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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2000
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 1-8501
HARTMARX CORPORATION
A Delaware Corporation IRS Employer No. 36-3217140
101 North Wacker Drive, Chicago, Illinois 60606
Telephone No.: 312/372-6300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $2.50 par value per New York Stock Exchange
share Chicago Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
10 7/8% Senior Subordinated Notes New York Stock Exchange
due
January 15, 2002
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On February 15, 2001, 29,857,941 shares of the Registrant's common stock
were outstanding. The aggregate market value of common stock held by non-
affiliates of the Registrant was approximately $102,000,000.
Certain portions of the Registrant's definitive proxy statement dated
February 26, 2001 for the Annual Meeting of Stockholders to be held April 12,
2001 are incorporated by reference into Part III of this report.
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HARTMARX CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
ITEM
No. Page
---- ----
PART I
1 Business.............................................................................. 1
2 Properties............................................................................ 6
3 Legal Proceedings..................................................................... 6
4 Submission of Matters to a Vote of Security Holders................................... 6
Executive Officers of the Registrant.................................................. 7
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters................. 8
6 Selected Financial Data............................................................... 9
7 Management's Discussion and Analysis of Financial Condition and Results of Operations. 10
7A Quantitative and Qualitative Disclosures About Market Risk............................ 15
8 Financial Statements and Supplementary Data........................................... 15
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 36
PART III
10 Directors and Executive Officers of the Registrant.................................... 37
11 Executive Compensation................................................................ 37
12 Security Ownership of Certain Beneficial Owners and Management........................ 37
13 Certain Relationships and Related Transactions........................................ 37
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 37
PART I
Item 1--Business
General and Operating Segments
Hartmarx Corporation, a Delaware corporation, functions essentially as a
holding company, overseeing its various operations and providing resources and
services in financial, administrative, legal, human resources, advertising and
other areas. The management of the respective operations has responsibility
for optimum use of the capital invested in them and for planning their growth
and development in coordination with the strategic plans of Hartmarx and the
other operating entities (collectively, the "Company").
Established in 1872, the Company believes it is the largest manufacturer
and marketer of men's suits, sport coats and slacks ("men's tailored
clothing") in the United States. From this established position, Hartmarx has
diversified into men's and women's sportswear, including golfwear, dress
furnishings (shirts and ties) and women's career apparel.
The Company operates exclusively in the apparel business. Its operations
are comprised of: (i) Men's Apparel Group ("MAG") which designs, manufactures
and markets men's tailored clothing, slacks and sportswear (including
golfwear) and dress furnishings (shirts and ties); products are sold under a
broad variety of business and casual apparel brands, both owned and under
license to an extensive range of retail, catalog and e-commerce channels; and
(ii) Women's Apparel Group, comprised of International Women's Apparel
("IWA"), which markets women's career apparel and sportswear to department and
specialty stores under owned and licensed brand names, and Barrie Pace, a
direct mail business offering a wide range of apparel and accessories to
business and professional women through its catalogs. The Operating Segment
Information on page 10 in Item 7 and on pages 35 and 36 in the accompanying
Notes to Consolidated Financial Statements further describes the Company's
operations.
Substantially all of the Company's products are sold to a wide variety of
retail channels under established brand names or the private labels of major
retailers. The Company owns two of the most recognized brands in men's
tailored clothing--Hart Schaffner & Marx(R), which was introduced in 1887, and
Hickey-Freeman(R), which dates from 1899. The Company also offers its products
under other brands which it owns such as Sansabelt(R), Racquet Club(R), Palm
Beach(R), Brannoch(R), Barrie Pace(R), Hawksley & Wight(R), Desert Classic(R),
Pusser's of the West Indies(R), Cambridge(R), Coppley(R), Keithmoor(R) and
Royal Shirt(TM); and under exclusive license agreements for specified product
lines including Tommy Hilfiger(R), Jack Nicklaus(R), Bobby Jones(R),
Burberry(R) men's tailored clothing, Austin Reed(R), Perry Ellis(R), Kenneth
Cole(R), Ted Baker(R), Evan-Picone(R), Daniel Hechter(R), Gieves & Hawkes(R),
Pringle of Scotland(R), Claiborne(R), Pierre Cardin(R), Alan Flusser(R) and KM
by Krizia(TM). To broaden the distribution of the apparel sold under its owned
and licensed trademarks, the Company has also entered into over 20 license or
sublicense agreements with third parties for specified product lines to
produce, market and distribute products in 15 countries outside the United
States. Additionally, the Company has direct marketing activities primarily in
Europe, but also in Asia, North America and South America, selling golfwear in
18 countries.
The Company has expanded its product offerings through acquisitions in the
last few years. On August 27, 1999, a wholly owned subsidiary of the Company
acquired 100% of the capital stock of The Royal Shirt Company, Ltd. ("Royal"),
a Canadian based manufacturer and marketer of dress and sport shirts.
Effective December 1, 1998, a wholly-owned subsidiary of the Company acquired
100% of the capital stock of The Coppley, Noyes and Randall Limited
("Coppley"), a leading Canadian manufacturer and marketer of men's tailored
clothing and other apparel. In November 1998, the Company purchased the
wholesale apparel business of Pusser's Ltd. ("Pusser's") from an entity which
operates restaurants, pubs and retail stores carrying nautical and tropical
sportswear apparel and other products marketed under the Pusser's name. Assets
acquired include the trademarks associated with all apparel products along
with inventories associated with the wholesale business. Royal, Coppley and
Pusser's are hereafter referred to as "the new businesses". On November 26,
1996, a wholly-owned subsidiary of the Company purchased substantially all of
the license rights to manufacture
1
and market men's tailored suits, sport coats and slacks under the Burberry(R)
men's tailored clothing, Claiborne(R) and Evan-Picone(R) brands, as well as
ownership of the Palm Beach(R), Brannoch(R) and other names, and the current
assets, properties and operations of the Plaid Clothing Group, Inc., now PCG
Corp. I, and its subsidiaries ("Plaid").
This 2000 Annual Report on Form 10-K contains forward-looking statements
that are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Wherever possible, the Company has
identified these forward-looking statements by words such as "anticipates",
"believes", "estimates", "expects", "projects", "plans" and similar phrases.
Additionally, the Company may from time to time make other oral or written
statements that are also forward-looking statements. While the Company
believes that the assumptions underlying such forward-looking information are
reasonable based on present conditions, forward-looking statements made by the
Company are not guarantees of future performance and actual results may differ
materially from those in the forward-looking statements as a result of various
factors. Accordingly, the Company has identified various important risk
factors which could cause the Company's actual financial results to differ
materially from any such results which might be projected, forecasted or
estimated by the Company in written or oral forward-looking statements
including, but not limited to the following:
. The overall retail economy in the United States could affect retailers'
expectations of future apparel product sales. A more pessimistic
evaluation compared to 2000 could adversely affect both the advance order
and in-stock product lines marketed by the Company. The Company's sales
and earnings could be adversely impacted to the extent that the financial
strength of its existing or new retail customers worsens.
. The Company's largest customer represented approximately 20% of
consolidated sales in fiscal 2000. The Company's second largest customer
in 2000 represented approximately 7% of consolidated sales. The Company
believes it maintains an excellent business relationship with these
customers. However, an unanticipated decline in sales with the Company's
largest customers would adversely affect profitability as it would be
difficult to immediately replace this business with new customers or
increase volume with other existing customers.
. Substantially all of the Company's men's and women's sportswear, men's
ties, women's career wear and a portion of its tailored suits, sport
coats, slack and dress shirts production are manufactured utilizing
independent contractors, mostly located outside of the United States. The
percentage of product manufactured or assembled outside of the United
States is increasing. The Company is dependent upon the contractors'
ability to deliver such products on a timely basis. Labor, delivery or
transportation difficulties regarding contractor sourced products which
result in delays not readily controllable by the Company could negatively
affect operating profits. Also, unanticipated political or economic
disruptions in these countries and/or currency fluctuations could
adversely impact overall Company profitability.
. Continuation of the trend towards more casual dressing in the workplace
could further reduce the demand for the Company's tailored clothing
products, especially for tailored suits. While the Company markets
several sportswear and casual product lines, consumer receptiveness to
the Company's casual and sportswear products may be less than
anticipated.
. Sales derived from products which utilize licensed brand names represent
an important current component of the Company's overall revenues and
profitability. The Company also serves as a licensing agent for several
of its principal licensors. While the Company believes the relationships
with its principal licensors to be favorable and the termination of any
single licensing agreement would not have a material adverse effect on
its business taken as a whole, the long-term prospects of the Company
assume the continuation of a significant percentage of existing licensing
arrangements and ongoing consumer acceptance of the products sold under
these licensed brands.
. The tailored clothing market relating to suit units has experienced unit
declines for the past several years, partially offset by increasing
demand for sport coats and dress slacks. The Company has been, among
other things, reducing overall product costs, including increased off-
shore sourcing and introducing new
2
brands with higher gross margin potential, and placing less emphasis on
brands which do not have the potential of achieving acceptable profit
margins. If these efforts do not meet with consumer acceptance, sales and
profitability could be adversely affected.
. Fabric purchases from the Company's largest supplier approximated one-
fifth of the total fabric requirements in fiscal 2000, down from
approximately one-fourth in the prior year and one-third two years ago.
As is customary in the industry, there are no long-term contracts with
fabric suppliers. The Company believes that there are alternative sources
of supply available to satisfy its raw material requirements. However, a
prolonged, unanticipated disruption of scheduled deliveries from this or
other suppliers would adversely affect production scheduling and
ultimately the Company's ability to meet customer delivery dates.
. During 2000, the Company's variable rate debt (based on the Prime or
LIBOR rates in effect from time to time) averaged approximately $73
million under its Revolving Credit Facility. An unexpected increase in
total borrowings and/or in the borrowing rates under the Revolving Credit
Facility would adversely affect profitability.
. The Company is not aware of and has assumed no significant adverse impact
of pending or threatened litigation matters.
The Company assumes no obligation to update publicly or release any
revisions to any forward-looking statements, whether as a result of new
information, future events or otherwise.
Products Produced and Services Rendered
The Company's merchandising strategy is to market a wide selection of men's
tailored clothing, sportswear and dress furnishings, and women's career
apparel and sportswear across a wide variety of fashion directions, price
points and distribution channels. MAG represented 91% of sales in 2000, 93% in
1999 and 92% in 1998. Women's Apparel Group represented approximately 9% of
sales in 2000, 7% of sales in 1999 and 8% in 1998. As an integrated
manufacturer and marketer, the Company is responsible for the design,
manufacture and sourcing of its apparel. The majority of its men's tailored
clothing and slacks are manufactured in twelve Company operated facilities
located in the United States, three facilities in Canada, one factory in Costa
Rica and one factory in Mexico. Some of its dress furnishings are produced at
a Company-operated facility in Canada. The Company utilizes domestic and
foreign contract manufacturers to produce its remaining products, principally
men's and women's sportswear, as well as women's career apparel and sportswear
in accordance with Company specifications and production schedules.
Approximately one-third of the catalog sales are of products provided by
affiliated companies.
Sources and Availability of Raw Materials
Raw materials, which include fabric, linings, thread, buttons and labels,
are obtained from domestic and foreign sources based on quality, pricing,
fashion trends and availability. The Company's principal raw material is
fabric, including woolens, cottons, polyester and blends of wool and
polyester. The Company procures and purchases its raw materials directly for
its owned manufacturing facilities and may also procure and retain ownership
of fabric relating to garments cut and assembled by contract manufacturers. In
other circumstances, fabric is procured by the contract manufacturer directly
but in accordance with the Company's specifications. For certain of its
product offerings, the Company and selected fabric suppliers jointly develop
fabric for the Company's exclusive use. Approximately two-fifths of the raw
materials purchased by the Company is imported from foreign mills. A
substantial portion of these purchases is denominated in United States
dollars. Purchases from Burlington Industries, Inc., the Company's largest
fabric supplier, accounted for approximately one-fifth of the Company's total
fabric requirements in fiscal 2000. No other supplier accounts for over 5% of
the Company's total raw material requirements. As is customary in the
industry, the Company has no long-term contracts with its suppliers. The
Company believes that a variety of alternative sources of supply are available
to satisfy its raw material requirements.
3
Product lines are developed primarily for two major selling seasons, spring
and fall, with smaller lines for the summer and holiday seasons. The majority
of the Company's products are purchased by its customers on an advance order
basis, five to seven months prior to shipment. Seasonal commitments for a
portion of the expected requirements are made approximately three to five
months in advance of the customer order. Certain of the Company's businesses
maintain in-stock inventory programs on selected product styles giving
customers the capability to order electronically with resulting shipment
within 24 to 48 hours. Programs with selected fabric suppliers provide for
availability to support in-stock marketing programs. The normal production
process from fabric cutting to finished production is five to six weeks for
tailored suits and sport coats and three to four weeks for tailored slacks. A
substantial portion of sportswear and women's apparel is produced by
unaffiliated contractors utilizing Company designs.
Competition and Customers
The Company emphasizes quality, fashion, brand awareness and service in
engaging in this highly competitive business. While no manufacturer of men's
clothing accounts for more than a small percentage of the total amount of
apparel produced by the entire industry in the United States, the Company
believes it is the largest domestic manufacturer and marketer of men's
tailored clothing and men's slacks with expected retail prices over $50. The
Company's women's apparel sales do not represent a significant percentage of
total women's apparel sales. The Company's customers include major department
and specialty stores (certain of which are under common ownership and
control), value-oriented retailers and direct mail companies. Sales in the
United States were approximately 95% of total revenues. The Company's largest
customer, Dillard Department Stores, represented approximately 20%, 18% and
16% of consolidated sales in 2000, 1999 and 1998, respectively. No other
customer exceeded 8% of net sales.
Trademarks, Licensing Agreements and Research
A significant portion of the Company's sales are of products carrying
brands and trademarks owned by the Company. As noted previously, the Company
also manufactures and markets products pursuant to exclusive license
agreements with others. While the terms and duration of these license
agreements vary, typically they provide for certain minimum payments and are
subject to renewal and renegotiation.
In the apparel industry, new product development is directed primarily
towards new fashion and design changes and does not require significant
expenditures for research. The Company's fixed assets include expenditures for
new equipment developed by others. The Company does not spend material amounts
on research activities relating to the development of new equipment.
