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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, 1997
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, 1998, 34,031,097 shares of the Registrant's common stock
were outstanding. The aggregate market value of common stock held by non-
affiliates of the Registrant was $270,000,000.
Certain portions of the Registrant's definitive proxy statement dated
February 27, 1998 for the Annual Meeting of Stockholders to be held April 9,
1998 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.............................................. 4
4 Submission of Matters to a Vote of Security Holders............ 4
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. 33
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), Hawksley & Wight(R) and Desert
Classic(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 25 license or sublicense agreements with third parties
for specified product lines to produce, market and distribute products in 13
countries outside the United States. Additionally, the Company has commenced
direct marketing primarily in Europe and Asia, selling golfwear in 28
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, including golfwear, 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 page 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
were sold exclusively through Kuppenheimer operated retail stores.
Kuppenheimer's operating results for 1995, net of tax benefit, have been
reflected as a discontinued operation in the accompanying Consolidated
Statement of Earnings.
This 1997 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
1
statements are subject to risks and uncertainties. Exhibit 99 to this 1997 10-
K Report identifies important risk factors which could cause the Company's
actual financial results to differ materially from results forecasted 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 1997, tailored clothing (suits and sportcoats) represented
approximately 65% of the Company's total sales. Sportswear (which includes
golfwear) and slacks represented approximately 26% of sales and women's
apparel represented approximately 9% of sales.
As an integrated manufacturer and marketer, the Company is responsible for
the design, manufacture and sourcing of its apparel. The majority of its men's
tailored clothing and slacks are manufactured in 16 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, Hickey-Freeman, Intercontinental
Branded Apparel and, in 1997, 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 22% 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 40% of the Company's total fabric requirements in fiscal 1997. No other
supplier accounts for over 4% 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 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.
2
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 15%, 18% and 16% of consolidated sales in 1997, 1996 and 1995,
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 8,100 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
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
3
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 *
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 2000
Knoxville, TN........... 231,000 Manufacturing *
Michigan City, IN (2 420,000 Office; manufacturing; warehousing *
locations).............
New York, NY............ 72,000 Sales offices/showrooms 2005
Rector, AR.............. 52,000 Manufacturing *
Rochester, NY........... 223,000 Office; manufacturing; warehousing *
St. Louis, MO (2 88,000 Office; manufacturing 2000
locations).............
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 page 26 of this Form 10-K.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and lawsuits will not
have a material adverse effect on the Company's financial position or results
of operations.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
4
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 Mr. Wohlschlaeger. 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
SERVICE TO
WITH PRESENT
NAME POSITION AGE COMPANY POSITION
- ---- -------- --- ------- --------
Elbert O. Hand.......... Chairman and Chief Executive Officer 58 33 1992
(Director since 1984)
Homi B. Patel........... President and Chief Operating Officer 48 18 1992
(Director since January, 1994)
Glenn R. Morgan......... Executive Vice President and Chief Financial Officer 50 18 1995
Frederick G. Senior Vice President, General Counsel and Secretary 47 1 1997
Wohlschlaeger..........
James E. Condon......... Vice President and Treasurer 47 20 1995
Linda J. Valentine...... Vice President, Compensation and Benefits 47 17 1993
Andrew A. Zahr.......... Controller and Chief Accounting Officer 54 25 1994
Frederick G. Wohlschlaeger became Senior Vice President, General Counsel and
Secretary in July 1997. Prior to joining the Company, he was employed by
Morton International, Inc. for seven years, most recently serving as vice
president for legal affairs and group counsel of a significant operating
group.
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:
1997 1996 1995
-------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
------- ------ ------ ------ ------ ------
First Quarter........................ $ 6.00 $4.875 $4.625 $3.75 $6.375 $5.125
Second Quarter....................... 10.125 5.50 6.50 3.875 5.875 4.25
Third Quarter........................ 10.00 7.125 6.375 4.625 6.875 4.75
Fourth Quarter....................... 9.375 7.25 5.375 4.25 6.625 4.50
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 a cumulative maximum amount of $17.5 million. The current
financing agreements also contain various restrictive covenants pertaining to
additional debt incurrence, capital expenditures, asset sales, operating
leases, and ratios relating to 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, 1998, there were approximately 5,915 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, 1998, 552,500 shares have been purchased
pursuant to this authorization and the plan's aggregate holdings are
1,072,112.
6
ITEM 6--SELECTED FINANCIAL DATA
The following table summarizes data for the years 1993 through 1997. The
Company's complete annual financial statements and notes thereto for fiscal
1997 appear elsewhere herein.
