
million for the three months ended December 31, 1997, primarily as a result
of the reduction in accounts receivable of $20.2 million. During the first
quarter of fiscal 1998, the Company used cash in investing activities of $3.6
million, the result of purchases of $2.1 million in property, plant, and
equipment, primarily in conjunction with the opening of retail stores. Cash
flows used in financing activities of $2.8 million were due to a net decrease
in long-term debt of $3.0 million.
The Company believes that the cash flows generated from operations and the
funds available under the foregoing credit facilities will be adequate to
meet its working capital and related financing needs for the foreseeable
future.
YEAR 2000 CONSIDERATIONS
GENERAL. The Year 2000 issue concerns the inability of some computerized
systems to properly process date-sensitive information on and after January
1, 2000, because of the use of only the last two digits to identify a year.
The Company has appointed a full-time project manager to coordinate the
assessment and remediation of Year 2000 issues affecting the Company. The
project manager and team leaders from various areas within the Company have
developed and are now implementing a plan to accomplish the remediation
necessary to prepare the Company for the Year 2000. The Company has also
established a steering committee composed of members from various functional
groups to provide oversight by reviewing and evaluating the progress of the
Year 2000 program. The Company presently expects that all of its core
operations and essential functions will be ready for the Year 2000 transition.
STATE OF READINESS. The Company's Year 2000 program classifies all of its
computerized systems into the following categories:
BUSINESS SYSTEMS: This category consists of computer programs that
run the Company's primary business functions (e.g., manufacturing,
order processing, inventory control and accounting).
11
<PAGE>
HARDWARE/PC SOFTWARE: This category consists of all computer
hardware and operating systems (including networking,
telecommunications and other PC-based software applications).
ENGINEERING SYSTEMS: This category consists of manufacturing,
distribution and laboratory equipment (including sewing equipment,
cutters, conveyors and scanners) that control the manufacturing
process.
FACILITIES SYSTEMS: This category consists of systems that support
the physical infrastructure of the Company's facilities (including
forklifts, ovens, boilers, HVAC and security systems).
In order to establish priorities for assessment and remediation of Year 2000
issues, each of the systems within these categories has been further classified
as follows:
CRITICAL: These are systems without which the Company's business
would be severely adversely affected (e.g., manufacturing,
distribution and retail point of sale).
PRIORITY: These are systems that the Company could do without for
only a few days without materially adversely affecting operations
(e.g., telecommunications and energy management).
REQUIRED: These are systems needed to remain competitive or in
compliance with regulatory requirements (e.g., voice mail and
security systems).
DESIRABLE: These systems enable employees to work more efficiently
(e.g., pagers, fax machines and postage meters).
The approximate percentage of completion of remediation within each system
category and application priority level as of January 20, 1999 are set forth in
the table below.
<TABLE>
<CAPTION>
Critical Priority Required Desirable
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Business Systems 71% 39% 99% 0%*
Hardware/PC
Software 44% 40% 30% 0%*
Engineering
Systems 41% 9% 0%* 0%*
Facilities
Systems 92% 37% 54% 100%
</TABLE>
* Scheduled to commence in the second quarter of fiscal 1999.
Overall, the Company's Year 2000 compliance program was approximately 48%
complete as of January 1999, which was substantially on schedule with the
program plan.
In addition to its internal Year 2000 compliance program, the Company has
requested information from a majority of its customers and vendors concerning
their Year 2000 compliance. Responses have been received from most key customers
indicating that they do not presently anticipate any significant Year
12
<PAGE>
2000 problems. The Company is continuing to collect and review responses from
vendors, and presently expects to complete this process during the second
quarter of fiscal 1999. The Company intends to continue to communicate with its
key customers and vendors as more information becomes available in order to
further evaluate potential risks to the Company's business operations.
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company is executing its Year 2000
program primarily with existing internal resources. The principal costs
associated with these internal resources are payroll and employee benefits of
the information systems group. However, the Company does not separately track
the internal costs attributable to the Year 2000 program.