Conditions Affecting the Environment
Regulations relating to the protection of the environment have not had a
significant effect on capital expenditures, earnings or the competitive
position of the Company. The making of apparel is not energy intensive, and
the Company is not engaged in producing fibers or fabrics.
Employees
The Company presently has approximately 7,200 employees, of which
approximately 96% are employed in MAG. Most of the employees engaged in
manufacturing and distribution activities in the United States and Canada are
covered by union contracts with the Union of Needletrades, Industrial &
Textile Employees. The Company considers its employee relations to be
satisfactory.
4
Seasonality; Working Capital
The men's tailored clothing business has two principal selling seasons,
spring and fall. Additional lines for the summer and holiday seasons are
marketed in men's and women's sportswear. Men's tailored clothing, especially
at higher price points, generally tends to be less sensitive to frequent
shifts in fashion trends, economic conditions and weather, as compared to
men's sportswear or women's career apparel and sportswear. While there is
typically little seasonality to the Company's sales on a quarterly basis,
seasonality can be affected by a variety of factors, including the mix of
advance and fill-in orders, the distribution of sales across retail trade
channels and overall product mix between traditional and fashion merchandise.
The Company generally receives orders from its wholesale customers
approximately five to seven months prior to shipment. Some of the Company's
operating businesses also routinely maintain in-stock positions of selected
inventory in order to fill customer orders on a quick response basis.
Sales and receivables are recorded when inventory is shipped, with payment
terms generally 30 to 60 days from the date of shipment. With respect to the
tailored clothing advance order shipments, customary industry trade terms are
60 days from the seasonal billing dates of February 15 and August 15. The
Company's borrowing needs are typically lowest in July and January. Financing
requirements begin to rise as inventory levels increase in anticipation of the
spring and fall advance order shipping periods. Peak borrowing levels occur in
late March and September, just prior to the collection of receivables from
men's tailored clothing advance order shipments.
5
Item 2--Properties
The Company's principal executive and administrative offices are located in
Chicago, Illinois. Its principal office, manufacturing and distribution
operations are conducted at the following locations:
Approximate
floor area
in square Expiration date
Location feet Principal Use of material leases
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Anniston, AL............ 76,000 Manufacturing 2005
Buffalo, NY............. 280,000 Manufacturing; warehousing; office 2015
Cape Girardeau, MO...... 171,000 Manufacturing; warehousing *
Chicago, IL............. 102,000 Executive and administrative offices 2004
Des Plaines, IL......... 361,000 Manufacturing; warehousing *
Easton, PA.............. 220,000 Warehousing; office *
Elizabethtown, KY....... 54,000 Manufacturing *
Erlanger, KY............ 225,000 Warehousing 2004
Farmington, MO.......... 65,000 Warehousing *
Michigan City, IN (2
locations)............. 420,000 Manufacturing; warehousing; office *
New York, NY............ 100,000 Sales offices/showrooms/retail store 2005
Rector, AR.............. 52,000 Manufacturing *
Rochester, NY........... 223,000 Manufacturing; warehousing; office *
Somerset, KY............ 225,000 Manufacturing *
Winchester, KY.......... 92,000 Manufacturing *
Hamilton, Ontario,
Canada (3 locations)... 163,000 Manufacturing; warehousing; office 2003
San Jose, Costa Rica.... 72,000 Manufacturing *
Tolcayuca, Mexico....... 50,000 Manufacturing *
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*Properties owned by the Registrant
The Company believes that its properties are well maintained and its
manufacturing equipment is in good operating condition and sufficient for
current production. For information regarding the terms of the leases and
rental payments thereunder, refer to the "Commitments and Contingencies" note
to the Consolidated Financial Statements on pages 27 and 28 of this Form 10-K.
Item 3--Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and lawsuits will not
have a material adverse effect on the Company's financial position or results
of operations.
Item 4--Submission of Matters to a Vote of Security Holders
None.
6
Executive Officers of the Registrant
Each of the executive officers of the Registrant listed below has served
the Registrant in various executive capacities for the past five years. Each
officer is elected annually by the Board of Directors, normally for a one-year
term and is subject to removal powers of the Board.
Years
of
Service
with
Name Position Age Company
---- ----------------------------------------------------------- --- -------
Elbert O. Hand.......... Chairman and Chief Executive Officer (Director since 1984) 61 36
Homi B. Patel........... President and Chief Operating Officer (Director since 1994) 51 21
Glenn R. Morgan......... Executive Vice President and Chief Financial Officer 53 21
James E. Condon......... Vice President and Treasurer 50 23
Taras R. Proczko........ Vice President, Corporate Counsel and Secretary 46 20
Linda J. Valentine...... Vice President, Compensation and Benefits 50 20
Andrew A. Zahr.......... Vice President and Controller; Chief Accounting Officer 57 28
Mr. Hand was elected to his current position as Chairman and Chief
Executive Officer in October 1992.
Mr. Patel was elected to his current position as President and Chief
Operating Officer in February 1993.
Mr. Morgan was elected to his current position as Executive Vice President
and Chief Financial Officer in September 1995.
Mr. Condon was elected to his current position as Vice President and
Treasurer in September 1995.
Mr. Proczko was elected to his current position as Vice President,
Corporate Counsel and Secretary in January 2000. From March 1993 to December
1999, he served as Assistant General Counsel.
Ms. Valentine was elected to her current position as Vice President,
Compensation and Benefits in February 1993.
Mr. Zahr was elected to his current position as Vice President and
Controller in April 1998. From July 1994 to April 1998, he served as
Controller.
7
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters
Hartmarx Corporation common stock is traded on the New York and Chicago
Stock Exchanges. The quarterly composite price ranges of the Company's common
stock for the past three fiscal years were as follows:
2000 1999 1998
----------- ----------- -----------
High Low High Low High Low
----- ----- ----- ----- ----- -----
First Quarter............................... $3.97 $3.13 $6.13 $3.94 $8.50 $7.06
Second Quarter.............................. 3.22 2.16 5.25 4.31 9.00 7.38
Third Quarter............................... 3.03 2.20 5.06 3.63 8.00 6.50
Fourth Quarter.............................. 3.13 2.34 4.94 3.69 7.19 4.38
The most recent quarterly dividend paid was in November 1991, in the amount
of $.15 per share. The current financing agreement contains a limitation on
restricted payments, as defined, which includes dividends, to a cumulative
maximum amount of $12.5 million for any four consecutive fiscal quarters. The
current financing agreements also contain limitations on share repurchases
related to borrowing availability as well as various restrictive covenants
pertaining to additional debt incurrence, capital expenditures, asset sales,
operating leases, and ratios relating to maximum funded debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA") and minimum
fixed charge coverage, as well as other customary covenants, representations
and warranties, funding conditions and events of default. The Company was in
compliance with all covenants under these agreements.
As of February 15, 2001, there were approximately 4,593 holders of the
Company's common stock. The number of holders was estimated by adding the
number of registered holders furnished by the Company's registrar together
with the number of participants in the Hartmarx Employee Stock Ownership Plan.
On April 13, 2000, the Board of Directors of the Company approved an
amendment and restatement (the "Amendment") of the Rights Agreement, dated
December 6, 1995, between the Company and First Chicago Trust Company of New
York, as Rights Agent (the "Rights Agreement"). The Amendment, among other
things, allows Traco International, N.V. and its affiliates, collectively, to
beneficially own up to and including 19.5% of the outstanding Common Stock,
$2.50 par value per share, of the Company without triggering the distribution
and exercisability of the rights issued pursuant to the Rights Agreement.
8
Item 6--Selected Financial Data
The following table summarizes data for the fiscal years 1996 through 2000.
The Company's complete annual financial statements and notes thereto for
fiscal 2000 appear elsewhere in this Annual Report on Form 10-K.
Income Statement Data
In Thousands, Except Per
Share Data
For Years Ended November 30 2000 1999(/1/) 1998 1997(/2/) 1996(/2/)
- --------------------------- -------- --------- -------- --------- ---------
Net sales.................... $680,647 $726,805 $725,002 $718,135 $610,180
Licensing and other income... 3,114 2,894 1,882 3,375 4,263
Cost of sales................ 490,751 541,730 540,545 544,003 463,533
Operating expenses........... 163,134 156,560 144,121 143,482 127,699
Earnings before non-cash
charge, interest, taxes and
extraordinary gain.......... 29,876 31,409 42,218 34,025 23,211
Non-cash charge re:
termination of systems
project..................... -- 11,195 -- -- --
Earnings before interest,
taxes and extraordinary
gain........................ 29,876 20,214 42,218 34,025 23,211
Interest expense............. 15,686 17,669 18,633 17,480 16,681
Earnings before taxes and
extraordinary gain.......... 14,190 2,545 23,585 16,545 6,530
Tax (provision) benefit...... (5,605) (965) (8,965) 8,695 17,300
Net earnings before
extraordinary gain.......... 8,585 1,580 14,620 25,240 23,830
Extraordinary gain, net of
tax......................... 227 -- -- -- 725
Net earnings................. 8,812 1,580 14,620 25,240 24,555
Diluted earnings per share:
before extraordinary gain... .29 .05 .42 .74 .72
after extraordinary gain.... .30 .05 .42 .74 .74
Cash dividends per share..... -- -- -- -- --
Diluted average number of
common shares and
equivalents................. 29,568 32,861 34,885 34,167 33,021
Balance Sheet Data
In Thousands, Except Per
Share Data
At November 30
- ------------------------
Cash......................... $ 1,755 $ 2,133 $ 5,292 $ 1,626 $ 2,844
Accounts receivable.......... 135,421 144,921 131,342 136,854 135,554
Inventories.................. 167,111 176,214 207,679 193,780 165,913
Other current assets......... 26,766 21,668 19,115 24,484 16,155
Net properties............... 36,407 38,994 51,034 45,782 43,909
Other assets/deferred taxes.. 71,015 75,743 70,260 67,857 65,864
Total assets................. 438,475 459,673 484,722 470,383 430,239
Accounts payable, accrued
expenses and taxes.......... 113,815 100,152 93,768 100,098 99,745
Current maturities of long-
term debt................... 15,077 15,073 10,067 20,062 20,100
Long-term debt............... 110,470 155,300 169,927 157,939 148,428
Shareholders' equity......... 199,113 189,148 210,960 192,284 161,966
Equity per share............. 6.69 6.43 6.06 5.62 4.85
Other Data
In Thousands
For Years Ended November 30
- ---------------------------
Earnings before non-cash
charge, interest, taxes,
depreciation, amortization
and extraordinary gain...... $ 36,976 $ 38,492 $ 49,450 $ 41,673 $ 31,469
Depreciation and amortization
of fixed assets............. 7,100 7,083 7,232 7,648 8,258
Capital expenditures......... 4,494 7,820 12,753 10,086 8,207
- --------
(1) 1999 results reflect a second quarter non-cash writedown of systems
development costs of $11.2 million (pre-tax), $6.9 million (after-tax) or
$.21 per share.
(2) 1996 and 1997 included favorable non-cash income tax adjustments to the
tax valuation reserve related to recognition of net operating loss
carryforwards of $19.9 million and $15.0 million, respectively. Excluding
this adjustment in each year, net earnings before extraordinary gain and
diluted earnings per share would have been $4.0 million or $.12 per share,
respectively, in 1996 and $10.3 million or $.30 per share, respectively,
in 1997.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, along with the Financing and Taxes on Earnings footnotes to the
Consolidated Financial Statements, provide additional information relating to
the comparability of the information presented above.
9
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
Performance in 2000 reflected improved pre-tax margins on 6% lower sales in
a generally lackluster retail environment for apparel; total debt declined $45
million or 26% from both cash earnings and working capital reductions. The
Company continued to implement its previously stated strategies of planned
reductions associated with lower profit potential tailored clothing brands and
programs along with increased investment to develop an enhanced presence in
branded sportswear product lines. Consolidated revenues were $681 million in
2000 compared to $726 million in 1999 and $725 million in 1998. Earnings
before interest and taxes were $29.9 million in 2000 compared to $20.2 million
in 1999 and $42.2 million in 1998. Results for 1999 included a non-cash pre-
tax charge of $11.2 million ($6.9 million or $.21 per share net of tax) to
reflect the write-down of capitalized development costs related to the
termination of an enterprise resource planning system ("the non-cash charge").
The Company operates exclusively in the apparel business. Its operations
are comprised of: (i) Men's Apparel Group ("MAG"), which designs, manufactures
and markets men's tailored clothing, slacks, sportswear (including golfwear)
and dress furnishings (shirts and ties); products are sold under a broad
variety of apparel brands, both owned and under license, to an extensive range
of retail, catalog and e-commerce channels; and (ii) Women's Apparel Group,
comprised of International Women's Apparel ("IWA"), which markets women's
career apparel and sportswear to department and specialty stores under owned
and licensed brand names, and Barrie Pace, a direct mail business offering a
wide range of apparel and accessories to business and professional women
through its catalogs.
Results of Operations
The following summarizes sales and earnings before interest and taxes
("EBIT") for the Company's business groups (in millions):
Year Ended November
30,
----------------------
2000 1999 1998
------ ------ ------
Sales:
Men's Apparel Group............................. $619.8 $672.6 $665.0
Women's Apparel Group........................... 60.8 54.2 60.0
------ ------ ------
Total......................................... $680.6 $726.8 $725.0
====== ====== ======
EBIT:
Men's Apparel Group............................. $ 36.9 $ 37.9 $ 43.9
Women's Apparel Group........................... 5.7 5.7 6.8
Other and adjustments........................... (12.7) (12.2) (8.5)
------ ------ ------
Total......................................... $ 29.9 $ 31.4 $ 42.2
====== ====== ======
EBIT for 1999 excludes the $11.2 million non-cash charge previously noted.
MAG sales were $620 million in 2000, $673 million in 1999 and $665 million
in 1998. Revenues in 2000 reflected lower orders for suit units and planned
reductions associated with brands or programs being deemphasized which do not
have the likelihood of achieving acceptable long term profitability rates;
partially offsetting these conditions were unit increases in selected tailored
sport coat and slack brands and sportswear growth in Nicklaus golfwear and
Tommy Hilfiger casual pants. Revenues in 1999 compared to 1998 reflected
approximately $36 million attributable to new products, principally from the
acquisition of the Canadian based Coppley tailored clothing lines, as well as
growth of the Kenneth Cole and Evan-Picone brands and introduction of Hart
Schaffner & Marx and Hickey-Freeman dress furnishings. These increases were
mostly offset by declines attributable to the generally difficult retail
environment for business apparel and planned reductions in low profit
potential brands and programs. MAG EBIT was $37 million in 2000 compared to
$38 million in 1999 and
10
$44 million in 1998, with tailored clothing products representing the most
significant contributor to earnings and cash flow in each year. The $1 million
decline in 2000 EBIT compared to 1999 reflected the improved operating margins
which about offset the unfavorable impact of the lower sales and incremental
costs associated with developing the Company's sportswear product lines. The
$6 million decline in 1999 EBIT compared to 1998 was primarily attributable to
the decline in sales from comparable operations, including the product lines
being repositioned or eliminated, partially offset by EBIT applicable to
Coppley.