INCOME STATEMENT DATA
IN THOUSANDS, EXCEPT PER
SHARE DATA
FOR YEARS ENDED NOVEMBER
30 (A) 1997 1996 1995 1994 1993
------------------------ -------- -------- -------- -------- --------
Net sales..................... $718,135 $610,180 $595,272 $621,847 $606,148
Licensing and other income.... 3,375 4,263 6,429 7,277 5,823
Cost of sales................. 544,003 463,533 447,414 459,295 444,335
Operating expenses............ 143,482 127,699 132,806 139,720 137,315
Earnings before interest,
taxes, discontinued operation
and extraordinary items...... 34,025 23,211 21,481 30,109 30,321
Interest expense.............. 17,480 16,681 19,851 20,988 22,639
Earnings before taxes,
discontinued operation and
extraordinary items.......... 16,545 6,530 1,630 9,121 7,682
Tax (provision) benefit....... 8,695 17,300 19,800 9,992 (273)
Earnings before discontinued
operation and extraordinary
items........................ 25,240 23,830 21,430 19,113 7,409
Discontinued operation, net of
tax.......................... -- -- (18,283) 897 (1,189)
Net earnings before
extraordinary items.......... 25,240 23,830 3,147 20,010 6,220
Extraordinary items, net of
tax.......................... -- 725 -- (3,862) --
Net earnings.................. 25,240 24,555 3,147 16,148 6,220
Net earnings (loss) per share:
continuing operations........ .74 .72 .66 .59 .24
discontinued operation....... -- -- (.56) .03 (.04)
before extraordinary items... .74 .72 .10 .62 .20
after extraordinary items.... .74 .74 .10 .50 .20
Cash dividends per share...... -- -- -- -- --
Average number of common
shares and equivalents....... 34,167 33,021 32,631 32,243 31,375
BALANCE SHEET DATA
IN THOUSANDS, EXCEPT PER
SHARE DATA
AT NOVEMBER 30
------------------------
Cash.......................... $ 1,626 $ 2,844 $ 5,700 $ 2,823 $ 1,507
Accounts receivable........... 136,854 135,554 108,486 114,597 120,442
Inventories................... 193,780 165,913 154,898 183,347 193,818
Other current assets.......... 24,484 16,155 10,409 11,670 21,948
Net properties................ 45,782 43,909 44,624 51,543 56,477
Other assets/deferred taxes... 67,857 65,864 52,519 28,220 10,919
Total assets.................. 470,383 430,239 376,636 392,200 405,111
Accounts payable, accrued
expenses and taxes........... 100,098 99,745 78,867 76,049 63,001
Total debt.................... 178,001 168,528 163,278 187,784 233,113
Shareholders' equity.......... 192,284 161,966 134,491 128,367 108,997
Equity per share.............. 5.62 4.85 4.11 3.95 3.41
OTHER DATA
IN THOUSANDS
FOR YEARS ENDED NOVEMBER
30 (A)
------------------------
Earnings before interest,
taxes, depreciation,
amortization, discontinued
operation and extraordinary
items........................ $ 41,673 $ 31,469 $ 30,069 $ 39,502 $ 39,917
Depreciation and amortization
of fixed assets.............. 7,648 8,258 8,588 9,393 9,596
Capital expenditures.......... 10,086 8,207 8,441 6,173 5,467
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(A) 1995 and prior years reflect the Company's former retail business,
Kuppenheimer, as a discontinued operation.
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 results for 1997 reflected a substantial improvement over 1996.
Full year sales of $718.1 million increased 17.7% from $610.2 million in 1996,
and pre-tax earnings more than doubled to $16.5 million in 1997 from $6.5
million in the prior year. The improved operating performance reflected, among
other things, the sales and related margins associated with the acquisition of
assets and license rights from the Plaid Clothing Group, Inc. at fiscal year
end 1996, the continued strength in the premium price point businesses of
Hickey-Freeman, Hart Schaffner & Marx and Bobby Jones, revenue and earnings
improvements in the women's businesses and continued emphasis on expense
control which resulted in selling and administrative expenses declining as a
percentage of sales to 20.0% in 1997 from 20.9% last year.
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, Hickey-Freeman, Intercontinental Branded Apparel and,
in 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 year ended November 30, 1995.
RESULTS OF OPERATIONS
Consolidated sales were $718.1 million in 1997, $610.2 million in 1996 and
$595.3 million in 1995. The 17.7% increase in 1997 compared to 1996 was
primarily attributable to the Plaid brands acquired at the end of the
Company's 1996 fiscal year. The Company's premium priced tailored clothing
brands, which include Hickey-Freeman, Hart Schaffner & Marx and the Burberry's
license acquired from Plaid, recorded a combined sales gain of 15%. Three of
the brands acquired from Plaid were the major contributors to the 33%
improvement in the moderate price tailored clothing brands. Golfwear sales
were in excess of $50 million and increased approximately 6% over 1996 levels.
Women's Apparel Group sales increased 17%. The 2.5% consolidated sales
increase in 1996 compared to 1995 was principally attributable to increases in
the premium priced tailored clothing brands, as well as the women's
businesses, partially offset by declines in the moderately priced branded and
private label product lines.
Consolidated 1997 pre-tax income improved significantly to $16.5 million in
1997 from $6.5 million in 1996 and $1.6 million in 1995. As discussed below,
results for each year reflected recognition of non-cash income tax benefits of
$8.7 million in 1997, $17.3 million in 1996 and $19.8 million in 1995
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 gain were $25.2 million or
$.74 per share in 1997, $23.8 million or $.72 per share in 1996 and $21.4
million or $.66 per share in 1995. Fiscal 1996 consolidated results also
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 1995 loss on discontinued operation, attributable to
Kuppenheimer, aggregated $18.3 million or $.56 per share and consisted of an
$18.1 million loss on the sale and $.2 million operating loss incurred before
disposition. After consideration of the extraordinary gain and discontinued
operation, net earnings were $24.6 million or $.74 per share in 1996 and $3.1
million or $.10 per share in 1995.
8
The following summarizes sales and earnings before interest and taxes
("EBIT") for the Company's business groups (in millions):
YEAR ENDED NOVEMBER
30,
----------------------
1997 1996 1995
------ ------ ------
Sales:
Men's Apparel Group............................. $658.5 $559.1 $547.1
Women's Apparel Group........................... 59.6 51.1 48.2
------ ------ ------
Total......................................... $718.1 $610.2 $595.3
====== ====== ======
EBIT:
Men's Apparel Group............................. $ 36.3 $ 30.3 $ 32.1
Women's Apparel Group........................... 6.7 3.6 (1.3)
Other and adjustments........................... (9.0) (10.7) (9.3)
------ ------ ------
Total......................................... $ 34.0 $ 23.2 $ 21.5
====== ====== ======
MAG sales were $659 million in 1997, $559 million in 1996 and $547 million
in 1995. The 17.8% increase in 1997 compared to 1996 principally reflected the
Plaid brands acquired in November 1996 and continuing strength of the premium
priced tailored clothing brands, as well as improvements in Bobby Jones
golfwear. The 2.2% increase in 1996 compared to 1995 reflected the strength of
the premium priced tailored clothing brands and improvements in golfwear
sales, partially offset by a 1.2% decrease in the businesses marketing
moderately priced apparel. Sales were also impacted in 1996 compared to 1995
by the decline in volume to zero from $15 million with The Hastings Group,
Inc., the purchaser of the HSSI, Inc. business, which was sold by Hartmarx in
September, 1992. MAG EBIT was $36 million in 1997 compared to $30 million in
1996 and $32 million in 1995. Tailored clothing represented the most
significant contributor to earnings in each year. The $6 million improvement
in 1997 EBIT compared to 1996 was primarily attributable to improvements in
the premium priced tailored clothing product lines and inclusion of the Plaid
results; continuing competitive pressures in the moderately priced product
lines prevented wholesale price increases, although gross margins improved
slightly from product cost reductions achieved in part from more off-shore
sourcing. The $2 million decline in 1996 EBIT compared to 1995 primarily
reflected industry-wide conditions adversely affecting gross margins in the
moderately priced product lines, partially offset by improvement in the
premium priced tailored clothing and golfwear offerings.
