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UNITED STATESSECURITIES 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, 1996
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -----------------------
Common Stock $2.50 par value per share New York Stock Exchange
Chicago Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
10 7/8% Senior Subordinated Notes due New York Stock Exchange
January 15, 2002
Securities registered pursuant to Section 12(g) of the Act: NONE
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. [_]
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
On February 20, 1997, 33,280,563 shares of the Registrant's common stock
were outstanding. The aggregate market value of common stock held by non-
affiliates of the Registrant was $185,312,000.
Certain portions of the Registrant's definitive proxy statement dated
February 28, 1997 for the Annual Meeting of Stockholders to be held April 18,
1997 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..................................................... 4
3 Legal Proceedings.............................................. 5
4 Submission of Matters to a Vote of Security Holders............ 5
Executive Officers of the Registrant........................... 5
PART II
Market for Registrant's Common Equity and Related Stockholder
5 Matters........................................................ 6
6 Selected Financial Data........................................ 7
Management's Discussion and Analysis of Financial Condition and
7 Results of Operations.......................................... 8
8 Financial Statements and Supplementary Data.................... 14
Changes in and Disagreements with Accountants on Accounting and
9 Financial Disclosure........................................... 33
PART III
10 Directors and Executive Officers of the Registrant............. 33
11 Executive Compensation......................................... 33
12 Security Ownership of Certain Beneficial Owners and Management. 34
13 Certain Relationships and Related Transactions................. 34
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
14 K.............................................................. 34
PART I
ITEM 1--BUSINESS
General and Operating Segments
Hartmarx Corporation functions essentially as a holding company, overseeing
its various operating companies and providing them with resources and services
in the financial, administrative, legal, human resources, advertising and other
areas. The management of the respective operating subsidiaries 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, sportcoats 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, and women's career
apparel.
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) and Hawksley & Wight(R); and under
exclusive license agreements for specified product lines including Tommy
Hilfiger(R), Jack Nicklaus(R), Bobby Jones(R), Burberrys(R), Austin Reed(R),
Perry Ellis(R), Kenneth Cole(R), Evan-Picone(R), Daniel Hechter(R), Robert
Comstock(TM), Gieves & Hawkes(R), Claiborne(R), KM by Krizia(TM), Pierre
Cardin(R) and Nino Cerruti(R). To broaden the distribution of the apparel sold
under its owned and licensed trademarks, the Company has also entered into over
30 license or sublicense agreements with third parties for specified product
lines to produce, market and distribute products in 16 countries outside the
United States. Additionally, the Company has commenced direct marketing
primarily in Europe and Asia, selling golfwear through distributors in 13
countries.
The Company and its subsidiaries are engaged in the manufacturing and
marketing of quality men's and women's apparel to independent retailers and
through catalogs. Its operations currently consist of the following
businesses--Men's Apparel Group ("MAG") and Women's Apparel Group. MAG designs,
manufactures and markets men's tailored clothing, slacks and sportswear to
retailers for resale to consumers. The Women's Apparel Group is comprised of
International Women's Apparel ("IWA"), which markets women's career apparel to
department and specialty stores, and Barrie Pace, a direct mail catalog
marketer of women's apparel and accessories. The Operating Segment Information
on pages 31 through 32 in the accompanying Notes to Consolidated Financial
Statements further describes the Company's operations.
On November 26, 1996, a wholly-owned subsidiary of the Company purchased
substantially all of the license rights, current assets, properties and
operations of the Plaid Clothing Group, Inc., now PCG Corp. I, and its
subsidiaries ("Plaid") pursuant to an Asset Purchase Agreement. Plaid has been
operating as a debtor-in-possession under Chapter 11 of the United States
Bankruptcy Code since July 17, 1995. The acquired assets included license
rights to manufacture and market men's tailored suits, sportcoats and slacks
under the Burberrys, Claiborne and Evan-Picone brands, as well as ownership of
the Palm Beach, Brannoch and other names. The inventory and receivables
associated with these brands and names were also purchased along with
production, warehouse and distribution facilities.
In July 1995, as the final step in the Company's previously announced
strategy to exit the retail business, the Company completed the disposition of
its Kuppenheimer operation, the vertically integrated factory-direct-to-
consumer manufacturer of popular priced men's tailored clothing whose products
are sold exclusively through Kuppenheimer operated retail stores.
Kuppenheimer's operating results for 1995 and 1994, net of tax benefit, have
been reflected as a discontinued operation in the accompanying Consolidated
Statement of Earnings.
1
This 1996 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. Such forward looking statements are subject to
risks and uncertainties. Exhibit 99 to this 1996 10-K Report identifies
important risk factors which could cause the Company's actual financial results
to differ materially from results forecast or estimated by the Company in
forward looking statements.
Products Produced and Services Rendered
The Company's merchandising strategy is to market a wide selection of men's
tailored clothing and sportswear and women's career apparel and sportswear
across a wide variety of fashion directions, price points and distribution
channels. In 1996, tailored clothing (suits and sportcoats) represented
approximately 61% of the Company's total sales. Sportswear (which includes
golfwear) and slacks represented approximately 29% of sales and women's apparel
represented approximately 10% of sales.
As an integrated manufacturer and marketer, the Company is responsible for
the design, manufacture and sourcing of its apparel. Substantially all of its
men's tailored clothing and slacks are manufactured in 17 Company operated
facilities located in the United States, one factory in Costa Rica and one
factory in Mexico. The Company also utilizes domestic and foreign contract
manufacturers to produce its remaining products, principally men's and women's
sportswear, in accordance with Company specifications and production schedules.
The Company's largest operating group, MAG, designs, manufactures and markets
on a wholesale basis substantially all of the Company's men's tailored clothing
through its Hart Schaffner & Marx ("HSM"), Hickey-Freeman, Intercontinental
Branded Apparel and Plaid business units. Slacks and sportswear are
manufactured and marketed principally through the Trans-Apparel Group,
Biltwell, Bobby Jones and Robert Comstock business units. IWA designs and
sources women's career apparel and sportswear for department and specialty
stores under owned and licensed brand names. The Barrie Pace catalog features
branded products principally purchased from unaffiliated sources, directed
towards the business and professional woman. Approximately 30% of Barrie Pace
sales are of products purchased from 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 19% 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 43% of
the Company's total fabric requirements in fiscal 1996. No other supplier
accounts for over 6% of the Company's total raw material requirements. As is
customary in its 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.
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
2
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
sportcoats 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. Its women's
apparel sales do not represent a significant percentage of total women's
apparel sales. The Company's customers include major United States department
and specialty stores (certain of which are under common ownership and control),
value-oriented retailers and direct mail companies. The Company's largest
customer, Dillard Department Stores, represented approximately 18%, 16% and 14%
of consolidated sales in 1996, 1995 and 1994, 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 8,600 employees, of which
approximately 97% are employed in MAG. Most of the employees engaged in
manufacturing and distribution activities are covered by union contracts with
the Union of Needletrades, Industrial & Textile Employees. The Company
considers its employee relations to be satisfactory.
Seasonality
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
3
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.
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 EXPIRATION
FLOOR AREA DATE OF
IN SQUARE MATERIAL
LOCATION FEET PRINCIPAL USE LEASES
- -------- ----------- --------------------------------------- ----------
Anniston, AL............ 76,000 Manufacturing 1999
Buffalo, NY............. 115,000 Manufacturing *
Buffalo, NY............. 280,000 Office; manufacturing; warehousing 2015
Cape Girardeau, MO...... 171,000 Manufacturing; warehousing *
Chambersburg, PA........ 70,000 Manufacturing 1997
Chicago, IL............. 102,000 Executive and operating company offices 2004
Des Plaines, IL......... 361,000 Manufacturing; warehousing *
Easton, PA.............. 220,000 Office; warehousing *
Elizabethtown, KY....... 54,000 Manufacturing *
Erlanger, KY............ 225,000 Warehousing 2004
Farmington, MO.......... 65,000 Warehousing *
Farmington, MO.......... 75,000 Manufacturing 1999
Knoxville, TN........... 231,000 Manufacturing *
Michigan City, IN
(2 locations).......... 420,000 Office; manufacturing; warehousing *
New York, NY............ 79,000 Sales offices/showrooms 2000
Rector, AR.............. 52,000 Manufacturing *
Rochester, NY........... 223,000 Office; manufacturing; warehousing *
Rochester, NY........... 51,000 Warehousing 1997
St. Louis, MO
(2 locations).......... 88,000 Office; manufacturing 2000
Somerset, KY............ 225,000 Manufacturing *
Whiteville, NC.......... 105,000 Manufacturing *
Winchester, KY.......... 92,000 Manufacturing *
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 "Leases" note to the consolidated
financial statements on pages 26 and 27 of this Form 10-K.
4
ITEM 3--LEGAL PROCEEDINGS
Spillyards Litigation. In September 1992, David Spillyards, represented to
be the holder of approximately 1,800 shares of common stock of the Company,
filed a class action complaint in the Circuit Court of Cook County, Illinois,
against the Company, its directors and former director Harvey A. Weinberg. The
complaint claimed that the Company's directors breached certain duties owed to
the Company's shareholders and sought certification as a class action, the
appointment of Mr. Spillyards' counsel as class counsel and related damages.
The complaint, which also included a derivative action, alleged that the
purpose of the sale of the Company's principal retail unit, HSSI, Inc.
("HSSI"), to HSSA Group, Ltd. ("HSSA"), was to benefit Mr. Weinberg. The
complaint was subsequently amended to include additional allegations
pertaining to the ultimate sale of 5,714,286 shares of common stock of the
Company and a three-year warrant for 1,649,600 shares of common stock of the
Company to Traco International, N.V. (the "Traco Agreement"). The complaint,
as amended, was dismissed on November 30, 1992, and Mr. Spillyards was given
permission by the Court to file another amended complaint, which was filed on
December 28, 1992 (the "Second Amended Complaint"). The Second Amended
Complaint, denominated as a class action and derivative complaint, again
challenged certain aspects of the Traco Agreement and alleged that the Company
made certain misleading representations in its July 17, 1991 prospectus. After
the Company's motion to dismiss the Second Amended Complaint was granted on
June 24, 1993, Mr. Spillyards filed a Third Amended Complaint (purporting to
assert new issues regarding the Traco Agreement), which was again dismissed on
September 29, 1993. Mr. Spillyards filed notices of appeal with the Illinois
Appellate Court on October 29, 1993, and December 23, 1993. The appeals were
consolidated by court order on February 8, 1994. On February 23, 1996, in a
unanimous opinion, the Illinois Appellate Court affirmed the trial court
rulings dismissing the complaints. No further appeals were taken.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Executive Officers of the Registrant
Each of the executive officers of the Registrant listed below has served the
Registrant or its subsidiaries in various executive capacities for the past
five years, with the exception of Ms. Allen. 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 ELECTED TO
SERVICE WITH PRESENT
NAME POSITION AGE COMPANY POSITION
- ---- ---------------------------------- --- ------------ ----------
Elbert O. Hand.......... Chairman and
Chief Executive Officer
(Director since 1984) 57 32 1992
Homi B. Patel........... President and
Chief Operating Officer
(Director since January, 1994) 47 17 1992
Mary D. Allen........... Executive Vice President
General Counsel and Secretary 51 2 1994
Glenn R. Morgan......... Executive Vice President and
Chief Financial Officer 49 17 1995
Frank A. Brenner........ Vice President, Marketing Services 68 28 1983
James E. Condon......... Vice President and Treasurer 46 19 1995
Linda J. Valentine...... Vice President, Compensation
and Benefits 46 16 1993
Andrew A. Zahr.......... Controller and Chief Accounting
Officer 53 24 1994
Mary D. Allen became Executive Vice President, General Counsel and Secretary
in September, 1994. Prior to joining the Company, she was employed by JMB
Realty Corporation for seven years during which she served in various
capacities, most recently as senior vice president.