The Company has also incurred costs for contract programmers and systems
upgrades in connection with its Year 2000 program. As a result of Year 2000
issues, the Company has elected to upgrade its accounting and manufacturing
software, its electronic data interchange software, and its network file
servers. Other significant projects have not been accelerated or deferred due
to Year 2000 issues. The costs of these programmers and upgrades have not
been, and are not expected to be in the future, material to the results of
operations or the financial condition of the Company. All costs of Year 2000
compliance are recorded as an expense in the period incurred.
RISKS OF YEAR 2000 ISSUES. The Company does not presently anticipate any
considerable delays or exceptions to the scheduled substantial completion of
its Year 2000 program by the end of August 1999. Therefore, any adverse
consequences from Year 2000 issues would result from presently unforeseen
circumstances. As a result, the Company has not yet developed any worst case
Year 2000 scenarios. The Company intends, however, to begin analyzing
potential risks and adverse scenarios during the second quarter of fiscal
1999.
Although the Company believes that it is adequately addressing the Year 2000
issue, there can be no assurance that Year 2000 problems will not have a
material adverse affect on its business, financial condition or results of
operations. In addition, disruptions in the economy generally resulting from
Year 2000 failures or the public's perceptions of failures could have a
material adverse affect on the Company.
CONTINGENCY PLANS. To date, the Company has focused on the conversion or
replacement of its own non-compliant systems and the evaluation of the Year 2000
compliance of its significant customers and vendors. During the second and third
quarters of fiscal 1999, the Company expects to develop contingency plans for
potential risks such as interruptions in the supply chain, transportation delays
and communications breakdowns with customers and vendors. These contingency
plans may include the use of substitute vendors or alternate product designs
that do not use raw materials from non-compliant vendors.
13
<PAGE>
FORWARD LOOKING STATEMENTS.
This report contains certain forward-looking statements. In addition, from time
to time the Company may issue press releases and other written communications,
and representatives of the Company may make oral statements, which contain
forward-looking information. Except for historical information, matters
discussed in such oral and written communications are forward-looking statements
that involve risks and uncertainties which could cause actual results to differ
materially from those in such forward-looking statements.
Risks and uncertainties inherent to the Company's line of business include such
factors as natural disasters, general economic conditions, the performance of
the retail sector in general and the apparel industry in particular, the
competitive environment, consumer acceptance of new products, and the success of
advertising, marketing and promotional campaigns. Additional risks and
uncertainties which could cause the Company's actual results to differ from
those contained in any forward-looking statements are discussed elsewhere
herein.
SUBSEQUENT EVENTS
On January 13, 1999, Haggar Clothing Co. ("Haggar"), a wholly-owned
subsidiary of Haggar Corp., completed the acquisition of Jerell, Inc. ("Old
Jerell"), a Texas corporation engaged in the design and marketing of women's
apparel. Pursuant to an Agreement and Plan of Merger dated December 17, 1998
(the "Agreement"), Old Jerell was merged into a Texas corporation recently
formed as a wholly-owned subsidiary of Haggar. Immediately thereafter, the
Texas subsidiary was merged into a newly formed Nevada corporation which is
also a wholly-owned subsidiary of Haggar, and the name of the surviving
Nevada subsidiary was changed to Jerell, Inc. ("New Jerell").
The purchase price for the acquisition was determined by arm's-length
negotiation among the parties. In connection with the merger, Haggar paid
cash consideration of $36.9 million to the shareholders of Old Jerell, all of
whom were directors, officers, employees or previous employees (or affiliates
thereof) of Old Jerell. The total cash consideration is subject to certain
post-closing adjustments related to Old Jerell as of the closing date. In
order to facilitate these post-closing adjustments and provide a source of
recovery for any breaches of representations by Old Jerell, the shareholders
of Old Jerell have deposited $2.0 million in escrow with Chase Bank of Texas
to be held until January 13, 2000. In addition, a shareholder of Old Jerell
also deposited $1.5 million with Chase Bank of Texas of which various amounts
will be distributed to the shareholder in annual installments through January
13, 2002.