Women's Apparel Group sales, comprising approximately 8% of the consolidated
total in each year, aggregated $60 million in 1997, $51 million in 1996 and
$48 million in 1995. Revenues at IWA increased in both 1997 and 1996,
reflecting growth of the Austin Reed brand and the introduction of the
Hawksley & Wight line in 1997, at price points below Austin Reed. Barrie Pace
catalog sales increased in 1997 following small declines in each of the two
previous years. Women's Apparel Group earnings before interest and taxes were
$7 million in 1997 compared to $4 million in 1996 and a loss of $1 million in
1995. IWA's improvement was attributable to both its revenue increases and
improved gross margins. The Barrie Pace business was also profitable following
a breakeven in 1996 and a loss in 1995; the improvement in each year reflected
implementation of expense reduction actions and enhanced productivity of the
catalogs distributed.
Gross Margins. The consolidated gross margin percentage of sales was 24.2%
in 1997, 24.0% in 1996 and 24.8% in 1995. The decline in the gross margin rate
to sales in 1996 compared to 1995 was principally related to margin pressures
in the moderately priced product lines characterized by declining wholesale
prices, which more than offset improved gross margin rates in both the premium
priced tailored clothing lines and in the women's businesses. The transition
to more off-shore sourcing to ultimately improve gross margins in the moderate
priced lines was initiated through the 1995 acquisition of production
facilities in Mexico and Costa Rica. During 1996, start-up costs associated
with these off-shore facilities aggregated $2.3 million, which adversely
affected the 1996 gross margin rate by .4%.
9
The .2% improvement in the 1997 gross margin rate compared to 1996 reflected
continued strength in the premium priced tailored clothing lines and in the
women's businesses. While wholesale prices in the moderately priced product
lines remained very competitive, there was some margin improvement as costs
were lowered from increased off-shore sourcing. Start-up costs related to
production in owned off-shore facilities unfavorably affected the 1997 gross
margin rate by .2%; start-up costs are expected to be minimal in 1998. LIFO
expense was $.3 million in 1997, $.1 million in 1996 and $2.1 million in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $143 million in 1997, $128 million in 1996 and
$133 million in 1995. As a percentage of sales, the expense rate declined to
20.0% in 1997 from 20.9% in 1996 and 22.3% in 1995, and reflected, among other
things, the increased sharing of administrative services among the individual
operating units and the higher sales. The improved ratio in 1997 was also
attributable to the elimination of less efficient and certain redundant
administrative functions associated with the assets acquired from Plaid at
fiscal year end 1996.
Advertising expenditures, including costs related to the Barrie Pace
catalog, were $23 million in 1997 compared to $20 million in 1996 and $22
million in 1995, representing 3.3%, 3.2% and 3.6% of consolidated sales,
respectively. The increase in 1997 primarily reflected higher MAG advertising
expenditures, including amounts related to the Plaid brands. The decrease in
1996 primarily reflected lower costs associated with Barrie Pace.
During 1997 the Company commenced a comprehensive upgrade of its management
information systems. This project encompasses a significant change to the
Company's existing hardware configuration and software applications and, among
other things, is expected to result in the Company's information systems being
year 2000 compliant upon completion during 1999. A significant portion of the
new system enhancements will emanate from purchased software and written
representation has been received from the various application vendors that
such software is year 2000 compliant. The Company will be testing the various
software during 1998 as an integral part of the phased implementation of the
new applications. Costs associated with maintaining or modifying systems not
expected to be replaced will be expensed as incurred. The Company's plans for
assuring year 2000 compliance are also expected to include performing
appropriate testing of its electronic interfaces with important customers' and
suppliers' systems. Amounts charged to expense during 1997 for year 2000
compliance were insignificant and the Company does not expect the costs
required to be expensed over the next several years to have a material effect
on its financial position or results of operations. The Company expects that
with the conversions to the new software and hardware, the year 2000 issue
will not pose a significant operational problem for its computer systems.
However, if the conversion is not made on a timely basis, the year 2000 issue
could have an impact on the Company's ability to operate efficiently.
Licensing and Other Income. This caption is principally comprised of income
generated from licensing and aggregated $3.4 million in 1997, $4.3 million in
1996 and $6.4 million in 1995. The decline in each year principally related to
the sale of certain license rights in prior years; a portion of the Company's
licensing income is derived from Asian sources, principally Japan, and this
area has also contributed to the decline in 1997 compared to 1996.
Earnings before Interest, Taxes, Discontinued Operation and Extraordinary
Items ( "EBIT"). EBIT was $34.0 million in 1997, $23.2 million in 1996 and
$21.5 million in 1995, representing 4.7%, 3.8% and 3.6% of sales,
respectively. The improvement in 1997 from 1996 was principally attributable
to the lower operating expense ratio to sales. The improvement in 1996 from
1995 was principally attributable to operating expense reductions, which more
than offset the decline in the gross margin ratio to sales.