5
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Hartmarx common shares are traded on the New York and Chicago Stock
Exchanges. The quarterly composite price ranges of the Company's common stock
for the past three years were as follows:
1996 1995 1994
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HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------
First Quarter......................... $4.625 $3.75 $6.375 $5.125 $7.375 $6.125
Second Quarter........................ 6.50 3.875 5.875 4.25 7.00 5.875
Third Quarter......................... 6.375 4.625 6.875 4.75 6.625 5.375
Fourth Quarter........................ 5.375 4.25 6.625 4.50 6.00 5.00
The most recent quarterly dividend paid was in November, 1991, in the amount
of $.15 per share. The current financing agreements restrict the payment of
dividends to 50% of consolidated net income, as defined, subject to a
cumulative maximum amount of $22.5 million. The current financing agreements
also contain various restrictive covenants pertaining to minimum net worth,
additional debt incurrence, capital expenditures, asset sales, operating
leases, and ratios relating to minimum accounts payable to inventory, maximum
funded debt to 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 20, 1997, there were approximately 6,200 stockholders of the
Company's $2.50 par value common stock. The number of stockholders was
estimated by adding the number of registered holders furnished by the Company's
registrar and the number of participants in the Hartmarx Employee Stock
Ownership Plan.
The Company has authorized the trustee of its retirement plan to purchase up
to one million shares of the Company's common stock in open market
transactions. As of February 20, 1997, 120,000 shares have been purchased
pursuant to this authorization and the plan's aggregate holdings are 639,612.
6
ITEM 6--SELECTED FINANCIAL DATA
The following table summarizes data for the years 1992 through 1996. The
Company's complete annual financial statements and notes thereto for fiscal
1996 appear elsewhere herein.
INCOME STATEMENT DATA
IN THOUSANDS, EXCEPT PER
SHARE DATA
FOR YEARS ENDED NOVEMBER
30 (A) 1996 1995 1994 1993 1992
------------------------ -------- -------- -------- -------- --------
Net sales.................... $610,180 $595,272 $621,847 $606,148 $684,171
Licensing and other income... 4,263 6,429 7,277 5,823 3,478
Cost of sales................ 463,533 447,414 459,295 444,335 507,200
Operating expenses........... 127,699 132,806 139,720 137,315 153,267
Restructuring charges........ -- -- -- -- 35,100
Earnings (loss) before
interest, taxes,
discontinued
operations and extraordinary
items....................... 23,211 21,481 30,109 30,321 (7,918)
Interest expense............. 16,681 19,851 20,988 22,639 21,062
Earnings (loss) before taxes,
discontinued operations
and extraordinary items..... 6,530 1,630 9,121 7,682 (28,980)
Tax (provision) benefit...... 17,300 19,800 9,992 (273) 870
Earnings (loss) before
discontinued operations
and extraordinary items..... 23,830 21,430 19,113 7,409 (28,110)
Discontinued operations, net
of tax...................... -- (18,283) 897 (1,189) (192,135)
Net earnings (loss) before
extraordinary items......... 23,830 3,147 20,010 6,220 (220,245)
Extraordinary items, net of
tax......................... 725 -- (3,862) -- --
Net earnings (loss).......... 24,555 3,147 16,148 6,220 (220,245)
Net earnings (loss) per
share:
continuing operations....... .72 .66 .59 .24 (1.10)
discontinued operations..... -- (.56) .03 (.04) (7.49)
before extraordinary items.. .72 .10 .62 .20 (8.59)
after extraordinary items... .74 .10 .50 .20 (8.59)
Cash dividends per share..... -- -- -- -- --
Average number of common
shares and equivalents...... 33,021 32,631 32,243 31,375 25,629
BALANCE SHEET DATA
IN THOUSANDS, EXCEPT PER
SHARE DATA
AT NOVEMBER 30
------------------------
Cash......................... $ 2,844 $ 5,700 $ 2,823 $ 1,507 $ 22,356
Accounts receivable.......... 135,554 108,486 114,597 120,442 159,772
Inventories.................. 165,913 154,898 183,347 193,818 216,751
Other current assets......... 16,155 10,409 11,670 21,948 30,894
Net properties............... 43,909 44,624 51,543 56,477 66,846
Other assets/deferred taxes.. 65,864 52,519 28,220 10,919 15,340
Total assets................. 430,239 376,636 392,200 405,111 511,959
Accounts payable, accrued
expenses and taxes.......... 99,745 78,867 76,049 63,001 126,932
Total debt................... 168,528 163,278 187,784 233,113 314,602
Shareholders' equity......... 161,966 134,491 128,367 108,997 70,425
Equity per share............. 4.85 4.11 3.95 3.41 2.72
OTHER DATA
IN THOUSANDS
FOR YEARS ENDED NOVEMBER
30 (A)
------------------------
Earnings before interest,
taxes, depreciation,
amortization, discontinued
operations
and extraordinary items..... $ 31,469 $ 30,069 $ 39,502 $ 39,917 $ 3,350
Depreciation and amortization
of fixed assets............. 8,258 8,588 9,393 9,596 11,268
Capital expenditures......... 8,207 8,441 6,173 5,467 4,331
- --------
(A) 1994 and prior years reflect the Company's former retail businesses
(Kuppenheimer, HSSI and Country Miss retail), as discontinued operations.
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.
7
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Consolidated 1996 results reflected a partial recovery from 1995's generally
weak apparel environment. A stronger second half contributed to a full year
pre-tax earnings improvement to $6.5 million in 1996 from $1.6 million in
1995. The 2.5% full year sales increase to $610.2 million this year from
$595.3 million in 1995 included an 11% fourth quarter improvement. Debt and
related interest expense declined during 1996 principally from working capital
reductions, although the purchase of assets and license rights from the Plaid
Clothing Group, Inc. ("Plaid") at fiscal year end, for approximately $27
million, caused the November 30 debt level to slightly exceed the year end
1995 amount.
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 on a wholesale basis, principally through its
Hart Schaffner & Marx, Intercontinental Branded Apparel, Hickey-Freeman and,
for 1997, the brands acquired from Plaid; slacks and sportswear (including
golfwear) are marketed principally through its Trans-Apparel Group, Biltwell,
Bobby Jones and Robert Comstock Apparel business units; 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. In July 1995, the Company sold its
Kuppenheimer business, the vertically integrated factory-direct-to-consumer
manufacturer of popular priced men's tailored clothing sold exclusively
through Kuppenheimer operated retail stores. This disposition completed the
Company's previously announced strategy to eliminate its retail businesses
and, accordingly, Kuppenheimer's operating results prior to disposition have
been reflected as a discontinued operation in the accompanying Consolidated
Statement of Earnings for the years ended November 30, 1995 and 1994.
RESULTS OF OPERATIONS
Consolidated sales were $610.2 million in 1996, $595.3 million in 1995 and
$621.8 million in 1994. The 2.5% increase in 1996 compared to 1995 was
achieved after replacing over $16 million of revenues with retail customers no
longer in business with sales to other customers. The Company's leading
brands, Hickey-Freeman and Hart Schaffner & Marx, recorded a combined sales
gain of 6% overall, and over 11% when excluding the retailers no longer in
business. Golfwear sales of $50 million increased 15% over last year. Sales in
the moderate price businesses declined $5 million or 1.2% and continuing
margin pressures adversely affected pre-tax income. Women's sales increased
5.9%. The 4.3% consolidated sales decline in 1995 compared to 1994 was
principally attributable to the moderately priced branded and private label
product lines, as the higher price point brands, such as Hickey-Freeman, Hart
Schaffner & Marx and Bobby Jones, achieved increases.
Consolidated 1996 pre-tax income improved to $6.5 million from $1.6 million
in 1995, although not fully recovered from 1994's $9.1 million. As discussed
below, results for each year reflected recognition of non-cash income tax
benefits of $17.3 million in 1996, $19.8 million in 1995 and $10.0 million in
1994 associated with operating loss carryforwards expected to be realized in
future periods. After considering these tax benefits, consolidated net
earnings before discontinued operation and extraordinary items were $23.8
million or $.72 per share in 1996, $21.4 million or $.66 per share in 1995 and
$19.1 million or $.59 per share in 1994. Fiscal 1996 consolidated results
included a $.7 million or $.02 per share extraordinary gain associated with
the purchase of $14.7 million of the Company's 10 7/8% Senior Subordinated
Debentures. The loss on discontinued operation in 1995 aggregated $18.3
million or $.56 per share and related to Kuppenheimer, consisting of an $18.1
million loss on the sale and $.2 million operating loss incurred before
disposition. In 1994, Kuppenheimer's after-tax earnings were $.9 million or
$.03 per share. Fiscal 1994 consolidated results included a $3.9 million or
$.12 per share extraordinary charge associated with the early repayment of
loans associated with the 1994 debt refinancing. After consideration of the
discontinued operation and extraordinary items, net earnings were $24.6
million or $.74 per share in 1996, $3.1 million or $.10 per share in 1995 and
$16.1 million or $.50 per share in 1994.