Pursuant to the Agreement, Haggar also paid $0.4 million to a certain
executive officer of Old Jerell in consideration for a covenant not to
compete with New Jerell. Immediately subsequent to the acquisition, Haggar
repaid $4.7 million in indebtedness incurred by Old Jerell pursuant to a
third party factoring agreement. In addition, Haggar incurred approximately
$0.2 million in expenses attributable to the acquisition. Of the $42.2
million aggregate acquisition cost, Haggar borrowed $20.0 million under its
existing credit facility with Chase Bank of Texas, received $2.8 million from
the repayment of loans from certain shareholders of Old Jerell, and funded
the balance from working capital.
14
<PAGE>
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 10 Fifth Amendment to First Amended and Restated Credit
Agreement dated December 29, 1998, between the Company
and Chase Bank of Texas, as agent for a bank syndicate.
27 Financial Data Schedule
(b) On January 28, 1999, a report on Form 8-K was filed
concerning the Company's acquisition of Jerell, Inc.
("Jerell") on January 13, 1999. Jerell is engaged in
the design and marketing of women's apparel. Jerell's
audited financial statements for the year ended
October 31, 1998 and the Company's unaudited condensed pro
forma consolidated balance sheet as of September 30, 1998
and unaudited condensed pro forma consolidated statement
of operations for the year ending September 30, 1998 were
filed as part of this report.
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.
Haggar Corp.,
Date: February 9, 1999 By: /s/ David M. Tehle
--------------------
David M. Tehle
Sr. Vice President
Chief Financial Officer
Signed on behalf of the
registrant and as principal
financial officer.
15
<PAGE>
FIFTH AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
This FIFTH AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT AGREEMENT
(this "AGREEMENT") is entered into as of December 29, 1998 (the "EFFECTIVE
DATE"), by and among Haggar Clothing Co., a Nevada corporation, f/k/a Haggar
Apparel Company (the "COMPANY"), Haggar Corp., a Nevada corporation
("HAGGAR"), the banks listed on the signature pages of this Agreement
(collectively, the "BANKS"), Chase Bank of Texas, National Association, a
national banking association, f/k/a Texas Commerce Bank National Association,
individually and as agent (the "AGENT") for the Banks, and is consented to by
Haggar and the domestic subsidiaries of the Company listed on the signature
pages of this Agreement (collectively, the "SUBSIDIARIES").
R E C I T A L S:
WHEREAS, pursuant to that certain First Amended and Restated Credit
Agreement (as heretofore and herein amended, the "CREDIT AGREEMENT") dated as
of September 18, 1996, executed by and among the Company, Haggar, the Banks
and the Agent, the Banks agreed to make advances to the Company on certain
terms and conditions set forth therein (each capitalized term used but not
defined herein shall have the meaning given to such term in the Credit
Agreement, as amended); and
WHEREAS, the Credit Agreement has been amended by that certain First
Amendment to First Amended and Restated Credit Agreement dated as of December
31, 1996, that certain Second Amendment to First Amended and Restated Credit
Agreement dated as of June 30, 1998, that certain Third Amendment to First
Amended and Restated Credit Agreement dated as of December 15, 1997, and that
certain Fourth Amendment to First Amended and Restated Credit Agreement dated
as of June 30, 1998; and
WHEREAS, the Company has requested that the Credit Agreement be amended
to allow (i) the Company to receive an Advance in connection with the
acquisition of Jerell, Inc., a Texas corporation ("JERELL"), and (ii) the
acquisition of Jerell by the Company; and
WHEREAS, the Agent and the Banks are agreeable to such request under the
present circumstances and upon the terms and conditions as set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed, the Company,
Haggar, the Banks and the Agent hereby agree as follows:
<PAGE>
A G R E E M E N T:
1. AMENDMENT TO DEFINITIONS. The following definition is hereby added
to Section 1.1 of the Credit Agreement:
"Jerell Acquisition" means the acquisition by the Company of
Jerell, for the sum of $36,756,637 (subject to adjustment as therein
provided), pursuant to that certain Agreement and Plan of Merger dated as of
December 17, 1998, by and between the Company, JI Acquisition, Inc., Jerell
and certain of Jerell's shareholders.
2. CONSENT. Notwithstanding Section 2.2 and Section 6.2 of the Credit
Agreement but subject to the other terms and conditions thereof, the Banks
consent to an Advance in connection with the Jerell Acquisition.