Interest Expense. Interest expense was $17.5 million in 1997, $16.7 million
in 1996 and $19.9 million in 1995. As a percentage of sales, interest expense
declined to 2.4% in 1997 from 2.7% in 1996 and 3.3% in 1995. The dollar
increase in 1997 from 1996 reflected higher average borrowings, principally
attributable to the $27 million paid for the assets acquired from Plaid. The
decline in 1996 from 1995 reflected lower average borrowings, primarily from
working capital reductions. The effective interest rate for all borrowings,
including
10
amortization costs, was 9.7% in 1997, 9.9% in 1996 and 10.4% in 1995. Interest
expense in 1997 and 1996 was favorably affected by approximately $.5 million
and $.4 million, respectively, 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 7.5% in 1997, 7.4% in 1996 and 8.5% in 1995. Interest expense
included non-cash amortization of financing fees and expenses of $1.0 million
in 1997 and 1996 and $1.4 million in 1995.
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 1997, the Company concluded that the more likely than not
criteria appropriately justified the recognition of the remaining amount of
the tax benefits previously unrecognized associated with available net
operating loss carryforwards. Accordingly, after giving effect to the benefit
of future operating loss carryforwards and other timing differences
recognized, the valuation reserve at November 30, 1997 was reduced to zero
from $15.0 million at November 30, 1996, and this adjustment was reflected in
the net tax benefit of $8.7 million recognized in fiscal 1997. This compares
to the net tax benefit of $17.3 million and $19.8 million recognized in fiscal
1996 and 1995, respectively, which included reductions in the tax valuation
reserve of $19.9 million and $20.6 million, respectively. Utilization of
available operating loss carryforwards of $144 million as of November 30, 1997
by fiscal year end 2007 requires average annual taxable earnings of
approximately $14 million.
In 1996 and 1995, a portion, but not all, of the then remaining valuation
allowance was deemed appropriate taking into consideration, among other
things, the following: the level of pre-tax earnings in relation to both
historical amounts earned during the 1980's and the significant operating
losses incurred in the early 1990's; a history of profitability of the core
MAG businesses, even during the 1990-1992 loss years which included operating
losses from retail businesses subsequently sold or liquidated; the Company's
income prospects in future years after consideration of available operating
loss carryforwards which expire during the 2007-2010 period.
(Also see "Liquidity and Capital Resources" for further discussion under
deferred tax assets and remaining operating loss carryforwards.)
LIQUIDITY AND CAPITAL RESOURCES
The current financing structure has been in place since March 1994, at which
time the Company issued $100 million of public senior subordinated debentures,
entered into a $175 million Revolving Credit Facility with a nine member
lending group ("Credit Facility") and privately placed $15.5 million of
industrial development bonds maturing in 2015 issued by development
authorities in prior years. This 1994 Refinancing accomplished several of the
Company's objectives, including extending maturities, reducing the level of
borrowings subject to interest rate variability and establishing a separate
working capital facility providing greater flexibility in addressing the
Company's seasonal borrowing requirements.
The Credit Facility is secured by inventories, accounts receivable and
intangibles of the Company and its subsidiaries. Facility amendments in July
1995, November 1995, January 1996 and October 1997, among other things,
resulted in a reduction in the fees, administrative charges and effective
borrowing rates, adjustment or elimination of certain covenants and extension
of the term from March 1997 to July 2000. The Credit Facility contains certain
restrictions on the operation of the Company's business, including covenants
pertaining to capital expenditures, asset sales, operating leases, incurrence
of additional indebtedness, ratios relating to maximum funded debt to EBITDA
and minimum fixed charge coverage, as well as other customary covenants,
representations and warranties, and events of default. The Company was in
compliance with the above noted covenants.
11
Net cash used in operating activities was $6 million in 1997 compared to net
cash provided by operating activities of $26 million in 1996 and $22 million
in 1995. The change in 1997 compared to 1996 was attributable to higher
working capital requirements, primarily inventories, partially offset by the
current earnings. The improvement in 1996 compared to 1995 was attributable to
both the higher earnings as well as working capital reductions during the
year. At November 30, 1997, net accounts receivable of $136.9 million
increased $1.3 million from November 30, 1996. The allowance for doubtful
accounts was $9.8 million compared to $10.0 million last year, representing
6.7% of gross receivables in 1997 and 6.8% in 1996. Inventories of $193.8
million at November 30, 1997 increased $27.9 million or 16.8% from November
30, 1996, primarily attributable to longer lead times associated with
increased off-shore production. Inventory turn was comparable to 1996, which
improved from 1995.
Recoverable and deferred income taxes at November 30, 1997 aggregated $62.8
million compared to $54.9 million at November 30, 1996. As noted previously,
the valuation allowance was zero at November 30, 1997 compared to $15.0
million at November 30, 1996. Approximately $42.6 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, 1997, the Company had
approximately $144 million of federal tax operating loss carryforwards
available to offset future taxable income.
At November 30, 1997, net properties were $45.8 million compared to $43.9
million at November 30, 1996. Capital additions during 1997 were $10.0 million
compared to $8.2 million in 1996. Depreciation expense was $7.6 million in
1997 and $8.3 million in 1996. Capital additions for 1998 are anticipated to
approximate $15 million and would 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. During 1997,
the Company capitalized approximately $7.5 million of costs related to the
acquisition of new information systems, which are expected to be fully
operational during 1999; costs related to business process reengineering were
expensed.
At November 30, 1997, total debt of $178.0 million was $9.5 million higher
than the year earlier level. The $20 million of notes payable classified as
current at November 30, 1997 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 48%
of the total $370 million capitalization at November 30, 1997, compared to 51%
at November 30, 1996, with the improvement principally resulting from the
trailing year earnings. Total additional borrowing availability at November
30, 1997 was $81 million.
Shareholders' equity of $192.3 million at November 30, 1997 represented
$5.62 book value per share compared to $4.85 book value per share at November
30, 1996. The $30.3 million equity increase during 1997 reflected the net
earnings for the year, ongoing equity sales to employee benefit plans,
proceeds from the exercise of stock options 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 1998. 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 $192 million book value after reflecting the
Company's use of LIFO inventory method and increases in the value of the
properties since acquisition. Earnings would be lower than reported, assuming
higher depreciation expense without a corresponding reduction in taxes.