8
The following summarizes sales and earnings before interest and taxes
("EBIT") for the Company's business groups (in millions):
YEAR ENDED NOVEMBER
30,
----------------------
1996 1995 1994
------ ------ ------
Sales:
Men's Apparel Group............................. $559.1 $547.1 $569.6
Women's Apparel Group........................... 51.1 48.2 52.2
------ ------ ------
Total......................................... $610.2 $595.3 $621.8
====== ====== ======
EBIT:
Men's Apparel Group............................. $ 30.3 $ 32.1 $ 46.3
Women's Apparel Group........................... 3.6 (1.3) (4.1)
Other and adjustments........................... (10.7) (9.3) (12.1)
------ ------ ------
Total......................................... $ 23.2 $ 21.5 $ 30.1
====== ====== ======
MAG sales were $559 million in 1996, $547 million in 1995 and $570 million
in 1994. The 2.2% increase in 1996 compared to 1995 reflected the strength of
the Hart Schaffner & Marx and Hickey-Freeman brands, as well as improvements
in golfwear sales. Revenues in the businesses marketing moderately priced
apparel declined 1.2%. Sales in each year were also impacted by the decline in
volume with The Hastings Group, Inc. ("Hastings"), the successor business to
HSSI, Incorporated, which was sold by Hartmarx in September, 1992. There were
no sales to Hastings in 1996 compared to $15 million in 1995 and $27 million
in 1994. The 4.0% decrease in 1995 MAG revenues compared to 1994 reflected the
generally weak retail environment for apparel and inventory liquidations of
several competitors operating in bankruptcy, which primarily affected the
sales and margins in moderately priced branded and private label product
lines. The businesses positioned in the upper end of the tailored clothing
market, which include the Hickey-Freeman and Hart Schaffner & Marx brands,
produced a 4% sales increase. Sales of Bobby Jones golfwear, also marketed at
the upper end price points, increased significantly. MAG EBIT was $30 million
in 1996 compared to $32 million in 1995 and $46 million in 1994. Tailored
clothing represented the most significant contributor to earnings in each
year. The $2 million decline in 1996 EBIT compared to 1995 primarily reflected
industry-wide conditions adversely affecting gross margins in the moderately
priced businesses, partially offset by improvement in the Hart Schaffner &
Marx, Hickey-Freeman and Bobby Jones higher price point businesses. The
decline in 1995 MAG EBIT compared to 1994 primarily reflected the lower sales,
the industry-wide conditions adversely affecting gross margins and LIFO
expense of $2.1 million in 1995 compared to LIFO income of $2.3 million in
1994.
Women's Apparel Group sales, comprising approximately 8% of the consolidated
total in each year, aggregated $51 million in 1996, $48 million in 1995 and
$52 million in 1994. Sales at IWA increased in 1996, reflecting the focusing
of its business on the Austin Reed line. Its decrease in 1995 was principally
attributable to two product lines discontinued in 1994. Barrie Pace catalog
sales declined slightly in each year. Women's Apparel Group earnings before
interest and taxes were $4 million in 1996 compared to losses of $1 million in
1995 and $4 million in 1994. The IWA business earned over $3 million in 1996
following a breakeven in 1995 and a loss in 1994 of $5 million. The
improvement was principally associated with the growth of its Austin Reed line
and the favorable impact after discontinuing two unprofitable product lines in
1994. The Barrie Pace business operated at just above a breakeven in 1996
following a $1 million loss in 1995 and $1 million earnings in 1994. Barrie
Pace results for 1995 and 1994 were unfavorably impacted by lower relative
response rates on an increased number and size of catalogs distributed and
accelerating postage and paper costs; the 1996 improvement reflected
implementation of expense reduction actions and enhanced productivity of the
catalogs distributed.
Gross Margins. The consolidated gross margin percentage of sales was 24.0%
in 1996, 24.8% in 1995 and 26.1% in 1994. Gross margins in 1996 were adversely
impacted by $2.3 million of start-up costs, associated with the Company's off-
shore production facilities, affecting the gross margin rate by .4%; start-up
costs in 1997
9
are anticipated to be minimal. Gross margins reflected LIFO expense of $.1
million in 1996 and $2.1 million in 1995, compared to LIFO income of $2.3
million in 1994. LIFO expense produced an unfavorable impact on consolidated
gross margin of .4% in 1995 compared to a favorable impact of .4% in 1994. The
MAG gross margin percentage declined in 1996 compared to 1995 and in 1995
compared to 1994. The 1996 reduction reflected the continuing margin pressures
in the moderately priced product lines, which have been those most susceptible
to the continuing industry margin pressures, and the $2.3 million of start-up
costs; gross margins in the higher priced point businesses improved compared
to 1995. The 1995 reduction compared to 1994 was principally attributable to
the moderately priced and private label tailored clothing product lines. The
gross margin percentage of sales in both 1995 and 1994 was also influenced by
the effect of LIFO as described above. In the women's businesses, the gross
margin ratio improved in 1996 principally attributable to the significant
percentage of business in the Austin Reed line which produced better margins
compared to other brands; the Barrie Pace gross margin rate also improved. The
women's gross margin ratio also improved in 1995 compared to 1994, principally
from inventory dispositions in 1994 associated with discontinued product lines
in the IWA business; however, margins declined in the catalog business due to
a greater proportion of units sold at less than full price.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses declined to $128 million in 1996 from $133 million in
1995 and $140 million in 1994, and also decreased as a percentage of sales to
20.9% in 1996 from 22.3% in 1995 and 22.5% in 1994. The $5 million decline in
fiscal 1996 was principally attributable to the Company's expense control
programs which included increased sharing of administrative services among the
individual operating units. In 1995, operating expenses declined from the
lower sales in both MAG and the Women's Apparel Group compared to 1994, and
also from expense reduction programs effected in their businesses. Operating
expenses in 1995 included non-recurring items, which together adversely
affected the 1995 expense to sales ratio by .2%.
Advertising expenditures, including costs related to the Barrie Pace
catalog, were $20 million in 1996 compared to $22 million in 1995 and $19
million in 1994, representing 3.2%, 3.6% and 3.0% of consolidated sales,
respectively. The decrease in 1996 primarily reflected lower costs associated
with Barrie Pace; MAG advertising expenditures were comparable to 1994's
level. The increased 1995 advertising compared to 1996 and 1994 reflected
higher expenditures in MAG related to the introduction of new brands, along
with higher costs associated with distributing more catalogs in the Barrie
Pace business.
In 1996, the Company adopted the disclosure provision of SFAS No. 123,
Accounting for Stock-Based Compensation. As permitted under this statement,
the Company retained its current method of accounting for stock compensation.
Licensing and Other Income. This caption is principally comprised of income
generated from licensing and aggregated $4.3 million in 1996, $6.4 million in
1995 and $7.3 million in 1994. The decline in each year principally related to
the sale of certain license rights in 1995 and 1994.
Earnings before Interest, Taxes, Discontinued Operation and Extraordinary
Items (EBIT). EBIT was $23.2 million in 1996, $21.5 million in 1995 and $30.1
million in 1994, representing 3.8%, 3.6% and 4.8% of sales, respectively. The
improvement in 1996 from 1995 was principally attributable to operating
expense reductions, partially offset by the lower gross margin ratio. The
decline in 1995 compared to 1994 was principally attributable to a decline in
the gross margin rate.
Interest Expense. Interest expense was $17 million in 1996, $20 million in
1995 and $21 million in 1994. The decline in each year reflected lower average
borrowings, primarily from working capital reductions and cash earnings.
Interest rates on credit facility borrowings declined in 1996 compared to
1995; interest expense in 1996 was favorably affected by approximately $.4
million from the repurchase of $14.7 million face value of the Company's 10
7/8% senior subordinated debentures utilizing credit facility availability.
The Company's weighted average short term borrowing rate was 7.4% in 1996,
8.5% in 1995 and 7.5% in 1994. Interest expense included non-cash amortization
of financing fees and expenses of $1.0 million in 1996, $1.4 million in 1995
and $1.7
10
million in 1994. The effective interest rate for all borrowings, including
amortization costs, was 9.9% in 1996, 10.4% in 1995 and 9.6% in 1994.
Income Taxes. The recorded tax benefit in each year was determined in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("FAS 109"). FAS 109 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.
During fiscal 1996, 1995 and 1994, the Company evaluated its deferred tax
asset and reversed a portion of its valuation allowance, resulting in a
recognized tax benefit of $17.3 million, $19.8 million and $10.0 million,
respectively. Among the factors considered in this year's recognition were:
. a history of sustained profitability of the core MAG businesses, even
during the 1990-1992 loss years which included operating losses from
retail businesses subsequently sold or liquidated;
. 1996 operating results improved compared to 1995, but earnings have
not yet recovered to either the 1994 level or to the historical
amounts earned in the 1980s. Aggregate pre-tax earnings from
continuing operations for the four years following the restructuring
in 1992 were approximately $25 million;
. the Company's income prospects in future years after consideration of
the $169 million available operating loss carryforwards, the
substantial portion of which do not expire until the 2007-2010
period. Utilization of the entire available tax loss carryforwards by
2007 would require annual taxable income to average approximately $15
million.
As the Company does expect to achieve positive earnings for both financial
reporting and tax purposes in future years, it was concluded that the more
likely than not criteria appropriately justified the recognition of a portion
of the available tax benefits. After giving effect to the benefit of future
operating loss carryforwards and other timing differences recognized, the
remaining valuation reserve at November 30, 1996 was $15.0 million. Earnings
and shareholders' equity would be accordingly increased upon the determination
that the realization of the remaining reserved tax asset is more likely than
not. (Also see "Liquidity and Capital Resources" for further discussion of
deferred tax assets and remaining operating loss carryforwards.)
LIQUIDITY AND CAPITAL RESOURCES
During 1994, the Company replaced its $307 million borrowing facility,
originally due to mature on December 30, 1995, with $100 million of public
senior subordinated debentures, a $175 million Revolving Credit Facility with
a nine member lending group ("Credit Facility") and the private placement of
$15.5 million of industrial development bonds issued by development
authorities in prior years and maturing in 2015. The 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.
The Credit Facility is secured by inventories, accounts receivable and
intangibles of the Company and its subsidiaries. Facility amendments in July
1995, November 1995 and January 1996, among other things, resulted in a
reduction in the fees, administrative charges and effective borrowing rates,
adjustment of certain covenants and extension of the term from March 1997 to
July 2000. The Facility contains certain restrictions on the operation of the
Company's business, including covenants pertaining to capital expenditures,
asset sales, operating leases, minimum net worth and incurrence of additional
indebtedness, ratios relating to minimum accounts payable to inventory,
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 was in compliance with the above noted covenants.
11
Net cash provided by operating activities was $26 million in 1996 compared to
$22 million in 1995 and $56 million in 1994. The improvement in 1996 compared
to 1995 was attributable to both the higher earnings and working capital
reductions during the year. The decline in 1995 compared to 1994 was
principally attributable to a smaller reduction in working capital than in 1994
and the lower earnings. At November 30, 1996, net accounts receivable of $135.6
million increased $27.1 million from November 30, 1995. Excluding the
receivables acquired as a result of the Plaid asset purchase, the increase was
$9.5 million or 8.8%, principally reflecting the higher fourth quarter sales.
The allowance for doubtful accounts was $10.0 million compared to $7.9 million
last year, representing 6.8% of gross receivables in each year. Inventories of
$165.9 million at November 30, 1996 increased $11.0 million from November 30,
1995. Excluding the amounts acquired as a result of the Plaid asset purchase,
inventories declined approximately $15 million or 9.8%, principally
attributable to inventory reductions in the moderately priced businesses.
Inventory turn, which improved in 1996 compared to 1995, was at the 1994 level.
Recoverable and deferred income taxes at November 30, 1996 aggregated $54.9
million compared to $38.0 million at November 30, 1995. The balance at November
30, 1996 reflected a valuation allowance of $15.0 million ($34.9 million at
November 30, 1995) principally related to tax assets associated with prior
years' operating losses. As discussed previously under "Income Taxes", the
Company has evaluated and will continue to evaluate the necessity for the
valuation allowance taking into consideration such factors as earnings trends
and prospects, anticipated reversal of temporary differences between financial
and taxable income, the expiration or limitations of operating loss
carryforwards and available tax planning strategies (including the ability to
adopt the FIFO inventory method for those inventories currently valued under
the LIFO valuation method). Approximately $43.3 million of the total deferred
income taxes has been classified as non-current, principally associated with
the benefit recognized attributable to expected utilization of future operating
loss carryforwards. At November 30, 1996, the Company had approximately $169
million of federal tax operating loss carryforwards available to offset future
taxable income.