3. AMENDMENT TO SECTION 7.4(c) AND (d). Section 7.4(c) and (d) of the
Credit Agreement are hereby amended in their entirety to read as follows:
(c) Other than the Jerell Acquisition, acquire, or permit any
Subsidiary of the Company to acquire, by purchase, lease or
otherwise, all or substantially all of the assets or capital
stock of any Person, provided that such acquisitions which, when
added to any other acquisitions since the effective date of this
Agreement (other than the Jerell Acquisition) and any permitted
investments made pursuant to Section 7.4(d), do not exceed
$15,000,000 in the aggregate (including all consideration given
in connection with such acquisitions), may be made so long as the
assets or Person acquired is involved in the same line of
business, or an integral part thereof, as is currently pursued by
the Company Group.
(d) Other than the Jerell Acquisition, invest or acquire an ownership
interest in, or permit any Subsidiary of the Company to invest or
acquire an ownership interest in, any joint venture, partnership,
corporation or other entity which is not an Affiliate of any
member of the Company Group, or otherwise invest in any new
business venture, provided that such investment which, when added
to any other investments since the effective date of this
Agreement and any permitted acquisitions made pursuant to
Section 7.4(c) (other than the Jerell Acquisition), do not exceed
$15,000,000 in the aggregate, may be made so long as no member
of the Company Group has any legal or contractual liability or
obligation in excess of such investment, and the business venture
in which the investment is made involves the same line of
business, or an integral part thereof, as is currently pursued by
the Company Group.
4. Jerell is currently a party to that certain Amended and Restated
Collection Factoring Agreement (the "FACTORING AGREEMENT") executed September
1, 1998, between Heller Financial, Inc. ("HELLER"), Jerell and San Gabriel
Enterprises, Inc. pursuant to which Heller was granted a security
<PAGE>
interest (the "HELLER SECURITY INTEREST") in certain collateral more
particularly described in Section 7 of the Factoring Agreement. The Banks
waive any Event of Default arising under Section 7.1 of the Credit Agreement
as a result of the Heller Security Agreement provided that (i) upon the
closing of the Jerell Acquisition and thereafter no sums shall be outstanding
under the Factoring Agreement, (ii) upon the closing of the Jerell
Acquisition, the Company shall give notice of termination of the Factoring
Agreement, and (iii) the Heller Security Interest shall be released of record
within ninety (90) days following the closing of the Jerell Acquisition and a
copy of such recorded releases delivered to the Agent. Except as expressly
set forth above, the waiver contained herein shall not waive any right, power
or remedy of the Agent or the Banks or any provision of the Loan Documents.
5. EXECUTION OF GUARANTY. Pursuant to Section 7.11 of the Credit
Agreement, in connection with the execution of this Agreement, Jerell and its
Subsidiaries shall, at the closing of the Jerell Acquisition, each execute
and deliver to the Agent a Subsidiary Guaranty in the form attached as
Exhibit E to the Credit Agreement (collectively, the "JERELL GUARANTY").
6. CERTIFICATES. This Agreement shall be effective as of the date
first above written when executed by all parties hereto and consented to by
the Guarantors as provided on the signature pages hereto, and upon receipt by
the Agent of the following, each in form, substance and bearing a date
satisfactory to the Agent and its counsel (items (b), (c), (e) and (f) being
delivered upon the closing of the Jerell Acquisition):
(a) A certificate of the Secretary or Assistant Secretary of the
Company and the Guarantors, respectively, certifying (i) that, except
as indicated therein, there has been no change to the articles of
incorporation or bylaws of the Company or the Guarantors since the same
were finished to the Agent in connection with the execution of the
Credit Agreement, (ii) as to the name and title of the officers of the
Company and the Guarantors and the authority of such officers to
execute this Agreement; and (iii) as to the existence and good standing
in their respective states of incorporation of the Company and the
Guarantors.