OUTLOOK
The Company's long-term earnings growth objectives combine revenue
increases, gross margin rate improvement, continued control over operating
expenses and reduction of financing costs. The significant improvement in 1997
operating results compared to 1996 was principally attributable to the sales
increase and the spreading of general and administrative costs over the larger
sales base; the .2% improvement in the gross
12
margin rate to sales also contributed to the earnings improvement, and
interest expense declined as a percentage of sales. Execution of the Company's
strategies during 1998 would result in further earnings improvements compared
to 1997 emanating principally from higher sales and improved gross margin
rates. Acquisitions to enhance revenue and earnings growth and to broaden the
Company's product offerings are also being actively pursued.
The Company's preeminent position in tailored clothing has been enhanced by
the brands acquired from Plaid at fiscal year end 1996, which contributed more
than $90 million of revenues during 1997. Other new initiatives included the
initial delivery of tailored clothing under the Kenneth Cole label commencing
for the Fall 1997 season. These, along with the continued strength of the Hart
Schaffner & Marx and Hickey-Freeman brands, are anticipated to result in
tailored clothing sales growth during 1998, even after reflecting declines
from the Cerruti and Krizia brands due to expiring license arrangements which
will not be renewed. Slacks, sportswear and golf apparel continue as important
sources for revenue and earnings growth. The Tommy Hilfiger casual slack
business, first introduced in Fall 1996, generated a sales gain in 1997 of
more than 30% and further revenue increases are anticipated in 1998. Hart
Schaffner & Marx introduced its line of casual products for the Fall 1997
season, addressing the less formal apparel needs of its business apparel
consumer; the Hickey-Freeman sportswear line, emphasizing casual dressing for
the affluent Hickey-Freeman core customer, continued to register revenue
increases during 1997, following its Fall 1996 introduction. Hickey-Freeman
dress furnishings are being introduced for Fall 1998 delivery and it is
anticipated that Hart Schaffner & Marx will expand into men's furnishings in
the near future. These two premium price point brands are being more broadly
positioned as full "collection" product offerings rather than as more limited
tailored clothing brands. Continued growth is anticipated in the golf inspired
collections marketed by the Bobby Jones division of Hickey-Freeman and will
include a players collection in 1998 to appeal to the more active golfer.
Approximately 150 dedicated Nicklaus golf selling spaces in major department
and specialty stores are expected to be opened during 1998. In the Women's
Apparel Group, the Austin Reed women's line of tailored coats, pants and
dresses will be augmented by a knit collection, first available for Spring
1998 deliveries; its moderately priced Hawksley & Wight line, first delivered
in Spring 1996, experienced sales growth in 1997, which is expected to
continue into 1998.
The economic difficulties experienced by many of the Asian economies has not
and is not expected to have a significant adverse impact on the Company's
results of operations. The Company does not have extensive sales to Asian
markets, although the weak Japanese economy contributed to the decline in
licensing income during 1997 compared to 1996. While only a limited percentage
of products are sourced from Asia (principally certain golf products and
certain women's styles), the Company could be expected to benefit marginally
from a reduction in prices for these product lines due to the weakened Asian
currencies relative to the U.S. dollar.
The current apparel environment continues to be highly competitive,
characterized by stable or declining wholesale prices in the moderately priced
tailored clothing category, applicable to suits generally retailing for
between $250 and $400. Gross margin enhancement remains a high priority, and
is being addressed through improved manufacturing methods in Company
production facilities and from a greater percentage of foreign sourcing. The
integration of the Plaid business during 1997 was an important contributor to
the significant reduction in selling, general and administrative expenses as a
percentage of sales from 20.9% to 20%; ongoing programs to leverage
administrative functions are continuing, although only modest incremental
improvement is likely in 1998. Debt and related interest expense reduction
continue as important elements in enhanced profitability. Although average
borrowing levels increased during 1997, largely attributable to the $27
million paid for the Plaid acquisition at fiscal year end 1996, average
borrowing rates declined slightly from repurchasing $15 million of the
Company's 10 7/8% subordinated debt during 1996. Interest rate reductions
applicable to the Company's revolving credit facility were effective in
October 1997 and the full year favorable effect should be approximately $.3
million during 1998. The subordinated debentures are callable at 103.1 on
January 15, 1999, and the Company is actively considering exercising its call
option or perhaps a tender offer prior to the call date.
The anticipated revenue growth, gross margin enhancement and continuing
emphasis on cost control are expected to collectively contribute to an
improved earnings performance in 1998.