At November 30, 1996, net properties were $43.9 million compared to $44.6
million at November 30, 1995. Capital additions during 1996 were $8.2 million
compared to $8.4 million in 1995. Depreciation expense was $8.3 million in 1996
and $8.6 million in 1995. Capital additions are expected to be principally
funded from cash generated from operating activities. The capital expenditure
limitations contained in the Company's current borrowing agreements are not
expected to result in delaying capital expenditures otherwise planned by the
Company.
At November 30, 1996, total debt of $168.5 million reflected the $27 million
outlay for the purchase of the Plaid assets and was $5.3 million higher than
the year earlier level. Excluding this payment, November 30 debt levels were
favorable to last year by $22 million. The Company's guarantee of a $2.5
million industrial development bond assumed by Kuppenheimer is included in long
term debt as a result of Kuppenheimer filing for protection under Chapter 11 of
the United States Bankruptcy Code in August 1996. The $20 million of notes
payable classified as current at November 30, 1996 reflects the anticipated
debt reduction during fiscal 1997 under the Company's long term credit facility
arrangements. Total debt, including short term borrowings and current
maturities, represented 51% of the total $330 million capitalization at
November 30, 1996, compared to 55% at November 30, 1995, with the improvement
principally resulting from the trailing year earnings. Total additional
borrowing availability at November 30, 1996, after reflecting the $27 million
paid for the Plaid assets, was approximately $77 million.
Shareholders' equity of $162.0 million at November 30, 1996 represented $4.85
book value per share compared to $4.11 book value per share at November 30,
1995. The $27.5 million equity increase during 1996 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. Dividends have not been paid since 1991 and no
dividends are anticipated to be declared during fiscal 1997. The current Credit
Facility restricts, but does not prohibit, the payment of dividends.
Considering the impact of inflation, the current value of net assets would be
higher than the Company's $162 million book value after reflecting the
Company's use of LIFO inventory method and increases in the value
12
of the properties since acquisition. Earnings would be lower than reported,
assuming higher depreciation expense without a corresponding reduction in
taxes.
OUTLOOK
Industry conditions stabilized in the second half of 1996. This followed the
unfavorable industry environment prevailing in 1995 and through the first half
of 1996 characterized by generally weak sales of apparel at retail, increasing
retailer bankruptcies and wholesale pricing pressures most affecting the
moderately priced tailored clothing products. This more favorable condition
contributed to the Company's improved second half and full year operating
results compared to 1995 and has continued into early 1997.
As noted previously, the Company purchased substantially all of the license
rights, current assets, properties and operations of Plaid at 1996 fiscal
year-end. The owned and licensed men's tailored clothing brands acquired
include the Burberrys, Evan-Picone, Claiborne, Palm Beach and Brannoch product
lines. It is anticipated that these product lines will generate aggregate
sales in excess of $90 million in fiscal 1997. After considering the
incremental borrowing costs associated with financing the $27 million paid for
the Plaid assets, it is expected that fiscal 1997 cash operating earnings
attributable to the product lines acquired will approximate the borrowing
costs. In subsequent years, the impact is expected to be increasingly
favorable, resulting from the consolidation of production facilities and
reduced general and administrative expenses arising from the integration of
certain functions with those of existing Company operating units.
The Company's preeminent position in tailored clothing has been enhanced by
the brands acquired from Plaid as noted above. Also, recent initiatives in the
Tommy Hilfiger, Perry Ellis and Daniel Hechter brands are expected to
contribute to enhanced revenues. In 1997, the initial tailored clothing
products under the Kenneth Cole label will be delivered. The Company has also
designated sportswear, including golf apparel, as an important source for
revenue and earnings growth. The introduction of Tommy Hilfiger casual slacks
in Fall 1996 has been received favorably by both retailers and consumers.
Deliveries were also initiated in Fall 1996 of the Hickey-Freeman sportswear
line, emphasizing casual dressing for the affluent Hickey-Freeman core
customer, including a separately designed line of sportcoats, slacks, sweaters
and shirts. Hart Schaffner & Marx will be shipping its introductory line of
casual products for the Fall 1997 season, addressing the less formal apparel
needs of its tailored business apparel consumer. In October 1996, the Company
and Robert Comstock, a designer of quality sportswear and leather clothing
products, formed Robert Comstock Apparel, Inc. to design and market products
under the Robert Comstock label, with each party retaining a 50% interest.
Continued growth is anticipated in the golf-inspired collections marketed by
the Bobby Jones division of Hickey-Freeman and the Jack Nicklaus division
following the 15% golfwear sales increase in 1996 compared to 1995. These golf
lines, which include women's apparel marketed under these brand labels, are
well established in pro shops, as well as in fine department and specialty
stores. In the Women's Apparel Group, demand for the Austin Reed women's line
of tailored coats, pants and dresses has been strong, augmented by the
moderately priced Hawksley and Wight line first delivered in Spring 1996.
The current apparel environment has been, and continues to be highly
competitive, characterized by stable or declining wholesale prices. Gross
margin enhancement remains a high priority, and is being addressed through
more effective material purchasing and utilization techniques, improved
manufacturing methods in Company operated production facilities and from a
greater percentage of foreign sourcing. Selling, general and administrative
expenses during 1996 were reduced both in absolute dollars and as percentage
of revenues. While preserving the autonomy of the various marketing companies,
the ongoing programs to leverage resources in the accounting, credit and
information systems areas continue, with the objective of further reducing the
operating expense ratio to sales.
Debt and related interest expense reduction continue as important elements
to enhanced profitability. Excluding the $27 million paid for the Plaid
acquisition at fiscal year-end 1996, total debt declined $22 million compared
to year end 1995 and interest expense decreased $3.2 million from 1995 levels,
principally from the working capital reductions and cash earnings. Interest
savings of approximately $.4 million in 1996 resulted from
13
$14.7 million of public market purchases of the Company's 10 7/8% senior
subordinated debentures utilizing Credit Facility availability; approximately
$9 million of additional debenture repurchases are permitted under the
Company's Credit Facility.
The recent stabilization in industry conditions, the anticipated revenue
growth from acquisitions and product line extensions, and continuing emphasis
on cost control and debt reduction covering all aspects of operations are
expected to collectively contribute to an improved earnings performance in
1997.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Financial Statements:
Report of Independent Accountants........................................ 15
Consolidated Statement of Earnings for the three years ended November 30,
1996.................................................................... 16
Consolidated Balance Sheet at November 30, 1996 and 1995................. 17
Consolidated Statement of Cash Flows for the three years ended November
30, 1996................................................................ 18
Consolidated Statement of Shareholders' Equity for the three years ended
November 30, 1996....................................................... 19
Notes to Consolidated Financial Statements............................... 20
Financial Statement Schedules
Schedule VIII -- Valuation and Qualifying Accounts..................... F-1
Schedules and notes 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).................................. 33
14
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, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Hartmarx Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards 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 the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
January 14, 1997
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.
15
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(000'S OMITTED)
FISCAL YEAR ENDED NOVEMBER 30,
---------------------------------
1996 1995 1994
---------- ---------- ----------
Net sales................................... $ 610,180 $ 595,272 $ 621,847
Licensing and other income.................. 4,263 6,429 7,277
---------- ---------- ----------
614,443 601,701 629,124
---------- ---------- ----------
Cost of goods sold.......................... 463,533 447,414 459,295
Selling, general and administrative
expenses................................... 127,699 132,806 139,720
---------- ---------- ----------
591,232 580,220 599,015
---------- ---------- ----------
Earnings before interest, taxes,
discontinued operation and extraordinary
items...................................... 23,211 21,481 30,109
Interest expense............................ 16,681 19,851 20,988
---------- ---------- ----------
Earnings before taxes, discontinued
operation and extraordinary items.......... 6,530 1,630 9,121
Tax benefit................................. 17,300 19,800 9,992
---------- ---------- ----------
Earnings before discontinued operation and
extraordinary items........................ 23,830 21,430 19,113
---------- ---------- ----------
Discontinued operation:
Operating earnings (loss), net of tax
benefit................................... -- (183) 897
Loss on disposition, net of $.4 million tax
benefit................................... -- (18,100) --
---------- ---------- ----------
-- (18,283) 897
---------- ---------- ----------
Net earnings before extraordinary items..... 23,830 3,147 20,010
Extraordinary items, net.................... 725 -- (3,862)
---------- ---------- ----------
Net earnings................................ $ 24,555 $ 3,147 $ 16,148
========== ========== ==========
Earnings per share:
Continuing operations...................... $ .72 $ .66 $ .59
Discontinued operation..................... -- (.56) .03
---------- ---------- ----------
Before extraordinary items................. $ .72 $ .10 $ .62
========== ========== ==========
After extraordinary items.................. $ .74 $ .10 $ .50
========== ========== ==========
(See accompanying notes to consolidated financial statements)
16
HARTMARX CORPORATION
CONSOLIDATED BALANCE SHEET
(000'S OMITTED)
NOVEMBER 30,
--------------------
1996 1995
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 2,844 $ 5,700
Accounts receivable, less allowance for doubtful
accounts of $9,983 in 1996 and $7,920 in 1995......... 135,554 108,486
Inventories............................................ 165,913 154,898
Prepaid expenses....................................... 4,555 3,471
Recoverable and deferred income taxes.................. 11,600 6,938
--------- ---------
Total current assets................................. 320,466 279,493
--------- ---------
INVESTMENTS AND OTHER ASSETS............................. 22,579 21,438
--------- ---------
DEFERRED INCOME TAXES.................................... 43,285 31,081
--------- ---------
PROPERTIES
Land................................................... 2,628 2,626
Buildings and building improvements.................... 48,758 47,837
Furniture, fixtures and equipment...................... 106,128 98,626
Leasehold improvements................................. 16,767 18,963
--------- ---------
174,281 168,052
Accumulated depreciation and amortization.............. (130,372) (123,428)
--------- ---------
Net properties....................................... 43,909 44,624
--------- ---------
TOTAL ASSETS............................................. $ 430,239 $ 376,636
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable.......................................... $ 20,000 $ 10,000
Current maturities of long term debt................... 100 497
Accounts payable....................................... 40,581 33,877
Accrued payrolls....................................... 19,338 17,276
Other accrued expenses................................. 39,826 27,714
--------- ---------
Total current liabilities............................ 119,845 89,364
--------- ---------
LONG TERM DEBT, less current maturities.................. 148,428 152,781
--------- ---------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value; 2,500,000 authorized
and unissued.......................................... -- --
Common shares, $2.50 par value; authorized 75,000,000;
issued 33,365,317 in 1996 and 32,759,797 in 1995...... 83,413 81,899
Capital surplus........................................ 77,355 76,771
Retained earnings (deficit)............................ 10,471 (14,084)
Unearned employee benefits............................. (9,273) (10,095)
--------- ---------
Shareholders' equity................................... 161,966 134,491
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $ 430,239 $ 376,636
========= =========
(See accompanying notes to consolidated financial statements)
17
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(000'S OMITTED)
FISCAL YEAR ENDED NOVEMBER
30,
----------------------------
1996 1995 1994
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents.