Women's Apparel Group sales, comprising approximately 9% of the
consolidated total in 2000, 7% in 1999 and 8% in 1998, aggregated $60 million
in 2000, $54 million in 1999 and $60 million in 1998. Revenues in 2000
primarily reflected higher catalog sales, as the number and size of catalogs
distributed in 2000 were more than in 1999. Revenues in 1999 were adversely
affected by lower in-stock business because of the generally soft retail
business and the fashion trend less favorable towards women's tailored coats;
catalog sales were slightly higher. Women's Apparel Group EBIT was $6 million
in 2000, $6 million in 1999 and $7 million in 1998. EBIT in 2000 reflected the
favorable impact from the higher catalog sales, which was about offset by
higher advertising and promotional costs associated with the distribution of
additional catalogs, as well as a small decline in the Women's Apparel Group's
substantial gross margin rate on its wholesale sales. The decline in 1999
compared to 1998 was primarily attributable to the lower sales.
Gross Margins. The consolidated gross margin percentage of sales was 27.9%
in 2000, 25.5% in 1999 and 25.4% in 1998. The improvement in the 2000 gross
margin rate reflected a change in the revenue product mix encompassing the
elimination/reduction of low margin moderate priced tailored clothing products
and programs, improved sourcing from certain ongoing tailored product lines
and a higher percentage of women's and men's sportswear product categories.
The small improvement in the 1999 gross margin rate compared to 1998
principally reflected the effect of the acquired product lines which have
higher gross margins and operating expense ratios compared to the then
existing product lines taken as a whole. Gross margins in the moderate priced
tailored clothing product lines improved in the latter part of 1999 from lower
product costs and favorable product mix changes related to the repositioning
efforts previously discussed; however, this gross margin enhancement during
1999 was largely offset from lower sales of higher margin tailored clothing
products sold at the higher price points and markdowns resulting from the
disposition of excess sportswear units. The effect of utilizing the LIFO
inventory method favorably impacted gross margins by $1.4 million in 2000 and
$.8 million in 1999 compared to an unfavorable impact of $.9 million in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $163 million in 2000, $157 million in 1999 and
$144 million in 1998. As a percentage of sales, the expense rate was 24.0% in
2000, compared to 21.5% in 1999 and 19.9% in 1998. The dollar increase in 2000
included the higher costs associated with the distribution of additional
catalogs in the Barrie Pace operation, costs related to development of the
sportswear product lines, as well as higher employee benefit costs and the
inclusion of the Royal shirt operations for a full year. The increase relative
to sales reflected changes in revenue mix towards products with higher gross
margin rates which have higher operating expense ratios to sales; also, the
decline in in-stock tailored clothing units could not be matched with
commensurate operating expense reductions. The dollar increase in 1999
compared to 1998 was primarily attributable to acquired operations and
incremental expenditures attributable to Year 2000 remediation, as the dollar
amount of expenses for comparable operations was about the same as the prior
year. The increase relative to sales reflected both new businesses with their
higher operating ratios existing at the time of acquisition and, for
comparable operations, the inability to immediately lower non-variable
expenses resulting from the declines associated with lower in-stock business.
Advertising expenditures, including costs related to the Barrie Pace
catalog, were $31 million in 2000 compared to $28 million in 1999 and $26
million in 1998, representing 4.5%, 3.9% and 3.6% of consolidated sales,
respectively. The increase in 2000 principally reflected higher amounts
associated with the distribution of Barrie Pace catalogs. The increase in 1999
compared to 1998 reflected the new businesses and higher MAG advertising
expenditures in support of new product lines.
11
Licensing and Other Income. This caption is principally comprised of income
generated from licensing and aggregated $3.1 million in 2000, $2.9 million in
1999 and $1.9 million in 1998. The increase in 2000 compared to 1999 and 1999
compared to 1998 reflected the improvement in the economic conditions in Asia,
especially Japan and Korea, where a significant portion of the Company's
licensing income is generated.
Earnings before Non-Cash Charge, Interest and Taxes ("EBIT"). EBIT was
$29.9 million in 2000, $31.4 million in 1999 and $42.2 million in 1998,
representing 4.4%, 4.3% and 5.8% of sales, respectively. The slight percentage
improvement in 2000 compared to 1999 reflected the impact of the product mix
changes on the overall lower sales level. The decline in 1999 compared to 1998
was principally attributable to the higher operating expense ratio to sales.
Non-Cash Charge. The non-cash charge of $11.2 million in 1999 reflected the
second quarter writedown of capitalized systems development costs related to
the termination of an enterprise resource planning system project, which had
been anticipated to be implemented Company-wide. After extensive evaluation,
the Company, in consultation with its advisors, concluded that company-wide
implementation of the application software purchased would not be appropriate.
Interest Expense. Interest expense was $15.7 million in 2000, $17.7 million
in 1999 and $18.6 million in 1998. As a percentage of sales, interest expense
represented 2.3% in 2000 compared to 2.4% in 1999 and 2.6% in 1998. The dollar
decrease in 2000 from 1999 reflected significantly lower average borrowings
which were only partially offset by higher average borrowing rates. The dollar
decrease in 1999 from 1998 reflected lower average borrowings during the year,
as well as lower average borrowing rates earlier in the year. The effective
interest rate for all borrowings, including amortization costs, was 9.6% in
2000, 8.5% in 1999 and 9.3% in 1998. The Company's weighted average short term
borrowing rate was 8.3% in 2000, 6.6% in 1999 and 7.2% in 1998. Interest
expense included non-cash amortization of financing fees and expenses of $.5
million in 2000 and 1999 and $.8 million in 1998.
Pre-Tax Earnings. Pre-tax earnings were $14.2 million in 2000 compared to
$13.7 million in 1999 (before consideration of the non-cash charge) and $23.6
million in 1998.
Income Taxes. The Company's effective tax rate was 39.5% in 2000 compared
to 38% in 1999 and 1998 and resulted in a tax provision of $5.6 million in
2000, $1.0 million in 1999 and $9.0 million in 1998. The increase in the
effective rate for 2000 was principally attributable to proportionately higher
non-US income compared to the previous two years.
Net Earnings. Comparable net earnings were $8.6 million or $.29 per diluted
share in 2000 (before consideration of a $.2 million extraordinary gain
related to purchases of the Company's subordinated debentures) compared to
$8.5 million or $.26 per diluted share in 1999 (before consideration of the
non-cash charge) and $14.6 million or $.42 per diluted share in 1998. Reported
earnings per share after consideration of the extraordinary gain in 2000 and
non-cash charge in 1999 were $8.8 million or $.30 per diluted share in 2000,
$1.6 million or $.05 per diluted share in 1999 and $14.6 million or $.42 per
diluted share in 1998.
Liquidity and Capital Resources
During fiscal 1994, the Company issued $100 million of public senior
subordinated debentures (the "Notes") and also entered into a then three-year
financing agreement (the "Credit Facility") with a group of lenders providing
for maximum borrowings of $175 million (including a letter of credit facility)
and privately placed $15.5 million of industrial development bonds maturing in
2015 issued by development authorities in prior years. This 1994 refinancing
accomplished several of the Company's objectives, including extending
maturities, reducing the level of borrowings subject to interest rate
variability and establishing a separate working capital facility providing
greater flexibility in addressing the Company's seasonal borrowing
requirements.
Credit Facility amendments in July 1995, November 1995, January 1996 and
October 1997, among other things, resulted in a reduction in the fees,
administrative charges and effective borrowing rates, adjustment or
12
elimination of certain covenants and extension of the Credit Facility term
from March 1997 to July 2000. In August 1999, the Company completed an
amendment and extension of the Credit Facility. Among other things, the Credit
Facility now provides for maximum borrowings of $200 million. The term of the
Credit Facility was extended from July 2000 to June 2003 (provided that no
more than $35 million of the Notes remain outstanding as of July 15, 2001),
along with increased flexibility with respect to the repurchase of Company
stock and future refinancing of the Company's long term borrowings. The Credit
Facility is secured by inventories, accounts receivable and intangibles of the
Company and its subsidiaries. The Credit Facility contains certain
restrictions on the operation of the Company's business, including covenants
pertaining to capital expenditures, asset sales, operating leases, incurrence
of additional indebtedness, ratios relating to maximum funded debt to EBITDA
and minimum fixed charge coverage, as well as other customary covenants,
representations and warranties, and events of default. The Company is in
compliance with all the covenants under the respective borrowing agreements.
Net cash provided by operating activities was $48 million in 2000 compared
to $39 million in 1999 and $13 million in 1998. The significant increase in
2000 compared to 1999, as well as 1999 compared to 1998, was attributable to
both cash operating earnings and working capital reductions. The favorable
cash flow in 2000 enabled the Company to reduce debt by $45 million. Cash flow
in 1999 allowed the Company to purchase approximately 6.7 million of its
shares for $30 million and to complete two acquisitions during the year, while
still reducing total debt by $10 million.
At November 30, 2000, net accounts receivable of $135.4 million declined
$9.5 million from November 30, 1999, attributable to the lower sales. The
allowance for doubtful accounts was $7.8 million compared to $8.6 million last
year, representing 5.4% of gross receivables in 2000 and 5.6% in 1999; agings
were slightly improved. Inventories were $167.1 million at November 30, 2000
compared to $176.2 million at November 30, 1999 and $207.7 million at November
30, 1998. These reductions of 5.2% in 2000 vs. 1999 and 15.2% in 1999 vs. 1998
reflected, among other things, the generally lackluster environment at retail
for non-casual apparel products, as well as the de-emphasis or elimination of
certain brands or programs that did not offer the prospects of adequate
profitability over the longer term. Inventory turn improved from 1999.
Recoverable and deferred income taxes at November 30, 2000 aggregated $52.9
million compared to $55.3 million at November 30, 1999. Statement of Financial
Accounting Standards No. 109,"Accounting for Income Taxes", requires, among
other things, the recognition of deferred tax assets, including the future
benefit associated with operating loss carryforwards, a periodic evaluation of
the likelihood that the deferred tax assets are realizable and the
establishment of a valuation allowance, in certain circumstances, to offset
deferred tax assets to the extent realization is not considered more likely
than not. The Company has concluded that it was more likely than not that its
deferred tax assets will be fully realized and that a tax valuation reserve
was not required. Approximately $35 million of the total deferred income taxes
has been classified as non-current, principally associated with the benefit
recognized attributable to expected future utilization of operating loss
carryforwards. At November 30, 2000, the Company had approximately $110
million of federal tax operating loss carryforwards available to offset future
taxable income. Utilizing the entire $110 million of available operating loss
carryforwards by their expiration over the 2007-2010 periods would require
average annual taxable earnings of approximately $15 million before
consideration of available tax planning alternatives.
At November 30, 2000, net properties were $36.4 million compared to $39.0
million at November 30, 1999. Capital additions (excluding expenditures
associated with the terminated systems project in 1999 and 1998) were $4.5
million in 2000 compared to $6.4 million in 1999 and $6.0 million in 1998.
Depreciation expense was $7.1 million in 2000 and 1999 and $7.2 million in
1998. The capital expenditure limitations contained in the Company's current
borrowing agreements have not, and are not expected to, delay capital
expenditures otherwise planned by the Company.
Total debt at November 30, 2000 of $125.5 million declined $44.8 million
compared to the year earlier level. Although not impacting overall debt
levels, the Company retired $23.0 million face value of its Notes during 2000,
utilizing availability under its Credit Facility. The $15.1 million of
borrowings classified as current
13
at November 30, 2000 reflects the anticipated debt reduction during fiscal
2001 pursuant to the Company's borrowing arrangements. Total debt, including
short term borrowings and current maturities, represented 39% of the Company's
total $325 million capitalization at November 30, 2000, compared to 47% at
November 30, 1999; the lower debt capitalization ratio primarily reflected the
decline in total debt levels. Total additional borrowing availability at
November 30, 2000 under the Credit Facility was approximately $127 million.
Shareholders' equity of $199.1 million at November 30, 2000 represented
$6.69 book value per share compared to $6.43 book value per share at November
30, 1999. The $10.0 million equity increase during 2000 reflected the net
earnings for the year, ongoing equity sales to employee benefit plans and
recognition of previously unearned employee benefits principally associated
with the Company's employee stock ownership plan, partially offset by the
purchase of .317 million treasury shares aggregating approximately $1.2
million. Dividends have not been paid since 1991. The current Credit Facility
restricts, but does not prohibit, the payment of dividends.
Outlook
During 2000, the improved gross margin rate to sales and lower interest
expense more than offset the pre-tax earnings impact of the 6% revenue
decline. Fall and Holiday 2000 apparel sales at retail were promotional and
generally disappointing, suggesting a cautious outlook for fiscal 2001,
especially for the first half. The Company anticipates that fiscal 2001
revenue declines related to tailored suit units would be about offset by
increases in tailored sportcoat and slack units along with other non-tailored
clothing product categories.
The Company expects to sustain its preeminent position in tailored clothing
while continuing to broaden its product offerings in branded sportswear, dress
furnishings, golfwear and womenswear. The actions to eliminate lower margin
potential products and programs within moderate tailored clothing product
offerings favorably impacted operating margins, but were a contributing factor
to the fiscal 2000 revenue decline. While these actions are nearing
completion, some additional reductions in domestic tailored clothing
productive capacity are likely. Increasing demand for branded tailored
sportcoat and dress slacks across most price points is alleviating the decline
in advance orders and expected in-stock tailored suit units. Product
categories other than tailored clothing, such as sportswear from Hickey-
Freeman and Hart Schaffner & Marx, Bobby Jones and Jack Nicklaus golfwear and
Tommy Hilfiger casual slacks represent important sources for future revenue
and earnings growth. During 2000, HMX Sportswear, Inc. was formed to focus
efforts in expanding men's non-tailored clothing product categories; the human
resources investment to develop, merchandise and sell a variety of branded
sportswear apparel will continue during 2001, with the incremental revenue
benefit expected to commence with Spring 2002 deliveries. In November, 2000,
the Company commenced a relationship to market the United Kingdom-based Ted
Baker collection of men's sportswear, tailored clothing and womenswear for the
North American market with initial deliveries commencing with the Fall 2001
season. The recently acquired Alex and Eye brands are being marketed by the
women's apparel business to augment the ongoing Austin Reed and Hawksley &
Wight women's lines of tailored coats, pants, shirts and sportswear; the
Barrie Pace women's catalog operations is expected to be enhanced by an
expanded internet marketing capability during 2001.