13
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, 1997............................................................... 16
Consolidated Balance Sheet at November 30, 1997 and 1996................ 17
Consolidated Statement of Cash Flows for the three years ended November
30, 1997............................................................... 18
Consolidated Statement of Shareholders' Equity for the three years ended
November 30, 1997...................................................... 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, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 1997, 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, 1998
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,
--------------------------
1997 1996 1995
-------- -------- --------
Net sales.......................................... $718,135 $610,180 $595,272
Licensing and other income......................... 3,375 4,263 6,429
-------- -------- --------
721,510 614,443 601,701
-------- -------- --------
Cost of goods sold................................. 544,003 463,533 447,414
Selling, general and administrative expenses....... 143,482 127,699 132,806
-------- -------- --------
687,485 591,232 580,220
-------- -------- --------
Earnings before interest, taxes, discontinued
operation and extraordinary gain.................. 34,025 23,211 21,481
Interest expense................................... 17,480 16,681 19,851
-------- -------- --------
Earnings before taxes, discontinued operation and
extraordinary gain................................ 16,545 6,530 1,630
Tax benefit........................................ 8,695 17,300 19,800
-------- -------- --------
Earnings before discontinued operation and
extraordinary gain................................ 25,240 23,830 21,430
-------- -------- --------
Discontinued operation:
Operating loss, net of tax benefit............... -- -- (183)
Loss on disposition, net of $.4 million tax
benefit......................................... -- -- (18,100)
-------- -------- --------
-- -- (18,283)
-------- -------- --------
Net earnings before extraordinary gain............. 25,240 23,830 3,147
Extraordinary gain, net of $.4 million tax
provision......................................... -- 725 --
-------- -------- --------
Net earnings....................................... $ 25,240 $ 24,555 $ 3,147
======== ======== ========
Earnings (loss) per share:
Continuing operations............................ $ .74 $ .72 $ .66
Discontinued operation........................... -- -- (.56)
-------- -------- --------
Before extraordinary gain........................ $ .74 $ .72 $ .10
======== ======== ========
After extraordinary gain......................... $ .74 $ .74 $ .10
======== ======== ========
(See accompanying notes to consolidated financial statements)
16
HARTMARX CORPORATION
CONSOLIDATED BALANCE SHEET
(000'S OMITTED)
NOVEMBER 30,
--------------------
1997 1996
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 1,626 $ 2,844
Accounts receivable, less allowance for doubtful
accounts of $9,803 in 1997 and $9,983 in 1996......... 136,854 135,554
Inventories............................................ 193,780 165,913
Prepaid expenses....................................... 4,332 4,555
Recoverable and deferred income taxes.................. 20,152 11,600
--------- ---------
Total current assets................................. 356,744 320,466
--------- ---------
INVESTMENTS AND OTHER ASSETS............................. 25,230 22,579
--------- ---------
DEFERRED INCOME TAXES.................................... 42,627 43,285
--------- ---------
PROPERTIES
Land................................................... 2,645 2,628
Buildings and building improvements.................... 49,003 48,758
Furniture, fixtures and equipment...................... 110,860 106,128
Leasehold improvements................................. 16,597 16,767
--------- ---------
179,105 174,281
Accumulated depreciation and amortization.............. (133,323) (130,372)
--------- ---------
Net properties....................................... 45,782 43,909
--------- ---------
TOTAL ASSETS............................................. $ 470,383 $ 430,239
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable.......................................... $ 20,000 $ 20,000
Current maturities of long term debt................... 62 100
Accounts payable....................................... 38,690 40,581
Accrued payrolls....................................... 18,564 19,338
Other accrued expenses................................. 42,844 39,826
--------- ---------
Total current liabilities............................ 120,160 119,845
--------- ---------
LONG TERM DEBT, less current maturities.................. 157,939 148,428
--------- ---------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value; 2,500,000 authorized
and unissued.......................................... -- --
Common shares, $2.50 par value; authorized 75,000,000;
issued 34,219,401 in 1997 and 33,365,317 in 1996...... 85,549 83,413
Capital surplus........................................ 79,934 77,355
Retained earnings...................................... 35,711 10,471
Unearned employee benefits............................. (8,910) (9,273)
--------- ---------
Shareholders' equity................................... 192,284 161,966
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $ 470,383 $ 430,239
========= =========
(See accompanying notes to consolidated financial statements)
17
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(000'S OMITTED)
FISCAL YEAR ENDED
NOVEMBER 30,
-------------------------
1997 1996 1995
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from operating activities:
Net earnings, including discontinued operation and
extraordinary gain............................... $25,240 $24,555 $ 3,147
Reconciling items to adjust net earnings to net
cash provided by operating activities:
Extraordinary gain, net......................... -- (725) --
Depreciation and amortization................... 8,644 9,269 9,987
Changes in:
Accounts receivable........................... (1,300) (8,800) 5,608
Inventories................................... (27,867) 16,171 (2,044)
Prepaid expenses.............................. (26) (242) 1,718
Other assets.................................. (2,759) (187) (5,103)
Accounts payable and accrued expenses......... 353 3,425 11,087
Taxes and deferred taxes...................... (7,894) (17,316) (21,204)
Loss on sale of discontinued operation.......... -- -- 18,100
Cash provided by discontinued operation......... -- -- 392
------- ------- -------
Net cash provided by (used in) operating activities. (5,609) 26,150 21,688
------- ------- -------
Cash Flows from investing activities:
Capital expenditures.............................. (10,086) (8,207) (8,441)
Cash paid for acquisitions........................ -- (27,993) (3,380)
Cash received re disposition, net of subsidiary
cash............................................. -- -- 12,000
------- ------- -------
Net cash provided by (used in) investing activities. (10,086) (36,200) 179
------- ------- -------
Cash Flows from financing activities:
Increase (decrease) in notes payable.............. 9,500 17,810 (21,310)
Purchase of $14.7 million principal amount of 10
7/8% Senior Subordinated Debentures, net......... -- (13,037) --
Decrease in other long term debt.................. (101) (499) (657)
Other equity transactions......................... 5,078 2,920 2,977
------- ------- -------
Net cash provided by (used in) financing activities. 14,477 7,194 (18,990)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ (1,218) (2,856) 2,877
Cash and cash equivalents at beginning of year...... 2,844 5,700 2,823
------- ------- -------
Cash and cash equivalents at end of year............ $ 1,626 $ 2,844 $ 5,700
======= ======= =======
Supplemental cash flow information
Net cash paid (received) during year for:
Interest expense................................ $16,000 $16,100 $19,000
Income taxes.................................... 900 (2,600) 1,400
(See accompanying notes to consolidated financial statements)
18
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(000'S OMITTED)
PAR
VALUE
OF RETAINED UNEARNED
COMMON CAPITAL EARNINGS EMPLOYEE
STOCK SURPLUS (DEFICIT) BENEFITS
------- ------- --------- --------
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 (3,837 shares
issued upon exercise of 3,837 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)
Net earnings for the year............... 25,240
Issuance of 357,699 shares, primarily to
employee benefit plans................. 895 937
Stock options exercised (292,619 shares
issued upon exercise of 293,646 options
and awards)............................ 732 1,507
Long-term incentive plan awards for
132,500 shares, net of forfeitures..... 331 710 (1,041)
Issuance of 71,266 shares for Restricted
Stock Awards........................... 178 187
Allocation of unearned employee
benefits............................... (762) 1,404
------- ------- -------- --------
Balance at November 30, 1997.............. $85,549 $79,934 $ 35,711 $ (8,910)
======= ======= ======== ========
(See accompanying notes to consolidated financial statements)
19
HARTMARX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES
Principal Business Activity -- The Company and its subsidiaries (the
"Company") are engaged in the manufacturing and marketing of quality men's and
women's apparel. The Company's products are sold principally in the United
States.