Cash Flows from operating activities:
Net earnings, including discontinued operation
and extraordinary items....................... $ 24,555 $ 3,147 $ 16,148
Reconciling items to adjust net earnings to
net cash provided by operating activities:
Extraordinary items, net..................... (725) -- 3,862
Depreciation and amortization................ 9,269 9,987 13,771
Changes in:
Accounts receivable........................ (8,800) 5,608 5,845
Inventories................................ 16,171 (2,044) 10,471
Prepaid expenses........................... (242) 1,718 7,402
Other assets............................... (187) (5,103) (3,152)
Accounts payable and accrued expenses...... 3,425 11,087 11,381
Taxes and deferred taxes................... (17,316) (21,204) (10,093)
Loss on sale of discontinued operation....... -- 18,100 --
Cash provided by discontinued operation...... -- 392 --
-------- -------- --------
Net cash provided by operating activities........ 26,150 21,688 55,635
-------- -------- --------
Cash Flows from investing activities:
Cash paid for acquisitions..................... (27,993) (3,380) --
Capital expenditures (8,207) (8,441) (7,124)
Cash received re disposition, net of subsidiary
cash.......................................... -- 12,000 --
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... (36,200) 179 (7,124)
-------- -------- --------
Cash Flows from financing activities:
Purchase of $14.7 million principal amount of
10 7/8% Senior Subordinated Debentures, net... (13,037) -- --
Increase (decrease) in notes payable........... 17,810 (21,310) (43,020)
Decrease in other long term debt............... (499) (657) (697)
Other equity transactions...................... 2,920 2,977 3,222
Proceeds from issuance of 10 7/8% Sr. Sub.
Notes, net.................................... -- -- 96,572
Proceeds from Credit Facility financing........ -- -- 132,727
Payment from borrowings under prior financing
agreement..................................... -- -- (235,999)
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 7,194 (18,990) (47,195)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (2,856) 2,877 1,316
Cash and cash equivalents at beginning of year... 5,700 2,823 1,507
-------- -------- --------
Cash and cash equivalents at end of year......... $ 2,844 $ 5,700 $ 2,823
======== ======== ========
Supplemental cash flow information
Net cash paid (received) during year for:
Interest expense............................. $ 16,100 $ 19,000 $ 16,700
Income taxes................................. (2,600) 1,400 800
(See accompanying notes to consolidated financial statements)
18
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(000'S OMITTED)
RETAINED UNEARNED
PAR VALUE OF CAPITAL EARNINGS EMPLOYEE
COMMON STOCK SURPLUS (DEFICIT) BENEFITS
------------ ------- --------- --------
Balance at November 30, 1993......... $79,878 $74,256 $(33,379) $(11,758)
Net earnings for the year.......... 16,148
Issuance of 309,815 shares,
primarily to employee benefit
plans............................. 774 843
Stock options exercised (7,079
shares including 6,250 shares
issued upon exercise of 6,250
$1.00 Director Stock Options)..... 18 22
Issuance of 209,442 shares for
Restricted Stock Awards........... 524 942 (1,466)
Allocation of unearned employee
benefits.......................... 1,565
------- ------- -------- --------
Balance at November 30, 1994......... 81,194 76,063 (17,231) (11,659)
Net earnings for the year.......... 3,147
Issuance of 278,160 shares,
primarily to employee benefit
plans............................. 695 697
Stock options exercised (3,387
shares issued upon exercise of
3,837 $1.00 Director Stock
Options).......................... 10 11
Allocation of unearned employee
benefits.......................... 1,564
------- ------- -------- --------
Balance at November 30, 1995......... 81,899 76,771 (14,084) (10,095)
Net earnings for the year.......... 24,555
Issuance of 473,020 shares,
primarily to employee benefit
plans............................. 1,183 992
Long-term incentive plan awards for
132,500 shares.................... 331 456 (787)
Allocation of unearned employee
benefits.......................... (864) 1,609
------- ------- -------- --------
Balance at November 30, 1996......... $83,413 $77,355 $ 10,471 $ (9,273)
======= ======= ======== ========
(See accompanying notes to consolidated financial statements)
19
HARTMARX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation--The Company and its subsidiaries (the
"Company") are engaged in the manufacturing and marketing of quality men's and
women's apparel to independent retailers and through catalog sales. 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, as such, 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.
Revenue Recognition--Sales are recognized at the time the order is shipped.
Catalog sales are net of expected returns and exclude sales taxes.
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, 1996 and 1995, approximately 49% and 42% of the Company's total
inventories, respectively, 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
and 3 to 15 years for furniture, fixtures and equipment. 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.
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. Recognition of advertising
costs is in conformance with the provisions of The American Institute of
Certified Public Accountants Statement of Position 93-7, Reporting of
Advertising Costs. Advertising costs of $19.5 million in 1996, $21.7 million
in 1995 and $18.8 million in 1994 are included in the accompanying Statement
of Earnings. Prepaid expenses at November 30, 1996 includes deferred
advertising costs of $1.2 million ($2.1 million at November 30, 1995), which
will be reflected as an expense during the quarterly period benefited.
20
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 principal 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 is made available
to non-union retired employees and eligible dependents. Approximately 170
retired employees are currently participating. Employees who were participating
in and eligible to receive medical benefits under the Hartmarx Group Life
Insurance, Medical and Dental Plan, and were also participating in the Hartmarx
Savings-Investment Plan and the Hartmarx Retirement Income Plan at the time of
retirement are eligible to participate in the plan. Retirees who elect to
receive coverage make contributions which offset the cost of the retiree plan.
Effective December 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106--Employers' Accounting for Postretirement Benefits
Other Than Pensions. Adoption of the statement had no impact on cash flows and
there was no effect on either net income or shareholders' equity.
Other Post-Employment Benefits--Effective December 1, 1994, the Company
adopted Statement of Financial Accounting Standards No. 112--Employers'
Accounting for Postemployment Benefits. As the Company's accounting practices
were substantially consistent with the provisions of this statement, adoption
did not impact financial condition or results of operations. Post-employment
benefit expense was not significant in any of the three years ended November
30, 1996.
Stock Options--When stock options are exercised, common stock is credited for
the par value of shares issued and capital surplus is credited with the
consideration in excess of par. For stock appreciation rights, compensation
expense is recognized on the aggregate difference between the market price of
the Company's stock and the option price only when circumstances indicate that
the right, and not the option, will be exercised. Compensation expense related
to restricted stock awards is recognized over the vesting period. For director
stock options and director deferred stock awards, compensation expense is
recognized at the date the option is granted or the award is made to the
outside director. In 1996, the Company adopted the disclosure provision of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. As permitted under this Statement, the Company retained its
current method of accounting for stock compensation.
Concentrations of Credit Risk and Financial Instruments--Financial
instruments which subject the Company to credit risk are primarily trade
accounts receivable. Concentrations of credit risk with respect to trade
accounts receivable are limited 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 largest customer represented approximately 18% and 16% of consolidated
sales in 1996 and 1995, respectively. Accounts receivable from this customer
represented approximately 10% and 7% of the Company's gross accounts receivable
at November 30, 1996 and 1995, respectively.
The Company also utilizes forward purchase contracts to limit the currency
risks associated with purchase obligations denominated in foreign currencies.
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.
The Company has entered into interest rate protection agreements from time to
time based on management's assessment of market conditions; however, none were
in effect at November 30, 1996 and 1995. In 1996 and 1995, no payments were
made or received relating to interest rate protection agreements and payments
made or received relating to the interest rate protection agreements in effect
during fiscal 1994 were not significant.
Per Share Information--The computation of earnings or loss per share in each
year is based on the weighted-average number of common shares outstanding. When
dilutive, stock options and warrants are included as share equivalents using
the treasury stock method. The number of shares used in computing the earnings
per share was 33,021,000 in 1996, 32,631,000 in 1995 and 32,243,000 in 1994.
21
ACQUISITIONS
On November 26, 1996, a wholly-owned subsidiary of the Company purchased
substantially all of the license rights, current assets, properties and
operations of the Plaid Clothing Group, Inc. and its subsidiaries ("Plaid")
pursuant to an Asset Purchase Agreement ("Agreement"). Plaid has been operating
as a debtor-in-possession under Chapter 11 of the United States Bankruptcy Code
since July 17, 1995.
Consideration for the assets acquired consisted of a cash payment of $27.1
million, assumption of $7.1 million of accounts payable and other scheduled
accrued liabilities, a future royalty payment of 2% of the first year sales of
certain product categories acquired in the transaction, less $.5 million, and
certain other payments described in the Agreement. The cash paid for the assets
purchased was made from available borrowing capacity under the Company's
existing revolving credit facility which is in effect through July, 2000.
Plaid's unsecured creditors will also receive the proceeds resulting from the
potential to exercise a five year warrant to purchase 400,000 shares of the
Company's common stock, exercisable at $5.50 per share, and the sale of the
underlying shares, pursuant to a formula to be determined by the creditors'
committee of Plaid.
The acquired assets included license rights to manufacture and market men's
tailored suits, sportcoats and slacks under the Burberrys, Claiborne and Evan-
Picone brands, as well as ownership of the Palm Beach, Brannoch and other trade
names. The inventory and receivables associated with the above described brands
and trade names were also purchased along with production, warehouse and
distribution facilities.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed or anticipated based on fair
values at the acquisition date. The excess of the fair values of the net assets
less liabilities assumed and anticipated over the purchase price will be
amortized on a straight line basis over five years. As the purchase was
completed as of the end of the Company's 1996 fiscal year, no results of
operations for the Plaid assets acquired are includable in the Statement of
Earnings for 1996. The following pro forma information has been prepared
assuming that the acquisition of assets had taken place at the beginning of the
respective periods along with adjustments for depreciation expense,
amortization of negative goodwill and interest expense that would have been
incurred to finance the acquisition. The pro forma information reflects only
the revenues, cost of goods sold and operating expenses related to the product
lines acquired from Plaid for the respective years, as Plaid's historical
results also included restructuring, bankruptcy and other related expenses and
liabilities. The same net tax benefit rate reflected in the historical
financial statements has been used in the determination of pro forma results.