(b) A certificate of the Secretary or Assistant Secretary of
Jerell and its Subsidiaries certifying that (i) attached thereto are
true and complete copies of the articles of incorporation and bylaws of
Jerell and its Subsidiaries, as amended, (ii) attached thereto are
resolutions of the Board of Directors of Jerell and its Subsidiaries
authorizing execution of the Jerell Guaranty, (iii) the name and title
and bearing the signature of the officers of Jerell and its
Subsidiaries identified therein are authorized to sign the Jerell
Guaranty, and (iv) Jerell and its Subsidiaries are in existence and
good standing in their respective states of incorporation.
(c) A written opinion of the Company's, Guarantors' and Jerell's
and its Subsidiaries' counsel in form acceptable to the Agent and its
counsel.
(d) A certificate, signed by the Treasurer of the Company or the
Chief Financial Officer of the Company, stating that as of the date of
this Agreement and after giving effect
<PAGE>
to this Agreement the statements set forth in Sections 4.2(a), (b)
and (g) of the Credit Agreement are true and correct.
(e) The Jerell Guaranty.
(f) True, complete and correct copies of the documents executed
and delivered or to be executed and delivered by the parties in
connection with the Jerell Acquisition.
7. EFFECTIVENESS OF DOCUMENTS. Except as expressly modified hereby,
all terms, provisions, representations, warranties, covenants and agreements
of the Company and Haggar related to the Loans, whether contained in the
Notes, the Credit Agreement and/or any of the other Loan Documents, are
hereby ratified and confirmed by the Company and Haggar, and all such
agreements shall be and shall remain in fill force and effect, enforceable in
accordance with their terms.
8. NO CLAIMS OR DEFENSES. Each of the Company and Haggar, by the
execution of this Agreement, hereby declares that it has no offsets, claims,
counterclaims, defenses or other causes of action against the Agent or the
Banks related to any Loan, the Credit Agreement, any of the other Loan
Documents or the modification of the Credit Agreement pursuant to this
Agreement.
9. AUTHORITY. Each of the Company and Haggar represents and warrants
that all requisite corporate action necessary for it to enter into this
Agreement has been taken.
10. BINDING AGREEMENT. This Agreement shall be binding upon, and shall
inure to the benefit of, each party hereto and such party's legal
representatives, successors and assigns.
11. ENTIRE AGREEMENT. THIS AGREEMENT AND THE LOAN DOCUMENTS REPRESENT
THE FINAL AGREEMENT AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS AMONG THE
PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES
HERETO.
12. CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF TEXAS,
BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart.
[SEE SIGNATURES ON ATTACHED PAGES]
<PAGE>
EXECUTED as of the date first above written.
HAGGAR CLOTHING CO., a Nevada corporation, f/k/a
Haggar Apparel Company
By: /s/ J. M. Haggar III
-----------------------------------------------
J. M. Haggar, III
Chief Executive Officer
HAGGAR CORP., a Nevada corporation
By: /s/ J.M. Haggar III
-----------------------------------------------
J. M. Haggar, III
Chief Executive Officer
THE BANKS CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, f/k/a
TEXAS COMMERCE BANK National Association,
$22,222,222.22 Individually, as the Agent
By: /s/ John P.Dean
-----------------------------------------------
John P.Dean
Senior Vice President
$22,222,222.22 NATIONSBANK, N.A.,
successor-in-interest by merger to NationsBank of
Texas, N.A.
By: /s/ Leesa C. Sluder
-----------------------------------------------
Leesa C. Sluder
Senior Vice President
<PAGE>
$18,518,518.51 COMERICA BANK - TEXAS
By: /s/ Paul L. Strange
-----------------------------------------------
Paul L. Strange
Vice President
$11,111,111.12 THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Jenny A. Gilpin
-----------------------------------------------
Jenny A. Gilpin
Vice President
$14,814,814.81 THE BANK OF TOKYO-MITSUBISHI, LTD.,
DALLAS OFFICE
By: /s/ Douglas M. Barnell
-----------------------------------------------
Douglas M. Barnell
Vice President
$11,111,111.12 NATIONAL CITY BANK, KENTUCKY,
f/k/a First National Bank of Louisville
By: /s/ Donald R. Pullen, Jr.
-----------------------------------------------
Donald R. Pullen, Jr.