The Company's $45 million debt reduction during fiscal 2000 resulted in the
lowest year-end debt level since 1986, and shareholders' equity of almost $200
million represented 61.3% of total capitalization. Free cash flow, which takes
into account depreciation expense, capital expenditures and the utilization of
tax operating loss carryforwards, was approximately $16 million or $.55 per
share in 2000. The Company's 10 7/8% subordinated debentures, due in January,
2002, are callable at 100 as of January 15, 2001; these debentures are
expected to be retired with approximately $17 million proceeds from new
mortgage financing and utilizing availability under the Company's Credit
Facility. The Company anticipates that sufficient capital resources will be
available to address growth opportunities generated internally or through
acquisition.
Increasing shareholder value through long-term earnings growth remains a
key objective; this would be achieved from a combination of revenue increases,
improved operating margins and lower financing costs.
14
Acquisitions and brand extensions will be pursued which provide opportunities
for expanded product offerings, channel diversification or operational
synergies.
Item 7A--Quantitative and Qualitative Disclosures About Market Risk
The Company enters into foreign exchange forward contracts from time to
time to limit the currency risks associated with purchase obligations
denominated in foreign currencies. The Company does not hold financial
instruments for trading purposes or engage in currency speculation. Foreign
exchange contracts are generally for amounts not to exceed forecasted purchase
obligations and require the Company to exchange U.S. dollars for foreign
currencies at rates agreed to at the inception of the contracts. These
contracts are closed by either cash settlement or actual delivery of goods.
The effects of movements in currency exchange rates on these instruments,
which are not significant, are recognized in earnings in the period in which
the purchase obligations are satisfied. As of November 30, 2000, the Company
had entered into foreign exchange contracts, aggregating approximately $10
million corresponding to approximately 19 billion Italian lire and 64 million
Japanese yen, primarily related to inventory purchases applicable to fiscal
2001.
The Company is subject to the risk of fluctuating interest rates in the
normal course of business, primarily as a result of borrowings under its
Credit Facility, which bear interest at variable rates. The variable rates may
fluctuate over time based on economic conditions, and the Company could be
subject to increased interest payments if market interest rates fluctuate. The
Company does not expect that change in the interest rates would have a
material adverse effect on the Company's results of operations. In the last
three years, the Company has not used derivative financial instruments to
manage interest rate risk.
Item 8--Financial Statements and Supplementary Data
Page
----
Financial Statements:
Report of Independent Accountants........................................ 16
Consolidated Statement of Earnings for the three years ended November 30,
2000.................................................................... 17
Consolidated Balance Sheet at November 30, 2000 and 1999................. 18
Consolidated Statement of Cash Flows for the three years ended November
30, 2000................................................................ 19
Consolidated Statement of Shareholders' Equity for the three years ended
November 30, 2000....................................................... 20
Notes to Consolidated Financial Statements............................... 21
Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts......................... F-1
Schedules not included have been omitted because they are not applicable
or the required information is included in the consolidated financial
statements and notes thereto.
Supplementary Data:
Quarterly Financial Summary (unaudited).................................. 36
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Directors of Hartmarx Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Hartmarx Corporation and its subsidiaries at November 30, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 2000, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of Hartmarx Corporation's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 17, 2001
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management of Hartmarx Corporation is responsible for the preparation of
the Company's financial statements. These financial statements have been
prepared in accordance with generally accepted accounting principles and
necessarily include certain amounts based on management's reasonable best
estimates and judgments, giving due consideration to materiality.
In fulfilling its responsibility, management has established cost-effective
systems of internal controls, policies and procedures with respect to the
Company's accounting, administrative procedures and reporting practices which
are believed to be of high quality and integrity. Such controls include
approved accounting, control and business practices and a program of internal
audit. The Company's business ethics policy, which is regularly communicated
to all key employees of the organization, is designed to maintain high ethical
standards in the conduct of Company affairs. Although no system can ensure
that all errors or irregularities have been eliminated, management believes
that the internal accounting controls in place provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition,
that transactions are executed in accordance with management's authorization,
and that financial records are reliable for preparing financial statements and
maintaining accountability for assets.
The Audit and Finance Committee of the Board of Directors meets
periodically with the Company's independent public accountants, management and
internal auditors to review auditing and financial reporting matters. This
Committee is responsible for recommending the selection of independent
accountants, subject to ratification by shareholders. Both the internal and
independent auditors have unrestricted access to the Audit and Finance
Committee, without Company management present, to discuss audit plans and
results, their opinions regarding the adequacy of internal accounting
controls, the quality of financial reporting and other relevant matters.
16
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(000's Omitted)
Fiscal Year Ended November
30,
-------------------------- ---
2000 1999 1998
-------- -------- --------
Net sales....................................... $680,647 $726,805 $725,002
Licensing and other income...................... 3,114 2,894 1,882
-------- -------- --------
683,761 729,699 726,884
-------- -------- --------
Cost of goods sold.............................. 490,751 541,730 540,545
Selling, general and administrative expenses.... 163,134 156,560 144,121
-------- -------- --------
653,885 698,290 684,666
-------- -------- --------
29,876 31,409 42,218
Non-cash charge for termination of systems
project........................................ -- 11,195 --
-------- -------- --------
Earnings before interest, taxes and
extraordinary gain............................. 29,876 20,214 42,218
Interest expense................................ 15,686 17,669 18,633
-------- -------- --------
Earnings before taxes and extraordinary gain.... 14,190 2,545 23,585
Tax provision................................... 5,605 965 8,965
-------- -------- --------
Net earnings before extraordinary gain.......... 8,585 1,580 14,620
Extraordinary gain.............................. 227 -- --
-------- -------- --------
Net earnings.................................... $ 8,812 $ 1,580 $ 14,620
======== ======== ========
Earnings per share (basic and diluted):
Before extraordinary gain..................... $ .29 $ .05 $ .42
======== ======== ========
After extraordinary gain...................... $ .30 $ .05 $ .42
======== ======== ========
(See accompanying notes to consolidated financial statements)
17
HARTMARX CORPORATION
CONSOLIDATED BALANCE SHEET
(000's Omitted)
November 30,
--------------------
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 1,755 $ 2,133
Accounts receivable, less allowance for doubtful
accounts of $7,770 in 2000 and $8,639 in 1999......... 135,421 144,921
Inventories............................................ 167,111 176,214
Prepaid expenses....................................... 8,867 6,663
Recoverable and deferred income taxes.................. 17,899 15,005
--------- ---------
Total current assets................................. 331,053 344,936
--------- ---------
INVESTMENTS AND OTHER ASSETS............................. 36,014 35,411
--------- ---------
DEFERRED INCOME TAXES.................................... 35,001 40,332
--------- ---------
PROPERTIES
Land................................................... 2,289 2,255
Buildings and building improvements.................... 42,971 42,079
Furniture, fixtures and equipment...................... 107,244 112,461
Leasehold improvements................................. 18,548 19,166
--------- ---------
171,052 175,961
Accumulated depreciation and amortization.............. (134,645) (136,967)
--------- ---------
Net properties......................................... 36,407 38,994
--------- ---------
TOTAL ASSETS............................................. $ 438,475 $ 459,673
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long term debt................... 15,077 15,073
Accounts payable....................................... 43,666 40,351
Accrued payrolls....................................... 24,904 18,518
Other accrued expenses................................. 45,245 41,283
--------- ---------
Total current liabilities............................ 128,892 115,225
--------- ---------
LONG TERM DEBT........................................... 110,470 155,300
--------- ---------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value; 2,500,000 authorized
and unissued.......................................... -- --
Common shares, $2.50 par value; authorized 75,000,000;
issued 36,328,564 in 2000 and 36,100,814 in 1999...... 90,821 90,252
Capital surplus........................................ 82,237 83,834
Retained earnings...................................... 60,723 51,911
Unearned employee benefits............................. (5,716) (7,161)
Common shares in treasury, at cost, 6,564,404 at
November 30, 2000 and 6,677,952 at November 30, 1999.. (28,952) (29,688)
--------- ---------
Shareholders' equity................................... 199,113 189,148
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $ 438,475 $ 459,673
========= =========
(See accompanying notes to consolidated financial statements)
18
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(000's Omitted)
Fiscal Year Ended November
30,
----------------------------
2000 1999 1998
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from operating activities:
Net earnings................................... $ 8,812 $ 1,580 $ 14,620
Reconciling items to adjust net earnings to net
cash provided by operating activities:
Extraordinary gain, net...................... (227) -- --
Non-cash charge.............................. -- 11,195 --
Depreciation and amortization................ 7,605 7,535 7,994
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable........................ 9,500 (3,899) 5,512
Inventories................................ 9,103 38,244 (13,162)
Prepaid expenses........................... (2,204) (3,387) 738
Other assets............................... (682) 687 (4,003)
Accounts payable and accrued expenses...... 13,663 (11,624) (6,330)
Taxes and deferred taxes................... 2,315 (973) 7,812
-------- -------- --------
Net cash provided by operating activities........ 47,885 39,358 13,181
-------- -------- --------
Cash Flows from investing activities:
Capital expenditures........................... (4,494) (7,820) (12,753)
Cash paid for acquisitions..................... -- (1,610) (2,737)
-------- -------- --------
Net cash used in investing activities............ (4,494) (9,430) (15,490)
-------- -------- --------
Cash Flows from financing activities:
Increase (decrease) in borrowings under Credit
Facility...................................... (21,885) (9,486) 2,200
Purchase of 10 7/8% Senior Subordinated Notes.. (22,965) (142) (220)
Decrease in other long term debt............... (72) (67) (61)
Purchase of treasury shares.................... (1,163) (29,711) --
Other equity transactions...................... 2,316 6,319 4,056
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... (43,769) (33,087) 5,975
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (378) (3,159) 3,666
Cash and cash equivalents at beginning of year... 2,133 5,292 1,626
-------- -------- --------
Cash and cash equivalents at end of year......... $ 1,755 $ 2,133 $ 5,292
======== ======== ========
Supplemental cash flow information
Net cash paid during the year for:
Interest..................................... $ 15,900 $ 17,500 $ 18,200
Income taxes................................. 3,300 1,300 1,200
(See accompanying notes to consolidated financial statements)
19
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(000's Omitted)
Unearned
Par Value of Capital Retained Employee Treasury
Common Stock Surplus Earnings Benefits Shares
------------ ------- -------- -------- --------
Balance at November 30, 1997. $85,549 $79,934 $35,711 $(8,910) $ --
Net earnings for the year.. 14,620
Issuance of 312,659 shares,
primarily to employee
benefit plans............. 782 1,298
Stock options exercised
(119,371 shares issued
upon exercise of 119,371
options).................. 298 445
Long-term incentive plan
awards for 188,000 shares,
net of forfeitures........ 470 1,070 (1,540)
Allocation of unearned
employee benefits......... (753) 1,986
------- ------- ------- ------- --------
Balance at November 30, 1998. 87,099 81,994 50,331 (8,464) --
Net earnings for the year.. 1,580
Issuance of 1,048,567
shares, primarily to
employee benefit plans.... 2,621 1,989
Long-term incentive plan
awards for 175,750 shares. 439 533 (972)
Allocation of unearned
employee benefits......... (868) 2,275
Stock options exercised
(37,066 shares issued upon
exercise of 42,221
options).................. 93 186 23
Purchase of treasury
shares.................... (29,711)
------- ------- ------- ------- --------
Balance at November 30, 1999. 90,252 83,834 51,911 (7,161) (29,688)
Net earnings for the year.. 8,812
Issuance of 420,485
treasury shares, primarily
to employee benefit plans. (780) 1,855
Long-term incentive plan
awards for 239,250 shares,
net of forfeitures........ 598 125 (752)
Allocation of unearned
employee benefits......... (948) 2,197
Stock options exercised and
vesting of restricted
stock awards.............. (29) 6 44
Purchase of treasury
shares.................... (1,163)
------- ------- ------- ------- --------
Balance at November 30, 2000. $90,821 $82,237 $60,723 $(5,716) $(28,952)
======= ======= ======= ======= ========
(See accompanying notes to consolidated financial statements)
20
HARTMARX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Accounting Policies
Principal Business Activity--The Company and its subsidiaries (the
"Company") are engaged in the manufacturing and marketing of quality men's and
women's apparel. The Company's products are sold principally in the United
States.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and all subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates--The financial statements have been prepared in conformity
with generally accepted accounting principles and, accordingly, include
amounts based on informed estimates and judgments of management with
consideration given to materiality. Actual results could differ from those
estimates, but management believes such differences will not materially affect
the Company's financial position, results of operations or cash flows.
Fair Value of Financial Instruments--The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their short-
term nature. The carrying amount of debt and credit facilities approximate
fair value due to their stated interest rate approximating a market rate.
These estimated fair value amounts have been determined using available market
information or other appropriate valuation methodologies.
Cash and Cash Equivalents--The Company considers as cash equivalents all
highly liquid investments with an original maturity of three months or less.
Inventories--Inventories are stated at the lower of cost or market. At
November 30, 2000 and 1999, approximately 49% and 41% of the Company's total
inventories at each year end are valued using the last-in, first-out (LIFO)
method representing certain work in process and finished goods. The first-in,
first-out (FIFO) method is used for substantially all raw materials and the
remaining inventories.
Property, Plant and Equipment--Properties are stated at cost. Additions,
major renewals and betterments are capitalized; maintenance and repairs which
do not extend asset lives are charged against earnings. Profit or loss on
disposition of properties is reflected in earnings, and the related asset
costs and accumulated depreciation are removed from the respective accounts.