The pro forma financial information does not purport to be indicative of
Hartmarx' results of operations that would actually have been obtained had the
transaction been completed on the assumed dates, or to project Hartmarx'
results of operations at any future date or for any future period (amounts in
millions):
YEAR ENDED NOVEMBER 30 (UNAUDITED) 1996 1995
---------------------------------- ------ ------
Sales..................................................... $713.1 $740.8
Earnings from continuing operations, before discontinued
operation and extraordinary item......................... 19.9 10.4
Net earnings (loss)....................................... 20.6 (7.9)
Earnings (loss) per share:
Continuing operations................................... .60 .32
After discontinued operation and extraordinary item..... .62 (.24)
In October 1996, the Company, along with an unaffiliated entity, formed
Robert Comstock Apparel, Inc. ("Comstock") which purchased certain receivables
and inventory aggregating approximately $1 million from a corporation owned by
Robert Comstock, a designer of quality sportswear and leather clothing. The
Company and Robert Comstock each retain a 50% interest in Comstock. During
1995, the Company acquired a slack
22
manufacturing facility in Mexico and a coat and slack manufacturing factory in
Costa Rica. The activities of these facilities since the respective date of
acquisition are included in the accompanying financial statements. Pro forma
results of operations have not been presented related to these transactions as
the effects of these acquisitions were not significant.
SALE OF SUBSIDIARY
On July 27, 1995, the Company sold the capital stock of Kuppenheimer, its
vertically integrated factory direct-to-consumer business. The Company received
$12 million cash at closing and under the terms of the Agreement, an additional
$2 million plus interest is due, payable in specified amounts through May 1,
1999. In connection with the Company's ongoing guaranty of a $2.5 million
industrial development bond retained by Kuppenheimer, the purchaser has issued
a separate $2.5 million note for the purchase of associated real estate secured
by a first mortgage on that property. Kuppenheimer's operating results for 1995
and 1994, net of tax benefit, have been reflected as a discontinued operation
in the accompanying Consolidated Statement of Earnings. Discontinued operation
also reflects a loss on disposition of $18.1 million, net of tax benefit,
representing the loss on the sale of stock, expenses directly related to the
disposition and operating losses from the measurement date to the disposition
date. In August 1996, Kuppenheimer filed for protection under Chapter 11 of the
United States Bankruptcy Code. As a result, the Company's ongoing guarantee of
the $2.5 million IDB has been included in long-term debt at November 30, 1996.
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 $25 million letter of credit facility) secured by eligible
inventories, accounts receivable and the intangibles of the Company and its
subsidiaries. Proceeds from these two transactions ("1994 Refinancing") were
utilized to repay $236 million of borrowings then outstanding related to the
Company's principal lending facility then in effect. The prior facility was
terminated upon completion of the Notes and Credit Facility transactions and an
extraordinary charge of $3.9 million, net of a $.1 million tax benefit, was
recorded in the second fiscal quarter of 1994 representing the loss from early
extinguishment of the prior debt.
Credit Facility amendments in July 1995, November 1995, and January 1996,
among other things, resulted in a reduction in fees, administrative charges,
and effective borrowing rates, adjustment of certain covenants and the
extension of the term from March 1997 to July 2000. 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 rates selected by the Company which are either
(i) LIBOR plus 1.75% or (ii) 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 contain various restrictive covenants
pertaining to minimum net worth, additional debt incurrence, capital
expenditures, asset sales, operating leases, and ratios relating to minimum
accounts payable to inventory, maximum funded debt to 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 the above noted covenants.
During fiscal 1996, the Company purchased $14.7 million face value of its
Notes (substantially all of which occurred in the first quarter) at a discount,
resulting in an extraordinary gain of $.7 million or $.02 per share, net of $.4
million tax provision.
23
At November 30, 1996 and 1995, long term debt, less current maturities,
comprised the following (000's omitted):
1996 1995
-------- --------
Notes payable.......................................... $ 63,400 $ 45,590
10 7/8% Senior Subordinated Notes, net................. 84,909 99,470
Industrial development bonds........................... 17,487 17,853
Other debt............................................. 2,732 365
-------- --------
168,528 163,278
Less--current maturities............................... 20,100 10,497
-------- --------
Long term debt......................................... $148,428 $152,781
======== ========
Industrial development bonds, 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 $10.6 million at
November 30, 1996. Interest rates on the various borrowing agreements range
from 5.0% to 8.5% (average of 7.4% at November 30, 1996 and 7.5% at November
30, 1995). 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 Kuppenheimer, which is due September 1, 2007. Interest rates ranged
from 8% to 11.5% per annum (average of 8.5% at November 30, 1996 and 8.7% at
November 30, 1995).
Accrued interest included in the Other Accrued Expenses caption in the
accompanying balance sheet was $4.7 million at November 30, 1996 and $5.2
million at November 30, 1995.
The approximate principal reductions required during the next five fiscal
years, including reductions under the Credit Facility which expires in 2000,
are as follows: $.1 million in 1997; $.1 million in 1998; $.1 million in 1999;
$63.5 million in 2000; $.1 million in 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 the 1994 Refinancing, 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
has been reduced for the amount representing unearned employee benefits. As
part of the 1994 Refinancing, 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 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):
1996 1995 1994
------ ------ ------
Principal payments.................................. $1,002 $ 911 $ 526
Interest payments................................... 1,042 1,133 1,171
------ ------ ------
Total loan payments made by ESOP.................... $2,044 $2,044 $1,697
====== ====== ======
As of November 30, 1996, 315,065 of the 620,155 shares of common stock have
been allocated to the accounts of the ESOP participants.
24
NOTES PAYABLE
The following summarizes information concerning notes payable (000's
omitted):
1996 1995 1994
------- ------- --------
Outstanding at November 30................... $63,400 $45,590 $ 66,900
Maximum month end balance during the year.... 83,500 93,821 158,635
Average amount outstanding during the year... 60,700 72,300 112,900
Weighted daily average interest rate during
the year.................................... 7.4% 8.5% 7.5%
Weighted average interest rate on borrowings
at November 30.............................. 7.9% 7.5% 8.2%
INVENTORIES
Inventories at fiscal year end were as follows (000's omitted):
NOVEMBER 30,
--------------------------
1996 1995 1994
-------- -------- --------
Raw materials.................................. $ 49,248 $ 39,617 $ 42,296
Work in process................................ 25,151 21,687 29,015
Finished goods................................. 91,514 93,594 112,036
-------- -------- --------
$165,913 $154,898 $183,347
======== ======== ========
The excess of current cost over LIFO costs for certain inventories was $34.9
million at November 30, 1996, $34.8 million at November 30, 1995 and $32.7
million at November 30, 1994.
TAXES ON EARNINGS
The tax benefit (provision) is summarized as follows (000's omitted):
1996 1995 1994
------- ------- -------
Federal........................................ $ 881 $ 833 $ 375
State and local................................ (285) (106) (231)
------- ------- -------
Total current................................ 596 727 144
------- ------- -------
Federal........................................ (3,196) (1,527) (3,512)
State and local................................ -- -- --
------- ------- -------
Total deferred............................... (3,196) (1,527) (3,512)
------- ------- -------
Change in valuation allowance.................. 19,900 20,600 13,360
------- ------- -------
Total tax benefit............................ $17,300 $19,800 $ 9,992
======= ======= =======
The difference between the tax benefit 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):
1996 1995 1994
------- ------- -------
Income from continuing operations............. $ 6,530 $ 1,630 $ 9,121
======= ======= =======
Tax provision computed at statutory rate...... $(2,220) $ (554) $(3,101)
State and local taxes on earnings, net of
federal tax benefit.......................... (188) (70) (155)
Change in valuation allowance................. 19,900 20,600 13,360
Other--net.................................... (192) (176) (112)
------- ------- -------
Total tax benefit........................... $17,300 $19,800 $ 9,992
======= ======= =======
25
A portion of the Company's deferred tax assets are reserved 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
assets recorded consider amounts recoverable from carrying back operating
losses to prior years, 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).
In fiscal 1996, 1995 and 1994, $2.6 million, $.8 million and $3.4 million,
respectively, of the valuation allowance offsetting the deferred tax asset
associated with pre-tax income for financial reporting, was reversed. The
Company reevaluated its deferred income tax asset and reversed additional
valuation allowance related to this asset of $17.3 million, $19.8 million and
$10.0 million in the fourth quarters of 1996, 1995 and 1994, respectively. The
valuation allowance offsetting the deferred tax asset will continue to be
evaluated in future periods.
At November 30, 1995, the Company had a net deferred tax asset of $35.7
million comprised of deferred tax assets of $94.0 million less deferred tax
liabilities aggregating $23.4 million and a $34.9 million valuation allowance.
The principal deferred tax assets included $4.3 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), operating loss
carryforwards of $65.0 million, alternative minimum tax credit carryforwards
("AMT") of $4.8 million, and $19.4 million attributable to expenses deducted in
the financial statements not currently deductible for tax purposes. Deferred
tax liabilities included excess tax over book depreciation of $2.4 million and
$10.2 million related to employee benefits, principally pensions.
At November 30, 1996, the Company had a net deferred tax asset of $54.0
million comprised of deferred tax assets of $94.1 million less deferred tax
liabilities aggregating $25.1 million and a $15.0 million valuation allowance.
The principal deferred tax assets included $5.0 million attributable to TRA
items, net operating loss carryforwards of $59.2 million, AMT credit
carryforwards of $5.0 million, and $24.9 million attributable to expenses
deducted in the financial statements not currently deductible for tax purposes.
Deferred tax liabilities included excess tax over book depreciation of $2.3
million and $11.1 million related to employee benefits, principally pensions.
As of November 30, 1996, the Company had approximately $169 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. The $5.0 million of AMT tax credit carryforwards can be carried forward
indefinitely.
LEASES
The Company and its subsidiaries lease office, manufacturing,
warehouse/distribution, showroom 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, 1996, total minimum rentals under noncancellable operating
leases were as follows (000's omitted):
YEARS AMOUNT
----- -------
1997............................. $ 6,416
1998............................. 5,691
1999............................. 5,229
2000............................. 4,060
2001............................. 2,468
Thereafter....................... 13,603
-------
Total minimum rentals due........ $37,467
=======
26
Rental expense, including rentals under short term leases, aggregated $10.3
million, $11.1 million and $12.8 million in fiscal 1996, 1995 and 1994,
respectively.
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.
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, covering most of its union employees. The
contribution rate of applicable payroll is based on the actuarially
recommended amount necessary to fund the costs of the benefits. Pension costs
relating to multi-employer plans were approximately $7.9 million in 1996, $8.5
million in 1995 and $8.7 million in 1994. 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 is
substantially in excess of the plan assets currently available for such
benefits; if current actuarial assumptions are realized, including those
relating to contractions in contributions by participating employers, the
ratio of assets to liabilities would increase so that plan assets would
eventually be sufficient to cover the accumulated benefit obligation.
The employer participants in this underfunded multi-employer plan along with
the Union of Needletrades, Industrial & Textile Employees 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 benefits 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 and is being 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%. During fiscal 1996, approximately $6.3 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 $65 million as
of November 30, 1996. In the event of a funding deficiency occurring in the
future, a net withdrawal liability and corresponding prepaid asset would be
established at that time, and the annual expense reflected in the statement of
earnings thereafter would not be expected to exceed the current amount.
The principal Company sponsored pension plan is a non-contributory defined
benefit pension plan covering substantially all eligible non-union employees.
Certain of the Company's subsidiaries have other defined benefit and
contribution plans, in which the aggregate expense was nominal in 1996, 1995
and 1994. Under the principal pension plan, 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. 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 an unfunded
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.