Principles of Consolidation -- The consolidated financial statements include
the accounts of the Company and all subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates -- The financial statements have been prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts based on informed estimates and judgments of management with
consideration given to materiality. Actual results could differ from those
estimates, but management believes such differences will not materially affect
the Company's financial position, results of operations or cash flows.
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, 1997 and 1996, approximately 40% and 49% 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. Advertising costs of $23.4
million in 1997, $19.5 million in 1996 and $21.7 million in 1995 are included
in the accompanying Statement of Earnings. Prepaid expenses at November 30,
1997 include deferred advertising costs of $1.4 million ($1.2 million at
November 30, 1996), 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 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 electing to receive the coverage make contributions to
offset the cost of the retiree plan.
Other Postemployment Benefits -- Postemployment benefit expense, which is
recorded in accordance with Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits", was not significant
in any of the three years ended November 30, 1997.
Stock Options -- The Company has elected to follow APB 25 and related
Interpretations under which the Company uses the intrinsic value method of
measuring stock compensation cost. Under this method, compensation cost is the
excess, if any, of the quoted market price of the Company's stock over the
amount the individual must pay for the stock.
Concentrations of Credit Risk and Financial Instruments -- Financial
instruments which subject the Company to credit risk are primarily trade
accounts receivable. The Company sells its products to department stores,
specialty retail stores, off-price marketers and catalog businesses. The
Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Concentrations of credit
risk with respect to trade accounts receivable are mitigated due to the large
number and diversity of customers comprising the Company's customer base.
Management believes that the risk associated with trade accounts receivable is
adequately provided for in the allowance for doubtful accounts.
The largest customer represented approximately 15%, 18% and 16% of
consolidated sales in 1997, 1996 and 1995, respectively, and no other customer
exceeded 8% of consolidated sales for the three years ended November 30, 1997.
Accounts receivable from the largest customer represented approximately 10% of
the Company's gross accounts receivable at November 30, 1997 and 1996,
respectively.
The Company enters into foreign exchange forward contracts from time to time
to limit the currency risks associated with purchase obligations denominated
in foreign currencies. The Company does not hold financial instruments for
trading purposes or engage in currency speculation. Foreign exchange contracts
are generally in amounts approximating forecasted purchase obligations and
require the Company to exchange U.S. dollars for foreign currencies at rates
agreed to at the inception of the contracts. These contracts are closed by
either cash settlement or actual delivery of goods and are included in cost of
goods sold in the accompanying Statement of Earnings. The effects of movements
in currency exchange rates on these instruments, which are not significant,
are recognized in the period in which the purchase obligations are satisfied.
As of November 30, 1997, the Company had entered into foreign exchange
contracts, primarily for Italian Lira, for approximately $33 million ($8
million at November 30, 1996), related to future inventory purchases.
From time to time, the Company has entered into interest rate protection
agreements; however, in fiscal 1997, 1996 or 1995, the Company did not enter
into any such agreements.
Per Share Information -- The computation of earnings 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 34,167,000 in 1997, 33,021,000 in 1996, and 32,631,000 in 1995.
21
Recent Accounting Pronouncements -- The provisions of Financial Accounting
Standards No. 128, "Earnings per Share" (FAS 128), are effective for the
Company's fiscal year commencing December 1, 1997. FAS 128 specifies the
computation, presentation and disclosure requirement of earnings per share
("EPS"). It replaces the presentation of primary and fully diluted EPS with
basic and diluted EPS. Basic EPS is based on the weighted average number of
common shares outstanding during the period and excludes all dilution. Diluted
EPS reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
There would have been no change in the earnings per share as reflected in the
accompanying Consolidated Statement of Earnings had FAS 128 been effective in
the periods ended November 30, 1997, 1996 and 1995.
The provisions of Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", are effective for the Company's fiscal year
commencing December 1, 1998. In addition to net income, comprehensive income
includes all non-owner changes in equity. Such changes would include, for
example, cumulative foreign currency translation adjustments, certain minimum
pension liabilities and unrealized gains and loss on available-for-sale
securities. The Statement requires restatement of prior period financial
statements for comparability purposes. The Company is currently evaluating the
disclosure impact of this Statement.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", establishes new standards
for reporting information about operating segments in interim and annual
financial statements. This Statement is effective for the Company's 1999
fiscal year beginning December 1, 1998. The Company is currently evaluating
the impact of this Statement in relation to the current disclosures contained
in the Operating Segment Information footnote.
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 at closing
of $27.1 million and assumption of $7.1 million of accounts payable and other
scheduled accrued liabilities, and an additional payment of $1.4 million in
January 1998, representing 2% of the first year sales of certain product
categories acquired in the transaction less $.5 million. The cash paid for the
assets purchased was made from available borrowing capacity under the
Company's existing revolving credit facility. Plaid's unsecured creditors are
also expected to receive the proceeds equivalent to 125,000 shares of the
Company's common stock.
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 is being amortized on a straight line basis over five years. The results
of operations of Plaid since the date of acquisition are included in the
accompanying 1997 financial statements.
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 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.
22
SALE OF SUBSIDIARY
On July 27, 1995, the Company sold the capital stock of Kuppenheimer, a
vertically integrated factory direct-to-consumer business. Kuppenheimer's
operating results for 1995, 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. The Company received $12 million cash at closing
and under the terms of the Agreement, an additional $2 million plus interest
was 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. 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 is included in long-term debt and other
amounts pertaining to the transaction have been reflected at estimated
realizable value at November 30, 1997 and 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.