Depreciation is generally computed on the straight-line method based on useful
lives of 20 to 45 years for buildings, 5 to 20 years for building
improvements, 3 to 15 years for furniture, fixtures and equipment and 3 to 5
years for software. Leasehold improvements are amortized over the terms of the
respective leases.
Intangibles--Intangible assets are included in "Investments and Other
Assets" at cost, less amortization, which is provided on a straight-line basis
over their economic lives, usually 10 years or less.
Impairment of Long-Lived Assets--If facts and circumstances indicate that
the cost of fixed assets or other assets may be impaired, an evaluation of
recoverability would be performed by comparing the estimated future
undiscounted pre-tax cash flows associated with the asset to the asset's
carrying value to determine if a write-down to market value or discounted pre-
tax cash flow value would be required.
Income Taxes--Deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Comprehensive Income--Transactions from non-owner sources which affected
shareholders' equity for the three years ended November 30, 2000 were nominal;
accordingly, a separate financial statement for such
21
transactions was not required as there was no effect on the Company's reported
financial position, results of operations or cash flows for the periods ended
November 30, 2000.
Revenue Recognition--Sales are recognized at the time the order is shipped
and returns are netted against sales. Catalog sales are net of expected
returns and exclude sales tax. Income from licensing arrangements is recorded
when received.
Advertising Costs--Advertising expenditures relating to the manufacturing
and marketing businesses are expensed in the period the advertising initially
takes place. Direct response advertising costs, consisting primarily of
catalog preparation, printing and postage expenditures, are amortized over the
period during which the benefits are expected. Advertising costs of $30.7
million in 2000, $28.2 million in 1999 and $25.9 million in 1998 are included
in Selling, General and Administrative Expenses in the accompanying Statement
of Earnings. Prepaid expenses at November 30, 2000 include deferred
advertising costs of $1.7 million ($1.3 million at November 30, 1999), which
will be reflected as an expense during the quarterly period benefited.
Retirement Plans--The Company and its subsidiaries maintain benefit plans
covering substantially all employees other than those covered by multi-
employer plans. Pension expense or income for the Company's defined benefit
plan is determined using the projected unit credit method. Pension expense
under each multi-employer plan is based upon a percentage of the employer's
union payroll established by industry-wide collective bargaining agreements;
such pension expenses are funded as accrued.
Retiree Medical Plan--A contributory health insurance plan has been made
available to non-union retired employees and eligible dependents whereby
retirees electing to receive the coverage made contributions to offset the
cost of the retiree plan. Effective January 1, 1998, the plan became an
insured plan and retirees electing to receive the coverage make the required
premium payments to the insurance company providing benefits under the plan.
Effective August 1, 1998, the plan is no longer offered to new retirees.
Approximately 140 retired employees are currently participating.
Other Postemployment Benefits--Postemployment benefit expense, which is
recorded in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits", was not significant
in any of the three years ended November 30, 2000.
Stock Options--The Company has elected to follow Accounting Principles
Board Opinion No. 25 and related Interpretations under which the Company uses
the intrinsic value method of measuring stock compensation cost. Under this
method, compensation cost is the excess, if any, of the quoted market price of
the Company's stock on the date of grant over the amount the individual must
pay for the stock.
Concentrations of Credit Risk and Financial Instruments--Financial
instruments which subject the Company to credit risk are primarily trade
accounts receivable. The Company sells its products to department stores,
specialty retail stores, off-price marketers, catalogs and through electronic
commerce channels. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Concentrations of credit risk with respect to trade accounts receivable are
mitigated due to the large number and diversity of customers comprising the
Company's customer base. Management believes that the risk associated with
trade accounts receivable is adequately provided for in the allowance for
doubtful accounts.
The only customer that exceeded 10% of consolidated revenues represented
approximately 20%, 18% and 16% of sales in 2000, 1999 and 1998, respectively.
Accounts receivable from the largest customer represented approximately 12%
and 14% of the Company's gross accounts receivable at November 30, 2000 and
1999, respectively.
The Company enters into foreign exchange forward contracts from time to
time to limit the currency risks associated with purchase obligations
denominated in foreign currencies. The Company does not hold financial
22
instruments for trading purposes or engage in currency speculation. Foreign
exchange contracts are generally in amounts approximating forecasted purchase
obligations and require the Company to exchange U.S. dollars for foreign
currencies at rates agreed to at the inception of the contracts. These
contracts are closed by either cash settlement or actual delivery of goods and
are included in cost of goods sold in the accompanying Statement of Earnings.
The effects of movements in currency exchange rates on these instruments,
which are not significant, are recognized in the period in which the purchase
obligations are satisfied. As of November 30, 2000, the Company had entered
into foreign exchange contracts for Italian Lire and Japanese yen, aggregating
approximately $10 million ($20 million at November 30, 1999), related to
future inventory purchases.
From time to time, the Company has entered into interest rate protection
agreements; however, in fiscal 2000, 1999 or 1998, the Company did not enter
into any such agreements.
Per Share Information--The calculation of basic earnings per share in each
year is based on the weighted-average number of common shares outstanding. The
calculation of diluted earnings per share reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock using the treasury stock method. The
number of shares used in computing basic and diluted earnings per share were
as follows, which includes both allocated and unallocated shares held by The
Hartmarx Employee Stock Ownership Plan (000's omitted):
Year Ended
November 30, Basic Diluted
------------ ------ -------
2000..................................................... 29,452 29,568
1999..................................................... 32,790 32,861
1998..................................................... 34,486 34,885
Recent Accounting Pronouncements--Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), as amended by Statement of Financial Accounting
Standards No. 137, is required to be adopted by the Company for its fiscal
year beginning December 1, 2000. FAS 133 requires disclosures of the
objectives for holding or issuing derivative instruments, the context to
understand the objectives and the strategies for achieving the objectives,
disclosures related to the impact of derivatives as reflected in the statement
of comprehensive income as well as requiring that all derivative instruments
be recognized as either assets or liabilities in the balance sheet and
measured at their fair value. FAS 133 also requires changes in the fair value
of derivatives to be recorded in each period in current earnings or
comprehensive income, depending on the intended use of the derivatives. Upon
implementation, the Company will record an initial asset or liability for the
fair value of the forward foreign currency exchange contracts with an offset
to Accumulated Other Comprehensive Income in the equity section of the balance
sheet. The derivative instruments will be revalued periodically to their fair
value with the aforementioned accounts adjusted accordingly. As of November
30, 2000, the cost of these contracts, which aggregated $9.7 million, exceeded
their fair value by approximately $.6 million.
Emerging Issues Task Force 00-10, "Accounting for Shipping and Handling
Costs", requires that amounts billed to customers for shipping and handling
costs be reflected as a component of net revenue, if material. The Company
believes that its billings to customers for shipping and handling costs are
not significant.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting (SAB) No. 101--"Revenue Recognition in Financial
Statements", which was amended by SAB No. 101A in March 2000 and SAB No. 101B
in June 2000. These SABs, which provide guidance on the recognition,
presentation and disclosure of revenue in financial statements, are effective
in the fourth quarter of fiscal 2000. The Company believes that its revenue
recognition, presentation and disclosures are in compliance with these SABs
and the adoption of these SABs did not effect the Company's results of
operations or its financial position for fiscal 2000.
23
Acquisitions
In November 1998, the Company completed the acquisition of the wholesale
apparel business of Pusser's, Ltd., from an entity which operates restaurants,
pubs and retail stores carrying tropical and nautical sportswear apparel as
well as other products marketed under the Pusser's name. Assets acquired
include the trademarks associated with all apparel products along with
inventories related to the wholesale business. Amounts paid for the trademarks
and inventories aggregated $2.7 million; additional amounts may be payable in
future years based on revenues or operating earnings associated with the
trademarks.
Effective December 1, 1998, the Company acquired 100% of the capital stock
of The Coppley, Noyes and Randall Limited ("Coppley"), a Canadian based
manufacturer and marketer of men's apparel. On August 27, 1999, the Company
acquired 100% of the capital stock of The Royal Shirt Company, Ltd. ("Royal"),
a Canadian based manufacturer and marketer of dress and sport shirts for men
and women. Royal continues as a manufacturing resource for products marketed
by the Company. Regarding the Coppley and Royal acquisitions, the fair value
of assets acquired was $20.3 million and liabilities assumed were $18.7
million.
The results of operations of Pusser's, Coppley and Royal since the date of
their respective acquisition are included in the accompanying financial
statements.
Financing
During fiscal 1994, the Company issued $100 million principal amount of 10
7/8% Senior Subordinated Notes due January 15, 2002 ("Notes") in a public
offering, and also entered into a then three-year financing agreement ("Credit
Facility") with a group of lenders providing for maximum borrowings of $175
million (including a $35 million letter of credit facility) collateralized by
eligible inventories, accounts receivable and the intangibles of the Company
and its subsidiaries. Various Credit Facility amendments in July 1995,
November 1995, January 1996 and October 1997, among other things, resulted in
a reduction in fees, administrative charges, and effective borrowing rates,
adjustment or elimination of certain covenants and the extension of the Credit
Facility term from March 1997 to July 2000.
In August 1999, the Company completed an amendment to the Credit Facility
which increased the maximum borrowing level and extended its duration. Among
other things, the Credit Facility now provides for maximum borrowings of $200
million, up from $175 million, (including a $50 million letter of credit
facility, up from $35 million). The term of the Credit Facility was extended
from July 2000 to June 2003 (provided that no more than $35 million of the
Notes remain outstanding by July 15, 2001), along with increased flexibility
with respect to the repurchase of Company stock and future refinancing of the
Company's long term borrowings. Borrowing availability under the Credit
Facility is being utilized for general corporate purposes. Borrowings are
subject to a borrowing base formula based upon eligible accounts receivable
and inventories; at the Company's option, borrowing rates are based on either
LIBOR or the prime rate of a major bank. Financing fees pertaining to the
Notes and Credit Facility, as amended, are being amortized over the life of
the respective agreements. Certain other fees are also payable under the
Credit Facility and Notes based on services provided.
The Notes and Credit Facility currently contain various restrictive
covenants covering ratios relating to maximum funded debt to EBITDA and
minimum fixed charge coverage, additional debt incurrence, capital
expenditures, asset sales, operating leases, as well as other customary
covenants, representations and warranties, funding conditions and events of
default. The Company was in compliance with all the covenants under the
respective borrowing agreements.
During fiscal 2000, 1999 and 1998, the Company purchased $23.0 million, $.1
million and $.2 million, respectively, face value of its Notes. The 2000
purchases were principally in the second quarter and were at a discount to par
value, resulting in an after-tax extraordinary gain of $.2 million. The 1999
and 1998 purchases were at a small premium to par value, resulting in a
nominal loss, which has been reflected in Licensing and Other Income.
Additional purchases of the Notes in fiscal 2001 will be made utilizing
availability under the Credit Facility.
24
At November 30, 2000 and 1999, long term debt, less current maturities,
comprised the following (000's omitted):
2000 1999
-------- --------
Borrowings under Credit Facility...................... $ 43,729 $ 65,614
10 7/8% Senior Subordinated Notes, net................ 61,900 84,769
Industrial development bonds.......................... 17,315 17,344
Other debt............................................ 2,603 2,646
-------- --------
125,547 170,373
Less--current......................................... 15,077 15,073
-------- --------
Long term debt........................................ $110,470 $155,300
======== ========
Industrial development bonds ("IDBs"), which mature on varying dates
through 2015, were issued by development authorities for the purchase or
construction of various manufacturing facilities having a carrying value of
$8.8 million at November 30, 2000. Interest rates on the various borrowing
agreements range from 5.0% to 8.5% (average of 7.5% at November 30, 2000 and
7.6% at November 30, 1999). Two IDBs totaling $15.5 million are callable by
the Company beginning July 1, 2000 at a 3% premium, declining to par on July
1, 2003.
Other long term debt includes installment notes and mortgages and the
Company's ongoing guarantee of a $2.5 million industrial development bond
retained by a former subsidiary due September 1, 2007. Interest rates ranged
from 8% to 8.5% per annum (average of 8.5% at November 30, 2000 and November
30, 1999).
Accrued interest included in the Other Accrued Expenses caption in the
accompanying balance sheet was $3.9 million at November 30, 2000 and $4.6
million at November 30, 1999.
The approximate principal reductions required during the next five fiscal
years, including reductions under the Notes which are due in 2002 and the
Credit Facility which expires in 2003, are as follows: $.1 million in 2001;
$62.0 million in 2002; $43.7 million in 2003; and zero in 2004 and 2005. The
Notes were callable at 101.6% of par at January 15, 2000 and are callable at
par effective January 15, 2001.
On December 1, 1988, The Hartmarx Employee Stock Ownership Plan ("ESOP")
borrowed $15 million from a financial institution and purchased from the
Company 620,155 shares of treasury stock at the market value of $24.19 per
share. Prior to 1994, the ESOP loan was guaranteed by the Company, and,
accordingly, the amount outstanding had been included in the Company's
consolidated balance sheet as a liability and shareholders' equity had been
reduced for the amount representing unearned employee benefits. In 1994, the
Company purchased the remaining interest in the loan from the financial
institution holding the ESOP note. Company contributions to the ESOP are used
to repay loan principal and interest. The common stock is allocated to
ESOP participants ratably over the term of the loan as the loan principal and
interest is repaid or accrued and amounts reflected as unearned employee
benefits are correspondingly reduced.
Information related to loan repayments by the ESOP are as follows (000's
omitted):
2000 1999 1998
------ ------ ------
Principal payments................................. $1,462 $1,331 $1,211
Interest payments.................................. 582 714 833
------ ------ ------
Total loan payments made by ESOP................... $2,044 $2,045 $2,044
====== ====== ======
As of November 30, 2000, 489,402 of the 620,155 shares of common stock
owned by the ESOP have been allocated to the accounts of the ESOP
participants. There were 130,753 shares committed to be released, and the fair
market value of those unearned ESOP shares was approximately $.3 million.