It is the Company's policy to fund the plans on a current basis to the
extent deductible under existing tax laws and regulations. Such contributions
are intended to provide for benefits attributed to service to date and also
for those expected to be earned in the future.
27
Pension data covering the principal plan for the three years ended November
30, 1996 included the following components in accordance with Statement of
Financial Accounting Standards No. 87--Employers' Accounting for Pensions
(000's omitted):
1996 1995 1994
-------- -------- --------
Service cost--benefits earned during the
period................................... $ (3,273) $ (3,250) $ (4,309)
Interest cost on projected benefit
obligation............................... (7,995) (7,851) (7,467)
Return on plan assets..................... 28,537 33,058 (179)
Net amortization and deferral............. (15,082) (18,534) 15,376
-------- -------- --------
Net periodic pension income............... $ 2,187 $ 3,423 $ 3,421
======== ======== ========
The above amounts are prior to consideration of the periodic pension expense
related to the benefits provided on an unfunded basis of $1.3 million in 1996,
$.9 million in 1995, and $1.5 million in 1994.
The Company sold its Kuppenheimer business in July 1995 and the accrual of
further pension benefits related to Kuppenheimer employees ceased as of the
sale date. This event qualified as a curtailment under the provisions of
Statement of Financial Accounting Standards No. 88. The projected benefit
obligation exceeded the accumulated benefit obligation for employees of
Kuppenheimer and, accordingly, a pre-tax pension gain of $1.5 million was
recorded and included in the determination of the loss on sale of discontinued
operation.
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, 1996, the plan assets included 519,612 shares of
the Company's stock with a market value of $2.7 million.
The following sets forth the funded status of the principal pension plan at
November 30 (000's omitted):
NOVEMBER 30,
--------------------
1996 1995
--------- ---------
Actuarial present value of benefit obligations:
Vested benefits.................................. $ (96,497) $ (98,213)
Non-vested benefits.............................. (385) (418)
--------- ---------
Accumulated benefit obligation................... (96,882) (98,631)
Effect of projected future compensation levels... (11,608) (12,499)
--------- ---------
Projected benefit obligation....................... (108,490) (111,130)
Plan assets, at fair value....................... 173,801 153,053
--------- ---------
Plan assets in excess of projected benefit
obligation...................................... 65,311 41,923
Unrecognized net gain............................ (34,357) (12,568)
Unrecognized prior service cost.................. (942) (1,044)
Unrecognized net transition asset................ -- (364)
--------- ---------
Prepaid pension cost........................... $ 30,012 $ 27,947
========= =========
The weighted average discount rate used in determining the projected benefit
obligation was 8.00% in 1996 and 7.25% in 1995. The assumed rate of increase in
future compensation levels was 5.5% in 1996 and 1995, and the expected long
term rate of return on the Company sponsored plan assets was 8.75% in 1996 and
1995.
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
28
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 invested in
common stock of the Company, although 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. The employer contribution is
one-fourth of the first 1% of earnings contributed by the employee plus one-
twentieth thereafter. 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 $1.3 million in 1996,
$2.1 million in 1995 and $2.3 million in 1994. The Company's annual
contributions in those respective years were $2.1 million, $2.1 million and
$2.3 million. At November 30, 1996, the assets of SIP and ESOP funds had a
market value of approximately $49.1 million, of which approximately $11.3
million was invested in 2,116,909 shares of the Company's common stock.
In 1995, the Company adopted Emerging Issues Task Force 93-6 relating to
ESOP accounting. Adoption of this statement had no material effect on either
net income or shareholders' equity.
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. Retirees, who elect to
receive the coverage, make contributions, which offset the cost of the retiree
plan.
STOCK PURCHASE RIGHTS
On December 6, 1995, the Company's Board of Directors approved a new
Stockholder Rights Plan, which took effect immediately upon the expiration of
the then existing Rights on January 31, 1996. A dividend of one Right per
common share was distributed to stockholders of record January 31, 1996. 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. This dividend distribution of the
Rights was not taxable to the Company or its stockholders.
Separate certificates for Rights will not be distributed, nor will the
Rights be exercisable, unless a person or group acquires 15 percent or more,
or announces an offer that could result in acquiring 15 percent or more, of
the Company's common shares. Following an acquisition of 15 percent or more of
the Company's common shares (a "Stock Acquisition"), each Right holder, except
the 15 percent or more 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 15 percent or more 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 a 15 percent 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.
29
STOCK OPTION PLANS AND RESTRICTED STOCK
The Company has in effect stock option plans under which officers, key
employees and directors may be granted options to purchase the Company's common
stock at prices equal to or exceeding the fair market value at date of grant.
Generally, options under the 1985 Stock Option Plan are exercisable to the
extent of 25% each year (cumulative) from the second through the fifth year,
and expire ten years after date of grant; however, all or any portion of the
shares granted are exercisable during the period beginning one year after date
of grant for participants employed by the Company for at least five years.
Options granted under the 1988 Stock Option 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 may be made under the 1985 Plan, and no additional
grants will be made under the 1988 Plan. Following the stockholder adoption of
the 1995 Incentive Stock Plan ("1995 Plan"), shares covered by grants or awards
under the terms of the 1985 or 1988 Plans which terminate, lapse or are
forfeited on or after April 13, 1995, will be added to the aggregate number of
shares authorized under the 1995 Plan and will be made available for grants
under the 1995 Plan. Options granted under the 1995 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 Plan and the 1995 Plan 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 is limited to one-half the gain. When options
and stock appreciation rights are granted in tandem, the exercise of one
cancels the other. The 1995 Plan also allows 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.
The 1995 Stock Plan for Non-Employee Directors ("Director Plan") provides for
an 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 to 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. Each non-employee director is also eligible
for an annual grant of a Director Deferred Stock Award ("DDSA") equal to 150
DDSA units, with a unit equal to 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. During fiscal 1996, 44,062 DSOs and DDSAs
were granted, and 450 DDSAs were exercised. At November 30, 1996, 313,986 DSOs
and DDSAs were outstanding and 213,975 shares were available for future DSOs
and DDSAs. At November 30, 1995, 270,374 DSOs and DDSAs were outstanding.
Stock options outstanding at November 30, 1996 included 80,166 shares granted
in tandem with stock appreciation rights. Options for 1,712,812 shares were
exercisable at November 30, 1996 at prices ranging from $5.25 to $30.81. At
November 30, 1996, 2,547,845 shares were reserved for options and restricted
stock awards outstanding and 517,469 shares were available for future stock
options and/or restricted stock awards (701,563 at November 30, 1995).
In 1996, long term incentive plan restricted stock awards for 132,500 shares
were made to 20 executives. These awards vest at the earliest of ten years from
date of grant, age 65 retirement, the Company stock price exceeding $9.00 for
thirty consecutive days or as otherwise authorized by the Compensation
Committee of the Board of Directors. Expense is being recognized over the
anticipated vesting period of the awards.
Information regarding employee stock option activity for the three years
ended November 30, 1996 is as follows:
30
NUMBER OF
SHARES PRICE PER SHARE
--------- ---------------
Balance at November 30, 1993.................. 1,025,791 $5.25 to $30.81
Granted..................................... 467,700 $5.56 to $ 6.81
Exercised................................... (829) $5.25
Expired or terminated....................... (40,862) $5.25 to $30.25
---------
Balance at November 30, 1994.................. 1,451,800 $5.25 to $30.81
Granted..................................... 994,500 $5.25
Expired or terminated....................... (182,132) $5.25 to $30.81
---------
Balance at November 30, 1995.................. 2,264,168 $5.25 to $30.81
Granted..................................... 249,000 $5.94
Expired or terminated....................... (97,823) $5.25 to $30.81
---------
Balance at November 30, 1996.................. 2,415,345 $5.25 to $30.81
=========
In 1996, the Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock Based Compensation". As permitted under this statement,
the Company retained its current method of accounting for stock compensation.
Following is information related to stock option grants and awards under the
1995 Incentive Stock Plan and 1995 Director Plan.
1996 1995
------- -------
1995 Incentive Plan
Options granted......................................... 249,000 994,500
Restricted stock awards................................. 132,500 --
1995 Director Plan........................................ 42,862 65,313
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 (22% to 32%), 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 (5.33% to 7.21%). 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):
1996 1995
------ ------
Additional compensation expense............................ $ 1.5 $ .5
Pro forma net earnings, before discontinued operation and
extraordinary item........................................ 22.9 21.1
Pro forma earnings per share, before discontinued operation
and extraordinary item.................................... .69 .65
LEGAL PROCEEDINGS
Certain litigation involving the Company, as described in "Item 3--Legal
Proceedings", has been concluded. The Company is involved in various other
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.
OPERATING SEGMENT INFORMATION
The Company is engaged in the business of manufacturing and marketing of
men's and women's apparel. The Company's businesses currently consist of the
following groups: Men's Apparel Group, which designs, manufactures and markets
tailored clothing, slacks and sportswear to retailers for resale to consumers;
and
31
Women's Apparel Group, comprised of International Women's Apparel, which
markets women's career apparel and sportswear to department and specialty
stores, and Barrie Pace, a direct mail catalog marketer of apparel and
accessories. The Kuppenheimer business was sold in July 1995 and is reflected
in the accompanying statement of earnings as a discontinued operation.
Information on the Company's operations for the three years ended November
30, 1996 is summarized as follows (in millions):
1996
------------------------------
MEN'S WOMEN'S
APPAREL APPAREL
GROUP GROUP ADJ. CONSOL.
------- ------- ----- -------
Sales...................................... $559.1 $51.1 -- $610.2
Earnings (loss) before taxes............... 30.3 3.6 (27.4) 6.5
Gross assets at year end................... 328.8 21.3 80.1 430.2
Depreciation and amortization.............. 7.4 0.4 0.5 8.3
Property additions......................... 7.8 0.2 0.2 8.2
1995
------------------------------
MEN'S WOMEN'S
APPAREL APPAREL
GROUP GROUP ADJ. CONSOL.
------- ------- ----- -------
Sales...................................... $547.1 $48.2 -- $595.3
Earnings (loss) before taxes............... 32.1 (1.3) (29.2) 1.6
Gross assets at year end................... 294.0 19.5 63.1 376.6
Depreciation and amortization.............. 7.7 0.6 0.3 8.6
Property additions......................... 7.5 0.1 0.8 8.4
1994
------------------------------
MEN'S WOMEN'S
APPAREL APPAREL
GROUP GROUP ADJ. CONSOL.
------- ------- ----- -------
Sales...................................... $569.6 $52.2 -- $621.8
Earnings (loss) before taxes............... 46.3 (4.1) (33.1) 9.1
Gross assets at year end................... 294.0 25.1 73.1 392.2
Depreciation and amortization.............. 8.6 .6 0.2 9.4
Property additions......................... 5.2 .2 1.7 7.1
Operating expenses incurred by the Company in generating sales are charged
against the respective segment's sales; indirect operating expenses are
allocated to the segments benefited. Segment results exclude any allocation of
general corporate expense, interest expense or income taxes.