Vice President
<PAGE>
CONSENT OF HAGGAR
Haggar hereby (a) acknowledges its consent to this Agreement, (b)
ratifies and confirms all terms and provisions of the Parent Guaranty, (c)
agrees that the Parent Guaranty is and shall remain in full force and effect,
(d) acknowledges that there are no claims or offsets against, or defenses or
counterclaims to, the terms and provisions of and the obligations created and
evidenced by the Parent Guaranty, (e) reaffirms all agreements and
obligations under the Parent Guaranty with respect to the Loans, the Notes,
the Credit Agreement and all other documents, instruments or agreements
governing, securing or pertaining to the Loans, as the same may be modified
by this Agreement, and (f) represents and warrants that all requisite
corporate action necessary for it to execute this Agreement has been taken.
HAGGAR CORP.,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chief Executive Officer
Dated as of December 29, 1998.
<PAGE>
CONSENT OF DOMESTIC SUBSIDIARIES
Each of the undersigned Subsidiaries hereby (a) acknowledges its consent
to this Agreement, (b) ratifies and confirms all terms and provisions of the
Subsidiary Guaranty to which it is a signatory, (c) agrees that the
Subsidiary Guaranty to which it is a signatory is and shall remain in full
force and effect, (d) acknowledges that there are no claims or offsets
against, or defenses or counterclaims to, the terms and provisions of and the
obligations created and evidenced by the Subsidiary Guaranty to which it is a
signatory, (e) reaffirms all agreements and obligations under the Subsidiary
Guaranty to which it is a signatory with respect to the Loans, the Notes, the
Credit Agreement and all other documents, instruments or agreements
governing, securing or pertaining to the Loans, as the same may be modified
by this Agreement, and (f) represents and warrants that all requisite
corporate action necessary for it to execute this Agreement has been taken.
BOWIE MANUFACTURING COMPANY,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
CORSICANA COMPANY,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
<PAGE>
DALLAS PANT MANUFACTURING COMPANY,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
GREENVILLE PANT MANUFACTURING
COMPANY, a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
MCKINNEY PANT MANUFACTURING COMPANY,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
OLNEY MANUFACTURING COMPANY,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
WAXAHACHIE GARMENT COMPANY,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
<PAGE>
LA ROMANA MANUFACTURING CORPORATION,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
HAGGAR SERVICES, INC.,
a Texas corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
AIRHAGGAR, INC., f/k/a HAGAIR, INC.,
a Texas corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
DUNCAN MANUFACTURING COMPANY,
an Oklahoma corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
<PAGE>
WESLACO CUTTING, INC.,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
WESLACO SEWING, INC.,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
HAGGAR DIRECT, INC.,
a Nevada corporation
By: /s/ J. M. Haggar III
----------------------------------------------
J. M. Haggar, III
Chairman/Chief Executive Officer
Dated as of December 29, 1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILE AS PART OF
SUCH FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000892533
<NAME> HAGGAR CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,491
<SECURITIES> 0
<RECEIVABLES> 40,819
<ALLOWANCES> 985
<INVENTORY> 95,705
<CURRENT-ASSETS> 166,673
<PP&E> 132,518
<DEPRECIATION> 69,415
<TOTAL-ASSETS> 232,164
<CURRENT-LIABILITIES> 49,662
<BONDS> 0
0
0
<COMMON> 857
<OTHER-SE> 170,302
<TOTAL-LIABILITY-AND-EQUITY> 232,164
<SALES> 84,795
<TOTAL-REVENUES> 84,795
<CGS> 55,139
<TOTAL-COSTS> 28,432
<OTHER-EXPENSES> (356)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 773
<INCOME-PRETAX> 807
<INCOME-TAX> 313
<INCOME-CONTINUING> 494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 494
<EPS-PRIMARY> 0.06<F1>
<EPS-DILUTED> 0.06<F1>
<FN>
<F1>THE EARNINGS PER SHARE INFORMATION HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO
128, AND BASIC AND DILUTED EARNINGS PER SHARE HAVE BEEN ENTERED IN PLACE OF
PRIMARY AND FULLY DILUTED RESPECTIVELY.
</FN>
</TABLE>