25
Borrowings Under The Credit Facility
The following summarizes information concerning borrowings under the Credit
Facility (000's omitted):
2000 1999 1998
------- -------- --------
Outstanding at November 30................... $43,729 $ 65,614 $ 75,100
Maximum month end balance during the year.... 91,716 115,500 120,700
Average amount outstanding during the year... 72,900 93,800 97,500
Weighted daily average interest rate during
the year.................................... 8.3% 6.6% 7.2%
Weighted average interest rate on borrowings
at November 30.............................. 8.8% 7.0% 6.6%
Inventories
Inventories at fiscal year end were as follows (000's omitted):
November 30
--------------------------
2000 1999 1998
-------- -------- --------
Raw materials................................... $ 55,450 $ 58,352 $ 48,969
Work in process................................. 15,262 19,269 30,904
Finished goods.................................. 96,399 98,593 127,806
-------- -------- --------
$167,111 $176,214 $207,679
======== ======== ========
The excess of current cost over LIFO costs for certain inventories was
$33.9 million in 2000, $35.3 million in 1999 and $36.1 million at November 30,
1998.
Taxes on Earnings
The tax provision is summarized as follows (000's omitted):
2000 1999 1998
------ ---- ------
Federal............................................... $ 324 $ 80 $ 434
State and local....................................... 600 (100) 1,103
Foreign............................................... 1,614 936 --
------ ---- ------
Total current..................................... 2,538 916 1,537
------ ---- ------
Federal............................................... 3,248 99 7,428
State and local....................................... -- -- --
Foreign............................................... (181) (50) --
------ ---- ------
Total deferred.................................... 3,067 49 7,428
------ ---- ------
Total tax provision................................... $5,605 $965 $8,965
====== ==== ======
The difference between the tax provision reflected in the accompanying
statement of earnings and the amount computed by applying the federal
statutory tax rate to pre-tax income, taking into account the applicability of
enacted tax rate changes, is summarized as follows (000's omitted):
2000 1999 1998
------- ------ -------
Earnings before taxes and extraordinary gain...... $14,190 $2,545 $23,585
======= ====== =======
Tax provision computed at statutory rate.......... $ 4,825 $ 865 $ 8,019
State and local taxes on earnings, net of federal
tax benefit...................................... 396 (66) 728
Foreign........................................... 198 82 --
Other--net........................................ 186 84 218
------- ------ -------
Total tax provision............................... $ 5,605 $ 965 $ 8,965
======= ====== =======
26
At November 30, 2000 and 1999, there was no valuation allowance offsetting
the deferred tax asset as the Company had concluded it was more likely than
not that the deferred tax asset would be fully realized. A portion of the
Company's deferred tax asset had been reserved in prior years through the
establishment of a tax valuation allowance. The valuation allowance was
originally recorded upon consideration of the operating losses incurred during
the 1990-1992 fiscal years and related uncertainty associated with realization
of the tax benefit of operating loss carryforwards, which is ultimately
dependent upon the generation of future earnings by the Company. The net tax
asset recorded considers amounts expected to be realized through future
earnings and available tax planning realization strategies (such as the
ability to adopt the FIFO inventory valuation method for those inventories
currently valued under the LIFO valuation method).
At November 30, 2000, the Company had a net deferred tax asset of $52.9
million comprised of deferred tax assets of $67.2 million less deferred tax
liabilities aggregating $14.3 million. The principal deferred tax assets
included operating loss carryforwards of $38.6 million, alternative minimum
tax credit carryforwards ("AMT") and other tax credit carryforwards of $6.4
million, $16.9 million attributable to expenses deducted in the financial
statements not currently deductible for tax purposes and $5.3 million
attributable to Tax Reform Act of 1986 ("TRA") items (allowance for bad debts,
accrued vacation and capitalization of certain inventory costs for tax
purposes). Deferred tax liabilities included excess tax over book depreciation
of $1.5 million and $7.1 million related to employee benefits, principally
pensions.
At November 30, 1999, the Company had a net deferred tax asset of $55.3
million comprised of deferred tax assets of $76.8 million less deferred tax
liabilities aggregating $21.5 million. The principal deferred tax assets
included net operating loss carryforwards of $45.7 million, AMT and other tax
credit carryforwards of $6.1 million, $19.8 million attributable to expenses
deducted in the financial statements not currently deductible for tax purposes
and $5.2 million attributable to TRA items. Deferred tax liabilities included
excess tax over book depreciation of $1.4 million and $9.0 million related to
employee benefits, principally pensions.
As of November 30, 2000, the Company had approximately $110 million of tax
operating loss carryforwards available to offset future income tax
liabilities. In general, such carryforwards must be utilized within fifteen
years of incurring the net operating loss; the loss carryforwards expire from
2007 to 2010. AMT tax credit carryforwards of $6.2 million can be carried
forward indefinitely.
Commitments and Contingencies
The Company and its subsidiaries lease office space, manufacturing,
warehouse and distribution facilities, showrooms and outlet stores,
automobiles, computers and other equipment under various noncancellable
operating leases. A number of the leases contain renewal options ranging up to
10 years.
At November 30, 2000, total minimum rentals under noncancellable operating
leases were as follows (000's omitted):
Years Amount
----- -------
2001............................................................. $ 9,914
2002............................................................. 9,523
2003............................................................. 9,145
2004............................................................. 8,986
2005............................................................. 7,438
Thereafter....................................................... 51,746
-------
Total minimum rentals due........................................ $96,752
=======
Rental expense, including rentals under short term leases, aggregated $9.8
million, $10.7 million and $10.9 million in fiscal 2000, 1999 and 1998,
respectively.
27
Most leases provide for additional payments of real estate taxes, insurance
and other operating expenses applicable to the property, generally over a base
period level. Total rental expense includes such base period expenses and the
additional expense payments as part of the minimum rentals.
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and lawsuits in the
aggregate will not have a material adverse effect on the Company's financial
position or results of operations.
Employee Benefits
Pension Plans
The Company participates with other companies in the apparel industry in
making collectively-bargained payments to pension funds, which are not
administered by the Company. The contribution rate of applicable payroll is
based on the amounts negotiated between the union and the participating
industry employers. Pension costs relating to multi-employer plans were
approximately $1.3 million in 2000, $1.4 million in 1999 and $6.4 million in
1998. As discussed elsewhere in this footnote, certain current pension costs
and obligations related to a multi-employer plan were assumed by the Company's
single employer plan, effective as of October 1, 1998. The Multi-Employer
Pension Plan Amendments Act of 1980 (the "Act") amended ERISA to establish
funding requirements and obligations for employers participating in multi-
employer plans, principally related to employer withdrawal or termination of
such plans.
The present value of accumulated benefits of one multi-employer plan has
been substantially in excess of the plan assets currently available for such
benefits. The employer participants in this underfunded multi-employer plan
along with the Union of Needletrades, Industrial & Textile Employees ("UNITE")
and the Pension Benefit Guaranty Corporation ("PBGC") entered into an
agreement during 1996 intended to provide further clarity regarding the future
of the plan. Among other things, employee benefit accruals were frozen at
existing levels and each employer's current and future contribution rate was
frozen at 10.33% of wages. Each participating employer's maximum contingent
withdrawal liability was individually capped as of December 31, 1994, to be
reduced by approximately 90% of the amounts contributed subsequent to January
1, 1996. Withdrawal liabilities arising from the bankruptcy of any
participating employer will no longer be reallocated to the remaining
participating employers. If a funding deficiency, as defined under the Act,
occurs in the future, each employer's mass withdrawal liability would be fixed
at the December 31, 1994 amount less the cumulative credited contributions
(the "net withdrawal liability"). That net withdrawal liability would be
payable over 20 years in quarterly installments plus interest at a fixed
annualized rate of 6.2%. Through September 30, 1998, approximately $15.5
million of the contributions made by the Company were applied to reduce the
amount which would represent its contingent net withdrawal liability,
estimated at approximately $56.1 million as of September 30, 1998.
Effective October 1, 1998, the Company entered into a separate agreement
with the trustees of the underfunded multi-employer plan, as discussed above,
along with UNITE which, among other things, provided for an assumption by the
Company sponsored pension plan of the retirement liabilities of certain
current, terminated vested and retired employees of the Company who were
participants in the underfunded multi-employer plan. This agreement was
approved by the Internal Revenue Service and the Pension Benefit Guaranty
Corporation. The Company's remaining contingent net actuarial withdrawal
liability to the underfunded multi-employer plan of approximately $56.1
million was satisfied by the assumption of a near equivalent amount of these
liabilities. Also effective October 1, 1998, the Company ceased future
contributions to the multi-employer plan for the applicable employees
(aggregating approximately $6 million on an annualized basis). The costs
associated with the accrual of benefits going forward, along with the interest
associated with prior service cost, are being reflected by the Company
sponsored pension plan.
The Company sponsored pension plan is a non-contributory defined benefit
pension plan covering substantially all eligible non-union employees and
certain union employees who have elected to participate in
28
the plan. Under this pension plan, non-union retirement benefits are a
function of years of service and average compensation levels during the
highest five consecutive salary years occurring during the last ten years
before retirement; union employee benefits are based on collectively bargained
amounts. To the extent that the calculated retirement benefit under the
formula specified in the plan exceeds the maximum allowable under the
provisions of the tax regulations, the excess is provided on a non-qualified
supplemental basis. Under the provisions of the Omnibus Budget Reconciliation
Act of 1993, the annual compensation limit that can be taken into account for
computing benefits and contributions under qualified plans was reduced from
$235,840 to $150,000, effective as of January 1, 1994, subject to indexing
increases in subsequent years ($170,000 limitation for 2000).
Company contributions, if any, are intended to provide for benefits
attributed to service to date and also for those expected to be earned in the
future. It is the Company's policy to fund the plans on a current basis to the
extent deductible under existing tax laws and regulations. There were no
employer contributions allowed or made in each of the three years ended
November 30, 2000.
Components of net periodic pension benefit (cost) for the three years ended
November 30, 2000 were as follows (000's omitted):
2000 1999 1998
-------- -------- -------
Service cost................................ $ (5,792) $ (6,537) $(4,546)
Interest cost............................... (13,493) (12,788) (9,397)
Expected return on plan assets.............. 17,521 17,649 16,832
Recognized net actuarial gain............... 1,233 1,108 1,949
Net amortization............................ (3,723) (2,459) (351)
-------- -------- -------
Net periodic pension income (expense)....... $ (4,254) $ (3,027) $ 4,487
======== ======== =======
The above amounts are prior to consideration of periodic pension expense of
$1.1 million in 2000, $1.7 million in 1999 and $1.4 million in 1998 related to
the Company's non-qualified supplemental pension plan covering certain
employees providing for incremental pension payments from the Company's funds
so that total pension payments equal amounts that would have been payable from
the Company's principal pension plan if it were not for the limitations
imposed by income tax regulations. The related amounts reflected in the
consolidated balance sheet at November 30, 2000 and 1999 were $9.9 million and
$9.6 million, respectively.
Plan assets consist primarily of publicly traded common stocks and
corporate debt instruments, and units of certain trust funds administered by
the Trustee of the plan. At November 30, 2000, the plan assets of
$187.0 million included 4,244,399 shares of the Company's stock with a market
value of approximately $9.8 million.
29
The following sets forth the information related to the change in the
benefit obligation and change in plan assets of the principal pension plan at
November 30 (000's omitted):
November 30,
------------------
2000 1999
-------- --------
Change in Benefit Obligation
Benefit obligation at beginning of year.............. $187,004 $194,909
Service cost......................................... 5,792 6,537
Interest cost........................................ 13,493 12,788
Amendments........................................... -- 2,588
Actuarial (gain) or loss............................. (2,000) (17,384)
Benefits paid........................................ (12,142) (12,434)
-------- --------
Benefit obligation at end of year.................... 192,147 187,004
-------- --------
Change in Plan Assets
Fair value of plan assets at beginning of year....... 201,071 202,653
Actual return on plan assets......................... (1,969) 10,852
Benefits paid........................................ (12,142) (12,434)
-------- --------
Fair value of plan assets at end of year............. 186,960 201,071
-------- --------
Funded status........................................ (5,187) 14,067
Unrecognized net actuarial gain...................... (15,864) (34,587)
Unrecognized prior service cost...................... 52,173 55,896
-------- --------
Prepaid benefit cost................................. $ 31,122 $ 35,376
======== ========
2000 1999
-------- --------
Weighted-Average Assumptions as of November 30
Discount rate........................................ 7.50% 7.50%
Expected return on plan assets....................... 8.75% 8.75%
Rate of compensation increase........................ 5.00% 5.00%
Savings Investment and Employee Stock Ownership Plans
The Company offers a qualified defined contribution plan, the Hartmarx
Savings-Investment Plan ("SIP"), which is a combined salary reduction plan
under Section 401(k) of the Internal Revenue Code and an after-tax savings
plan. Eligible participants in SIP can invest from 1% to 16% of earnings among
several investment alternatives, including a Company stock fund. Employees
participating in this plan automatically participate in the ESOP.
Participation in SIP is required to earn retirement benefits under the
Company's principal pension plan. An employer contribution is made through the
ESOP, based on the employee's level of participation, and is invested in
common stock of the Company, although most participants age 55 and over can
elect investments from among several investment alternatives. While employee
contributions up to 16% of earnings are permitted, contributions in excess of
6% are not subject to an employer contribution. Through June 30, 1998, the
employer contribution was one-fourth of the first 1% of earnings contributed
by the employee plus one-twentieth thereafter. Effective July 1, 1998, the
employer contribution was increased to one-fourth of the first, second and
third 1% of earnings and one-tenth thereafter. Effective July 1, 1999, the
employer contribution was increased to one-fourth of the first 6% of earnings
contributed by the employee. Effective July 1, 2000, the employer contribution
was increased to thirty percent of the first 6% of earnings contributed by the
employee. The Company's expense related to the ESOP is based upon the
principal and interest payments on the ESOP loan, the dividends, if any, on
unallocated ESOP shares, and the cost and market value of shares allocated to
employees' accounts. The Company's annual expense was $1.4 million in 2000,
$1.3 million in 1999 and $1.2 million in 1998. The Company's annual
contributions were $2.0 million in each of the respective years. At November
30, 2000, the assets of SIP and ESOP funds had a market value of approximately
$62.5 million, of which approximately $5.6 million was invested in 2,407,380
shares of the Company's common stock.
30
Health Care and Post Retirement Benefits
Certain of the Company's subsidiaries make contributions to multi-employer
union health and welfare funds pursuant to collective bargaining agreements.
These payments are based upon wages paid to the Company's active union
employees.
Health and insurance programs are also made available to non-union active
and retired employees and their eligible dependents. As of January 1, 1998,
the retiree plan became an insured plan and retirees electing to receive the
coverage make premium payments to the insurance company providing benefits
under the retiree plan; these premium payments cover the full cost of benefits
under the Plan. As of August 1, 1998, the retiree plan was closed to new
retirees.