Amounts included in the "adjustment" column for earnings before taxes consist
of interest expense for continuing operations and general corporate expenses.
Adjustments of gross assets are for cash, recoverable and deferred income
taxes, corporate properties, investments and other assets, and gross assets
related to Kuppenheimer at November 30, 1994. Adjustments of depreciation and
amortization and net property additions are for corporate properties and
property additions related to Kuppenheimer for 1994.
32
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Selected quarterly financial and common share information for each of the
four quarters in fiscal 1996 and 1995 is as follows (000's omitted):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
1996 (1)
--------
Sales.............................. $150,859 $134,253 $164,905 $160,163
Gross profit....................... 33,874 32,096 38,684 41,993
Net earnings (loss) before
extraordinary gain................ (1,595) (1,740) 3,131 24,034
Net earnings (loss)................ (934) (1,676) 3,131 24,034
Earnings (loss) per share:
continuing operations............. (.05) (.05) .09 .73
after extraordinary gain.......... (.03) (.05) .09 .73
1995 (2)
--------
Sales.............................. $149,283 $135,029 $166,659 $144,301
Gross profit....................... 36,707 33,169 39,203 38,779
Net earnings (loss) before
discontinued operation............ 58 (2,990) 2,175 22,187
Net earnings (loss)................ 135 (21,350) 2,175 22,187
Earnings (loss) per share:
continuing operations............. -- (.09) .07 .68
discontinued operation............ -- (.56) -- --
net............................... -- (.65) .07 .68
- --------
(1) The first quarter and second quarter of 1996 include a $.7 million or $.02
per share and $.1 million, respectively, extraordinary gain related to the
purchase of 10 7/8% Senior Subordinated Debentures.
(2) The second quarter of 1995 includes a loss of $18.3 million or $.56 per
share related to the disposition of Kuppenheimer.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 5 of the Proxy Statement for the 1997 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 Form 10-K Annual Report.
ITEM 11--EXECUTIVE COMPENSATION
Information contained under the caption "Executive Officer Compensation" on
pages 6 to 9 and "Information about Nominees for Directors" on pages 2 to 5 of
the Proxy Statement for the 1997 Annual Meeting is incorporated herein by
reference.
33
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained in the Proxy Statement for the 1997 Annual Meeting
under the captions "Information About Nominees for Directors" on pages 2 to 5
and "Ownership of Common Stock" on pages 14 to 15 is incorporated herein by
reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained in the Proxy Statement for the 1997 Annual Meeting
under the caption "Information About Nominees for Directors" on pages 2 to 5
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 14 are filed as part of
this Annual Report.
(a)(2) Financial Statement Schedules
Financial Statement Schedules for Hartmarx Corporation listed in the
Index to Financial Statements and Supplementary Data on page 14 are filed
as part of this Annual Report.
PAGE
----
Consent of Independent Accountants...................................... F-1
(a)(3) Index to Exhibits................................................ 35
(b) Reports on Form 8-K
(1) A Form 8-K was filed on October 18, 1996 announcing the Registrant
had signed a letter of intent to purchase substantially all of the current
assets, operations and licenses of Plaid Clothing Group, Inc.
(2) A Form 8-K was filed on December 10, 1996 announcing that on November
26, 1996 a wholly-owned subsidiary of the Registrant had acquired
substantially all of the license rights, current assets and operations of
the Plaid Clothing Group, Inc.
(3) A Form 8-K/A was filed on February 10, 1997 amending the Form 8-K
filed on December 10, 1996 to include financial statements of business
acquired and pro forma financial information in accordance with Item 7 of
Form 8-K.
34
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 (S)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 (Exhibit 3-B to Form 10-K for the year ended
November 30, 1995), (1).
*4-A Rights Agreement, dated as of December 6, 1995, 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 December 29, 1995), (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 Credit Agreement, dated as of March 23, 1994, among the Company, the Lenders
listed therein and General Electric Capital Corporation, as Managing Agent and
Collateral Agent (Exhibit 4-E to Form 10-Q for the quarter ended February 28,
1994), (1).
*4-C-1 Amendment No. 1 dated August 26, 1994 to the Credit Agreement (Exhibit 4-E-1 to
Form 10-Q for the quarter ended August 31, 1994), (1).
*4-C-2 Amendment No. 2 dated March 20, 1995 to the Credit Agreement (Exhibit 4-E-2 to
Form 10-Q for the quarter ended May 31, 1995), (1).
*4-C-3 Amendment No. 3 dated July 6, 1995 to the Credit Agreement (Exhibit 4-E-3 to Form
10-Q for the quarter ended May 31, 1995), (1).
*4-C-4 Amendment No. 4 dated November 30, 1995 to the Credit Agreement (Exhibit 4-C-4 to
Form
10-K for the year ended November 30, 1995), (1).
*4-C-5 Amendment No. 5 dated January 30, 1996 to the Credit Agreement (Exhibit 4-C-5 to
Form 10-K for the year ended November 30, 1995), (1).
*9-A Stockholders Agreement, dated as of September 20, 1992, between the Company and
Traco International, N.V. (Exhibit 9-A to Form 10-K for the year ended November
30, 1992), (1).
35
EXHIBIT
NO.
AND
APPLICABLE
SECTION OF
601 OF
REGULATION
S-K
----------
*9-A-1 Amendment to Stockholders Agreement, dated as of December 30, 1992 (Exhibit 9-A-1
to Form 10-K for the year ended November 30, 1995), (1).
*10-A 1995 Incentive Stock Plan (Exhibit A to Proxy Statement of the Company relating to
the 1995 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 AND STOCK OPTION COMMITTEE--
Executive Compensation Program--Short-Term Incentives" on page 11 in the Proxy
Statement of the Company relating to the 1997 Annual Meeting), (1).**
*10-C Description of Hartmarx Long Term Incentive Plan (Information to be included under
the caption "REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE--Executive
Compensation Program--Long-Term Incentives" on page 11 in the Proxy Statement of
the Company relating to the 1997 Annual Meeting), (1).**
*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 and Brenner (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 and Brenner (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.**
10-F-2 Employment Agreement dated August 1, 1996 between the Company and Homi B. Patel.**
10-F-3 Employment Agreement dated August 1, 1996 between the Company and Mary D. Allen.**
10-F-4 Employment Agreement dated August 1, 1996 between the Company and Glenn R.
Morgan.**
*10-F-5 Employment Agreement between the Company and Wallace L. Rueckel (Exhibit 10-F-7 to
Form
10-K for the year ended November 30, 1993), (1).**
10-G-1 Severance Agreement dated August 1, 1996 between the Company and Elbert O. Hand.**
10-G-2 Severance Agreement dated August 1, 1996 between the Company and Homi B. Patel.**
10-G-3 Severance Agreement dated August 1, 1996 between the Company and Mary D. Allen.**
10-G-4 Severance Agreement dated August 1, 1996 between the Company and Glenn R.
Morgan.**
36
EXHIBIT
NO.
AND
APPLICABLE
SECTION OF
601 OF
REGULATION
S-K
----------
*10-G-5 Form of Severance Agreement between the Company and Executive Officers Frank A.
Brenner and James E. Condon (Exhibit 10-F-5 to Form 10-K for the year ended
November 30, 1993), (1).**
*10-G-6 Form of Amendment to Severance Agreement between the Company and Executive
Officers Frank A. Brenner and James E. Condon (Exhibit 10-F-6 to Form 10-K for the
year ended November 30, 1994), (1).**
*10-H Form of Indemnity Agreement between the Company and Directors Abboud, Bakhsh,
Cole, Farley, Hand, Jacobs, Marshall, Patel, Rohlfs and Scott (Exhibit 10-G-1 to
Form 10-K for the year ended November 30, 1993), (1).**
*10-I Deferred Compensation Plan effective January 1, 1996 (Exhibit 10-I to Form 10-K
for the year ended November 30, 1995), (1).**
*10-J-1 Stock Purchase Agreement, dated as of May 8, 1995, among the Company, Kupp
Acquisition Corp. and Kuppenheimer Manufacturing Company, Inc. (Exhibit 2 to Form
8-K filed August 11, 1995), (1).**
*10-J-2 Asset Purchase Agreement dated November 5, 1996 among HMX/PBP Company, Hartmarx
Corporation and Plaid Clothing Group, Inc. and certain affiliates (Exhibit 2.1 to
Form 8-K filed December 10, 1996), (1).
*10-J-3 Amendment No. 1, dated November 26, 1996 to the Asset Purchase Agreement (Exhibit
2.2 to Form 8-K filed December 10, 1996), (1).
12 Statement of Computation Ratios.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants included on page F-1 of this Form 10-K.
24 Powers of Attorney, as indicated on page 38 of this Form 10-K.
27 Financial Data Schedules.
99 Forward Looking Statements.
- --------
*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.
37
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/ Mary D. Allen
By: _________________________________ and By: _________________________________
Glenn R. Morgan Mary D. Allen
Executive Vice President and Chief Executive Vice President, General
Financial Officer Counsel and Secretary
Date: February 27, 1997
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* Donald P. Jacobs*
- ------------------------------------- -------------------------------------
A. Robert Abboud, Director Donald P. Jacobs, Director
Samawal A. Bakhsh* Charles Marshall*
- ------------------------------------- -------------------------------------
Samawal A. Bakhsh, Director Charles Marshall, Director
Jeffrey A. Cole* Michael B. Rohlfs*
- ------------------------------------- -------------------------------------
Jeffrey A. Cole, Director Michael B. Rohlfs, Director
Raymond F. Farley* Stuart L. Scott*
- ------------------------------------- -------------------------------------
Raymond F. Farley, Director Stuart L. Scott, Director
Glenn R. Morgan* Andrew A. Zahr*
- ------------------------------------- -------------------------------------
Glenn R. Morgan Andrew A. Zahr
Executive Vice President, Controller and
Chief Financial Officer Principal Accounting Officer
/s/ Glenn R. Morgan
By: _________________________________
Glenn R. Morgan
/s/ Mary D. Allen
By: _________________________________
Mary D. Allen
- --------
*Pursuant to Power of Attorney
Date: February 27, 1997
38
HARTMARX CORPORATION
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED NOVEMBER 30, 1996, 1995, AND 1994
(000'S OMITTED)
RESERVE FOR DOUBTFUL ACCOUNTS
FISCAL YEAR ENDED NOVEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Balance at beginning of year................ $ 7,920 $ 7,368 $ 9,914
Charged to costs and expenses............... 3,490 2,783 2,591
Reserve related to acquired business........ 900 -- --
Deductions from reserves(1)................. (2,327) (2,231) (5,137)
---------- ---------- ----------
Balance at end of year...................... $ 9,983 $ 7,920 $ 7,368
========== ========== ==========
- --------
(1) Notes and accounts written off as uncollectible, net of recoveries of
accounts previously written off as uncollectible.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Commission File Nos. 33-58653 and 33-42202) of
Hartmarx Corporation of our report dated January 14, 1997 appearing on page 15
of this Form 10-K.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 27, 1997
F-1