Stock Purchase Rights
On December 6, 1995, the Company's Board of Directors approved a new
Stockholder Rights Agreement, which took effect immediately upon the
expiration of the then existing Rights on January 31, 1996 (the "Rights
Agreement"). A dividend of one Right per common share was distributed to
stockholders of record January 31, 1996 and with common shares issued
subsequently. This dividend distribution of the Rights was not taxable to the
Company or its stockholders. On April 13, 2000, the Board of Directors
approved an amendment and restatement of the Rights Agreement which, among
other things, (i) adds a fiduciary duty redemption provision imposing certain
procedural requirements on a new board of directors that wishes to redeem the
Rights, and (ii) permits the purchase of additional shares of the Company's
common stock by certain persons, as defined and within the limits set forth in
the Rights Agreement, without causing the Rights to distribute or become
exercisable.
Each Right, expiring January 31, 2006, represents a right to buy from the
Company 1/1000th of a share of Series A Junior Participating Preferred Stock,
$1.00 par value, at a price of $25 per Right. Separate certificates for Rights
will not be distributed, nor will the Rights be exercisable, unless an
Acquiring Person, as defined in the Rights Agreement, acquires 15 percent or
more, or in the case of an Exempt Person, as defined in the Rights Agreement,
in excess of 19.5 percent (the "threshold amount"), or announces an offer that
could result in acquiring the threshold amount of the Company's common shares.
Following an acquisition of the threshold amount of the Company's common
shares (a "Stock Acquisition"), each Right holder, except the threshold amount
stockholder, has the right to receive, upon exercise, common shares valued at
twice the then applicable exercise price of the Right (or, under certain
circumstances, cash, property or other Company securities), unless the
threshold amount stockholder has offered to acquire all of the outstanding
shares of the Company under terms that a majority of the independent directors
of the Company have determined to be fair and in the best interest of the
Company and its stockholders. Similarly, unless certain conditions are met, if
the Company engages in a merger or other business combination following a
Stock Acquisition where it does not survive or survives with a change or
exchange of its common shares or if 50 percent or more of its assets, earning
power or cash flow is sold or transferred, the Rights will become exercisable
for shares of the acquiror's stock having a value of twice the exercise price
(or, under certain circumstances, cash or property). The Rights are not
exercisable, however, until the Company's right of redemption described below
has expired. Generally, Rights may be redeemed for $.01 each (in cash, common
shares or other consideration the Company deems appropriate) until the earlier
of (i) the tenth day following public announcement that the threshold amount
or greater position has been acquired in the Company's stock or (ii) the final
expiration of the Rights. Until exercise, a Right holder, as such, has no
rights as a stockholder of the Company.
Stock Option Plans and Restricted Stock
The Company has in effect the 1985 Stock Option Plan ("1985 Plan"), the
1988 Stock Option Plan ("1988 Plan"), the 1995 Incentive Stock Plan ("1995
Plan") and the 1998 Incentive Stock Plan ("1998 Plan") under which officers,
key employees and directors (with respect to the 1988 Plan) may be granted
options to purchase the Company's common stock at prices equal to or exceeding
the fair market value at the date of grant.
31
Generally, options under the 1985 Plan are exercisable to the extent of 25%
each year (cumulative) from the second through the fifth year, and expire ten
years after the date of grant; however, all or any portion of the shares
granted are exercisable during the period beginning one year after the date of
grant for participants employed by the Company for at least five years.
Options granted under the 1988 Plan, 1995 Plan and 1998 Plan have exercise
provisions similar to the 1985 Plan, although some grants become exercisable
in cumulative one-third installments on each of the first three anniversaries
of the grant date. No additional grants will be made under the 1985, 1988 and
1995 Plans. Following the stockholder adoption of the 1998 Incentive Stock
Plan in April 1998, shares covered by grants or awards under the terms of the
1985, 1988 or 1995 Plans which terminate, lapse or are forfeited will be added
to the aggregate number of shares authorized under the 1998 Plan and will be
made available for grants under the 1998 Plan. Options granted under the 1998
Plan are evidenced by agreements that set forth the terms, conditions and
limitations for such grants, including the term of the award, limitations or
exercisability, and other provisions as determined by the Compensation and
Stock Option Committee of the Board of Directors. Under certain circumstances,
vesting may be accelerated for options granted under the various plans.
The 1988, 1995 and 1998 Plans also provide for the discretionary grant of
stock appreciation rights in conjunction with the option, which allows the
holder a combination of stock and cash equal to the gain in market price from
the grant until its exercise. Under certain circumstances, the entire gain
attributable to rights granted under the 1988 Plan may be paid in cash; the
cash payment under the 1995 Plan and the 1998 Plan is limited to one-half the
gain. When options and stock appreciation rights are granted in tandem, the
exercise of one cancels the other. There were no stock appreciation rights
associated with options outstanding at November 30, 2000, 1999 or 1998. The
1995 and 1998 Plans also allow for granting of restricted stock awards
enabling the holder to obtain full ownership rights subject to terms and
conditions specified at the time each award is granted.
Information regarding employee stock option activity for the three years
ended November 30, 2000 is as follows:
Price Per Share
--------- ------------------------
Number of Weighted
Shares Range Average
--------- --------------- --------
Balance at November 30, 1997........... 2,476,187 $5.25 to $21.31 $ 6.37
Granted.............................. 498,000 $7.31 to $ 8.09 8.06
Exercised............................ (86,934) $5.25 to $ 6.88 5.82
Expired or terminated................ (90,072) $5.25 to $21.31 14.64
---------
Balance at November 30, 1998........... 2,797,181 $5.25 to $16.00 6.42
Granted.............................. 498,250 $3.84 to $ 5.66 5.42
Expired or terminated................ (55,247) $5.25 to $ 8.09 6.35
---------
Balance at November 30, 1999........... 3,240,184 $3.84 to $16.00 6.27
Granted.............................. 800,750 $2.50 to $ 3.84 3.30
Exercised............................ --
Expired or terminated................ (564,458) $3.84 to $16.00 5.72
---------
Balance at November 30, 2000........... 3,476,476 $2.50 to $ 8.09 5.66
=========
There were 155,060 weighted average shares outstanding used in the
calculation of diluted earnings per share for the year ended November 30,
2000. At November 30, 2000, 4,332,976 shares were reserved for options and
restricted stock awards outstanding, and 75,688 shares were available for
future stock options and/or restricted stock awards (545,275 shares available
at November 30, 1999).
32
Information on exercisable employee stock options at each date is as
follows:
Options Average
Date Exercisable Price
---- ----------- -------
November 30, 2000..................................... 2,523,461 $6.44
November 30, 1999..................................... 2,632,178 $6.44
November 30, 1998..................................... 2,155,570 $6.07
Information on employee stock options outstanding and exercisable at
November 30, 2000 is as follows:
Weighted
Average
---------------
Remaining Weighted
Number Life in Number Average
Range of Prices Outstanding Years Price Exercisable Price
- --------------- ----------- --------- ----- ----------- --------
$2.50 to $4.53................. 860,550 9.3 $3.38 26,565 $4.36
$5.25 to $8.09................. 2,615,926 5.2 6.41 2,496,896 6.46
--------- ----- --------- -----
3,476,476 $5.66 2,523,461 $6.44
========= ===== ========= =====
Information regarding long term incentive restricted stock plan awards
pursuant to the 1995 Plan and 1998 Plan for the three years ended November 30,
2000 is as follows:
Number Price Per Share
of ----------------------
Shares Average Range
------- ------- --------------
Balance November 30, 1997.................... 265,000 $6.90 $5.94 to $7.72
Granted...................................... 204,000 $8.09 $8.09
Cancelled.................................... (16,000) $6.89 $5.94 to $7.72
-------
Balance November 30, 1998.................... 453,000 $7.43 $5.94 to $8.09
Granted...................................... 175,750 $5.53 $5.53
-------
Balance November 30, 1999.................... 628,750 $6.90 $5.53 to $8.09
Granted...................................... 249,250 $3.18 $2.50 to $3.84
Vested....................................... (11,500) $7.06 $5.53 to $8.09
Cancelled.................................... (10,000) $6.81 $5.53 to $8.09
-------
Balance November 30, 2000.................... 856,500 $5.82 $2.50 to $8.09
=======
The vesting threshold for restricted stock awards outstanding is as
follows:
Number of Vesting Latest
Shares Threshold Vesting Date
--------- --------- -----------------
112,500.......................................... $ 9.00 July 8, 2006
130,500.......................................... $11.50 July 8, 2007
195,500.......................................... $12.50 April 8, 2008
168,750.......................................... $ 9.00 January 18, 2009
121,250.......................................... $ 7.52 November 30, 2009
7,500.......................................... $ 7.52 February 21, 2010
120,500.......................................... $ 4.25 October 15, 2010
All of the above awards vest at the earliest of ten years from the date of
grant, retirement at age 65, the Company's stock price exceeding or, in some
cases, equaling or exceeding the vesting threshold price for thirty
consecutive calendar days, as shown above, or as otherwise authorized by the
Compensation and Stock Option Committee of the Board of Directors. As of
November 30, 2000, 11,500 of the awards had vested. Expense is being
recognized over the anticipated vesting period of the awards.
33
The 1995 Stock Plan for Non-Employee Directors ("Director Plan") provides
for a possible annual grant of Director Stock Options ("DSO") to non-employee
members of the Board of Directors at market value on the date of grant,
similar to grants available under the 1988 Plan. In addition, each non-
employee director may make an irrevocable election to receive a DSO in lieu of
all or part of his or her retainer. The number of whole shares which could be
granted is based on the unpaid annual retainer divided by the market value of
a share on such date minus $1.00 and the exercise price is $1.00. DSOs are
exercisable in full six months after the date of grant or earlier in the event
of death, disability or termination of service. Each non-employee director is
also eligible for a possible annual grant of a Director Deferred Stock Award
("DDSA") equal to the number of DDSA units computed by dividing the director's
annual retainer by the market value of a share on the date of the annual
meeting. In 2000, DSOs and DDSAs were not awarded to non-employee directors.
Prior to 1998, each non-employee director received a DDSA equal to 150 units.
A unit equals one share of the Company's common stock. DDSA units are payable
in shares of common stock upon death, disability or termination of service.
Dividend equivalents may be earned on qualifying DSO and DDSA units and
allocated to directors' respective accounts in accordance with the terms of
the Director Plan. Information regarding director stock option activity for
the three years ended November 30, 2000 is as follows:
2000 1999 1998
--------------- --------------- ---------------
Avg. Avg. Avg.
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- ------
Balance beginning of year....... 289,880 $ 3.73 274,555 $ 4.85 270,604 $ 5.45
Granted:
Fair Market Value............. -- -- 36,882 4.88 19,776 8.09
$1.00 Option.................. -- -- 20,619 1.00 11,284 1.00
DDSA.......................... -- -- 36,882 -- 19,776 --
Exercises:
Fair Market Value............. -- -- -- -- (11,490) 6.09
$1.00 Option.................. (2,556) 1.00 (42,221) 1.00 (20,947) 1.00
DDSA.......................... -- -- -- -- -- --
Expired:
Fair Market Value............. (5,955) 14.69 (36,837) 11.08 (14,448) 15.57
------- ------ ------- ------ ------- ------
Balance end of year............. 281,369 $ 3.52 289,880 $ 3.73 274,555 $ 4.85
======= ====== ======= ====== ======= ======
At November 30, 2000, 41,726 shares were available for future DSOs and DDSAs.
The weighted average fair value of options granted was estimated to be
$1.67, $2.68 and $4.13 in 2000, 1999 and 1998, respectively. The fair value of
each option granted in the respective year is estimated at the date of grant
using the Black-Scholes option-pricing model utilizing expected volatility
calculations based on historical data from December 1, 1992 (25% to 39%), the
first day of the fiscal year subsequent to the Company's 1992 restructuring,
and risk free rates based on U.S. government strip bonds on the date of grant
with maturities equal to the expected option term (4.81% to 6.94%). The
expected lives are between five and ten years, and no dividends are assumed.
Pro-forma information related to stock based compensation is as follows (in
millions):
2000 1999 1998
---- ---- -----
Additional compensation expense........................... $1.4 $1.8 $ 2.1
Pro forma net earnings.................................... 7.8 0.5 13.3
Pro forma diluted earnings per share...................... .27 .02 .38
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's
34
stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock options. The pro forma amounts may not be
representative of the future effects on reported net income and net income per
share.
Non-Cash Charge Re: Systems Project Termination
Results for the fiscal year ended November 30, 1999 included a second
quarter non-cash pre-tax charge of $11.2 million ($6.9 million or $.21 per
share net of tax) to reflect a writedown of capitalized development costs
related to the termination of an enterprise resource planning system project
which had been anticipated to be implemented company-wide ("the non-cash
charge"). The project software had been installed at one operating company
representing less than 5% of consolidated sales, and, after extensive
evaluation, the Company, in consultation with its advisors, concluded that
company-wide implementation would not be appropriate. Legal action has been
initiated against the principal software provider to recover damages incurred;
in accordance with generally accepted accounting principles, no recovery was
assumed in determining the reported non-cash charge.
Operating Segment Information
The Company is engaged in the manufacturing and marketing of apparel. The
Company's customers comprise major department and specialty stores, value
oriented retailers and direct mail companies. The Company's Men's Apparel
Group designs, manufactures and markets tailored clothing, slacks, sportswear
and dress furnishings; the Women's Apparel Group markets women's career
apparel, sportswear and accessories to both retailers and to individuals who
purchase women's apparel through a direct mail catalog.
Information on the Company's operations for the three years ended November
30, 2000 is summarized as follows (in millions):
Men's Women's
Apparel Apparel
2000 Group Group Adj. Consol.
- ---- ------- ------- ------ -------
Sales.......................................... $619.8 $60.8 $ -- $680.6
Earnings (loss) before taxes and extraordinary
gain.......................................... 36.9 5.7 (28.4) 14.2
Gross assets at year end....................... 314.9 32.8 90.8 438.5
Depreciation and amortization.................. 6.2 0.6 0.3 7.1
Property additions............................. 3.9 0.4 0.2 4.5
Men's Women's
Apparel Apparel
1999 Group Group Adj. Consol.
- ---- ------- ------- ------ -------
Sales.......................................... $672.6 $54.2 -- $726.8
Earnings (loss) before taxes................... 37.9 5.7 $(41.1) 2.5
Gross assets at year end....................... 338.8 28.1 92.8 459.7
Depreciation and amortization.................. 6.3 0.5 0.3 7.1
Property additions............................. 7.0 0.6 0.2 7.8
Men's Women's
Apparel Apparel
1998 Group Group Adj. Consol.
- ---- ------- ------- ------ -------
Sales.......................................... $665.0 $60.0 -- $725.0
Earnings (loss) before taxes................... 43.9 6.8 $(27.1) 23.6
Gross assets at year end....................... 364.3 29.8 90.6 484.7
Depreciation and amortization.................. 6.4 0.4 0.4 7.2
Property additions............................. 11.3 1.3 0.2 12.8
35
During the years ended November 30, 2000, 1999 and 1998, there were no
intergroup sales, and there was no change in the basis of measurement of group
earnings or loss.
Operating expenses incurred by the Company in generating sales are charged
against the respective group's sales; indirect operating expenses are
allocated to the groups benefited. Group results exclude any allocation of
general corporate expense, interest expense or income taxes.
Amounts included in the "adjustment" column for earnings before taxes and
extraordinary gain consist principally of interest expense and general
corporate expenses; the 1999 earnings before tax amount also includes the pre-
tax non-cash charge of $11.2 million. Adjustments of gross assets are for
cash, recoverable and deferred income taxes, investments, other assets and
corporate properties. Adjustments of depreciation and amortization and net
property additions are for corporate properties.
Quarterly Financial Summary (Unaudited)
Selected quarterly financial and common share information for each of the
four quarters in fiscal 2000 and 1999 is as follows (000's omitted):
First Second Third Fourth
2000 Quarter Quarter(1) Quarter Quarter
---- -------- ---------- -------- --------
Sales............................. $163,189 $172,452 $175,316 $169,690
Gross profit...................... 43,039 46,895 47,814 52,148
Earnings before taxes and
extraordinary gain............... 1,810 2,010 4,815 5,555
Net earnings before extraordinary
gain............................. 1,120 1,245 2,990 3,230
Net earnings...................... 1,120 1,472 2,990 3,230
Earnings per share (basic and
diluted):
Before extraordinary gain....... .04 .04 .10 .11
After extraordinary gain........ .04 .05 .10 .11
1999
----
Sales............................. $176,402 $172,680 $185,566 $192,157
Gross profit...................... 43,580 44,882 46,672 49,941
Earnings (loss) before taxes...... 2,265 (9,375) 4,240 5,415
Net earnings (loss)............... 1,405 (5,810) 2,630 3,355
Earnings (loss) per share (basic
and diluted)..................... .04 (.17) .08 .11
- --------
(1) 2000 second quarter included a $.2 million or $.01 per share extraordinary
gain related to the purchase of 10 7/8% Senior Subordinated Debentures.
1999 second quarter included a pre-tax non-cash non-recurring charge of
$11.2 million ($6.9 million or $.21 per share after-tax) relating to the
write-off of systems project development costs. Excluding this adjustment,
earnings before taxes for the second quarter would have been $1.8 million,
and net earnings for the second quarter would have been $1.1 million or
$.04 per share, basic and diluted.
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
36
PART III
Item 10--Directors and Executive Officers of the Registrant
Information contained under the caption "Information About Nominees For
Directors" on pages 2 to 4 of the Proxy Statement for the 2001 Annual Meeting
is incorporated herein by reference.
Information on Executive Officers of the Registrant is included as a
separate caption in Part I of this Annual Report on Form 10-K.
Item 11--Executive Compensation
Information contained under the caption "Executive Officer Compensation" on
pages 7 to 12 and "Information about Nominees for Directors" on pages 2 to 4
of the Proxy Statement for the 2001 Annual Meeting is incorporated herein by
reference.
Item 12--Security Ownership of Certain Beneficial Owners and Management
Information contained in the Proxy Statement for the 2001 Annual Meeting
under the captions "Security Ownership of Directors and Officers" on pages 22
and 23 and "Ownership of Common Stock" on pages 23 and 24 is incorporated
herein by reference.
Item 13--Certain Relationships and Related Transactions
Information contained in the Proxy Statement for the 2001 Annual Meeting
under the caption "Information About Nominees for Directors" on pages 2 to 4
is incorporated herein by reference.
PART IV
Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Financial statements for Hartmarx Corporation listed in the Index to
Financial Statements and Supplementary Data on page 15 are filed as part of
this Annual Report.
(a)(2) Financial Statement Schedule
Financial Statement Schedule for Hartmarx Corporation listed in the
Index to Financial Statements and Supplementary Data on page 15 are filed
as part of this Annual Report.
Page
----
(a)(3) Index to Exhibits................................................ 38
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 2000.
37
HARTMARX CORPORATION
Index to Exhibits
Exhibit
No.
and
Applicable
Section of
601 of
Regulation
S-K
----------
*3-A Restated Certificate of Incorporation (Exhibit 3-A to Form 10-K for
the year ended November 30, 1993), (1).
*3-A-1 Certificate of Amendment for increase in authorized shares of
Common Stock (Exhibit 3-A-2 to Form 10-K for the year ended
November 30, 1993), (1).
*3-A-2 Certificate of Amendment adding Article Fourteenth limiting
director liability as provided under Delaware General Corporation
Law '102(b)(7) (Exhibit 3-A-3 to Form 10-K for the year ended
November 30, 1993), (1).
*3-A-3 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (Exhibit 3-A-3 to Form 10-K
for the year ended November 30, 1995), (1).
*3-B By-laws of the Company, as amended to the date hereof. (Exhibit 3-B
to Form 10-K for the year ended November 30, 1999), (1).
*4-A Amended and Restated Rights Agreement, dated as of April 13, 2000,
by and between the Company and First Chicago Trust Company of New
York, as Rights Agent, which includes as Exhibit A the Certificate
of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock and as Exhibit B the form of Rights
Certificate (Exhibit 4.1 to Form 8-K filed April 13, 2000), (1).
*4-B Indenture, dated as of March 15, 1994, between the Company and Bank
One Wisconsin Trust Company, N.A., Trustee, relating to the 10 7/8%
Senior Subordinated Notes due 2002 of Hartmarx Corporation (Exhibit
4-D to Form 10-Q for the quarter ended February 28, 1994), (1).
*4-B-1 Instrument of Resignation, Appointment and Acceptance, dated July
31, 1995, accepting the resignation of Bank One Wisconsin Trust
Company, N.A. and appointing Bank One Columbus, N.A. as successor
Paying Agent, Registrar and Trustee under the Indenture (Exhibit 4-
B-1 to Form 10-K for the year ended November 30, 1995), (1).
*4-C Amended and Restated Credit Agreement, dated as of August 18, 1999,
among the Company, the Lenders listed therein and General Electric
Capital Corporation, as Managing Agent and Collateral Agent
(Exhibit 4-C to Form 10-Q for the quarter ended August 31, 1999),
(1).
4-C-1 First Amendment to the Amended and Restated Credit Agreement dated
November 21, 2000.
*10-A 1998 Incentive Stock Plan (Exhibit A to Proxy Statement of the
Company relating to the 1998 Annual Meeting), (1). **
*10-A-1 1995 Stock Plan for Non-Employee Directors (Exhibit B to Proxy
Statement of the Company relating to the 1995 Annual Meeting), (1).
**
*10-B Description of Hartmarx Management Incentive Plan (Information to
be included under the caption "REPORT OF THE COMPENSATION
COMMITTEE--Executive Compensation Program--Short-Term Incentives"
on pages 13 and 14 in the Proxy Statement of the Company relating
to the 2001 Annual Meeting), (1). **
*10-C Description of Hartmarx Long Term Incentive Plan (Information to be
included under the caption "REPORT OF THE COMPENSATION COMMITTEE--
Executive Compensation Program--Long-Term Incentives" on page 14 in
the Proxy Statement of the Company relating to the 2001 Annual
Meeting), (1). **
38
Exhibit
No.
and
Applicable
Section of
601 of
Regulation
S-K
----------
*10-D-1 Form of Deferred Compensation Agreement, as amended, between the
Company and Directors Abboud, Farley, Jacobs and Marshall (Exhibit
10-D-1 to Form 10-K for the year ended November 30, 1993), (1). **
*10-D-2 Form of First Amendment to Director Deferred Compensation Agreement
between the Company and Directors Abboud, Farley, Jacobs and
Marshall (Exhibit 10-D-2 to Form 10-K for the year ended November
30, 1994), (1). **
*10-E-1 Form of Deferred Compensation Agreement, as amended, between the
Company and Messrs. Hand, Patel, Morgan, Condon and Proczko
(Exhibit 10-E-1 to Form 10-K for the year ended November 30, 1993),
(1). **
*10-E-2 Form of First Amendment to Executive Deferred Compensation
Agreement between the Company and Messrs. Hand, Patel, Morgan,
Condon and Proczko (Exhibit 10-E-2 to Form 10-K for the year ended
November 30, 1994), (1). **
10-F-1 Employment Agreement dated August 1, 1996 between the Company and
Elbert O. Hand, amended and restated effective November 27, 2000.
**
10-F-2 Employment Agreement dated August 1, 1996 between the Company and
Homi B. Patel, amended and restated effective November 27, 2000. **
10-F-3 Employment Agreement dated August 1, 1996 between the Company and
Glenn R. Morgan, amended and restated effective November 27, 2000.
**
10-G-1 Severance Agreement dated August 1, 1996 between the Company and
Elbert O. Hand, amended and restated effective November 27, 2000.
**
10-G-2 Severance Agreement dated August 1, 1996 between the Company and
Homi B. Patel, amended and restated effective November 27, 2000. **
10-G-3 Severance Agreement dated August 1, 1996 between the Company and
Glenn R. Morgan, amended and restated effective November 27, 2000.
**
*10-G-4 Form of Severance Agreement between the Company and Executive
Officer James E. Condon (Exhibit 10-F-5 to Form 10-K for the year
ended November 30, 1993), (1). **
*10-G-5 Form of Amendment to Severance Agreement between the Company and
Executive Officer James E. Condon (Exhibit 10-F-6 to Form 10-K for
the year ended November 30, 1994), (1). **
*10-G-6 Amendment to Severance Agreement between the Company and Executive
Officer James E. Condon (Exhibit 10-G-7 to Form 10-K for the year
ended November 30, 1997), (1). **
10-G-7 Form of Severance Agreement between the Company and Executive
Officers Taras R. Proczko, Linda J. Valentine and Andrew A. Zahr.
**
*10-H-1 Supplemental Benefit Compensation Agreement dated December 23, 1999
between the Company and Elbert O. Hand (Exhibit 10-H-1 to Form 10-K
for the year ended November 30, 1999), (1). **
10-H-2 First Amendment to Supplemental Benefit Compensation Agreement
between the Company and Elbert O. Hand, effective November 27,
2000.**
*10-H-3 Supplemental Benefit Compensation Agreement dated December 23, 1999
between the Company and Homi B. Patel (Exhibit 10-H-2 to Form 10-K
for the year ended November 30, 1999), (1). **
39
Exhibit No.
and
Applicable
Section of
601 of
Regulation
S-K
-----------
10-H-4 First Amendment to Supplemental Benefit Compensation Agreement
between the Company and Homi B. Patel, effective November 27,
2000.**
*10-I Form of Indemnity Agreement between the Company and Directors
Abboud, Bakhsh, Cole, Farley, Hand, Jacobs, Marshall, Patel,
Rohlfs, Scott and Strubel (Exhibit 10-G-1 to Form 10-K for the
year ended November 30, 1993), (1). **
*10-J-1 Deferred Compensation Plan effective January 1, 1996 (Exhibit 10-I
to Form 10-K for the year ended November 30, 1995), (1). **
10-J-2 Deferred Compensation Plan effective January 1, 2001. **
12 Statement of Computation of Ratios.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Powers of Attorney, as indicated on page 41 of this Form 10-K.
27 Financial Data Schedule.
- --------
*Exhibits incorporated herein by reference. (1) File No. 1-8501
**Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Hartmarx Corporation
(Registrant)
/s/ Glenn R. Morgan /s/ Taras R. Proczko
By: ___________________________ and By: ________________________________
Glenn R. Morgan Taras R. Proczko
Executive Vice President and Vice President, Corporate Counsel
Chief Financial Officer and Secretary
Date: February 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Elbert O. Hand* Homi B. Patel*
_____________________________________ _____________________________________
Elbert O. Hand Homi B. Patel
Chairman, Chief Executive President, Chief Operating
Officer, Director Officer, Director
A. Robert Abboud* Charles Marshall*
_____________________________________ _____________________________________
A. Robert Abboud, Director Charles Marshall, Director
Samaual A.T. Bakhsh* Michael B. Rohlfs*
_____________________________________ _____________________________________
Samaual A.T. Bakhsh, Director Michael B. Rohlfs, Director
Jeffrey A. Cole* Stuart L. Scott*
_____________________________________ _____________________________________
Jeffrey A. Cole, Director Stuart L. Scott, Director
Raymond F. Farley* Ella D. Strubel*
_____________________________________ _____________________________________
Raymond F. Farley, Director Ella D. Strubel, Director
Donald P. Jacobs* Andrew A. Zahr*
_____________________________________ _____________________________________
Donald P. Jacobs, Director Andrew A. Zahr
Vice President and Controller
Glenn R. Morgan* Principal Accounting Officer
_____________________________________
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer
/s/ Glenn R. Morgan
By: _________________________________
Glenn R. Morgan
/s/ Taras R. Proczko
By: _________________________________
Taras R. Proczko
- --------
*Pursuant to Power of Attorney
Date: February 26, 2001
41
HARTMARX CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED NOVEMBER 30, 2000, 1999, and 1998
(000's Omitted)
Reserve for Doubtful
Accounts
Fiscal Year Ended
November 30,
-------------------------
2000 1999 1998
------- ------- -------
Balance at beginning of year......................... $ 8,639 $ 8,210 $ 9,803
Charged to costs and expenses........................ 1,493 1,769 2,220
Deductions from reserves(1).......................... (2,362) (1,926) (3,813)
Reserve related to acquired businesses............... -- 586 --
------- ------- -------
Balance at end of year............................... $ 7,770 $ 8,639 $ 8,210
======= ======= =======
- --------
(1) Notes and accounts written off as uncollectible, net of recoveries of
accounts previously written off as uncollectible.