Credit Facility amendments in July 1995, November 1995, January 1996, and
October 1997, among other things, resulted in a reduction in fees,
administrative charges, and effective borrowing rates, adjustment or
elimination of certain covenants and the extension of the 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 currently either (i) LIBOR plus 1.25% or
(ii) .5% below the prime rate of a major bank. Financing fees pertaining to
the Notes and Credit Facility, as amended, are being amortized over the life
of the respective agreements. Certain other fees are also payable under the
Credit Facility and Notes based on services provided.
The Notes and Credit Facility currently contain various restrictive
covenants covering ratios relating to maximum funded debt to EBITDA and
minimum fixed charge coverage, additional debt incurrence, capital
expenditures, asset sales, operating leases, as well as other customary
covenants, representations and warranties, funding conditions and events of
default. The Company was in compliance with 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.
At November 30, 1997 and 1996, long term debt, less current maturities,
comprised the following (000's omitted):
1997 1996
-------- --------
Notes payable.......................................... $ 72,900 $ 63,400
10 7/8% Senior Subordinated Notes, net................. 84,982 84,909
Industrial development bonds........................... 17,396 17,487
Other debt............................................. 2,723 2,732
-------- --------
178,001 168,528
Less--current maturities............................... 20,062 20,100
-------- --------
Long term debt......................................... $157,939 $148,428
======== ========
23
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 $9.9 million at
November 30, 1997. Interest rates on the various borrowing agreements range
from 5.0% to 8.5% (average of 7.4% at November 30, 1997 and 1996). 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 due September 1, 2007. Interest rates ranged from 8%
to 8.5% per annum (average of 8.4% at November 30, 1997 and 8.5% at November
30, 1996).
Accrued interest included in the Other Accrued Expenses caption in the
accompanying balance sheet was $5.2 million at November 30, 1997 and $4.7
million at November 30, 1996.
The approximate principal reductions required during the next five fiscal
years, including reductions under the Credit Facility which expires in 2000
and the Senior Subordinated Notes which are due in 2002, are as follows: $.1
million in 1998; $.1 million in 1999; $73.0 million in 2000; $.1 million in
2001; $85.4 million in 2002. The Senior Subordinated Notes are callable at
103.1 commencing on January 15, 1999 and 101.6 at January 15, 2000.
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):
1997 1996 1995
------ ------ ------
Principal payments.................................. $1,101 $1,002 $ 911
Interest payments................................... 943 1,042 1,133
------ ------ ------
Total loan payments made by ESOP.................... $2,044 $2,044 $2,044
====== ====== ======
As of November 30, 1997, 358,649 of the 620,155 shares of common stock have
been allocated to the accounts of the ESOP participants.
NOTES PAYABLE
The following summarizes information concerning notes payable (000's
omitted):
1997 1996 1995
-------- ------- -------
Outstanding at November 30................... $ 72,900 $63,400 $45,590
Maximum month end balance during the year.... 104,900 83,500 93,821
Average amount outstanding during the year... 74,200 60,700 72,300
Weighted daily average interest rate during
the year.................................... 7.5% 7.4% 8.5%
Weighted average interest rate on borrowings
at November 30.............................. 7.4% 7.9% 7.5%
24
INVENTORIES
Inventories at fiscal year end were as follows (000's omitted):
NOVEMBER 30
--------------------------
1997 1996 1995
-------- -------- --------
Raw materials.................................. $ 54,741 $ 49,248 $ 39,617
Work in process................................ 35,959 25,151 21,687
Finished goods................................. 103,080 91,514 93,594
-------- -------- --------
$193,780 $165,913 $154,898
======== ======== ========
The excess of current cost over LIFO costs for certain inventories was $35.2
million at November 30, 1997, $34.9 million at November 30, 1996 and $34.8
million at November 30, 1995.
TAXES ON EARNINGS
The tax benefit (provision) is summarized as follows (000's omitted):
1997 1996 1995
------- ------- -------
Federal........................................ $ (556) $ 881 $ 833
State and local................................ (940) (285) (106)
------- ------- -------
Total current.............................. (1,496) 596 727
------- ------- -------
Federal........................................ (4,794) (3,196) (1,527)
State and local................................ -- -- --
------- ------- -------
Total deferred............................. (4,794) (3,196) (1,527)
------- ------- -------
Change in valuation allowance.................. 14,985 19,900 20,600
------- ------- -------
Total tax benefit.............................. $ 8,695 $17,300 $19,800
======= ======= =======
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):
1997 1996 1995
------- ------- -------
Income from continuing operations............. $16,545 $ 6,530 $ 1,630
======= ======= =======
Tax provision computed at statutory rate...... $(5,625) $(2,220) $ (554)
State and local taxes on earnings, net of
federal tax benefit.......................... (620) (188) (70)
Change in valuation allowance................. 14,985 19,900 20,600
Other--net.................................... (45) (192) (176)
------- ------- -------
Total tax benefit............................. $ 8,695 $17,300 $19,800
======= ======= =======
At November 30, 1997, there was no valuation allowance offsetting the
deferred tax asset. A portion of the Company's deferred tax assets had been
reserved in prior years through the establishment of a tax valuation
allowance. The valuation allowance was originally recorded upon consideration
of the operating losses incurred during the 1990-1992 fiscal years and related
uncertainty associated with realization of the tax benefit of operating loss
carryforwards, which is ultimately dependent upon the generation of future
earnings by the Company. The net tax assets recorded consider 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 1997, 1996 and 1995, $6.3 million, $2.6 million and $.8 million,
respectively, of the valuation allowance offsetting the deferred tax asset was
reversed. The Company reevaluated its deferred income tax asset and reversed
additional valuation allowance related to this asset of $8.7 million, $17.3
million and $19.8 million in the fourth quarters of 1997, 1996 and 1995,
respectively.
25
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 operating loss carryforwards of
$59.2 million, alternative minimum tax credit carryforwards ("AMT") of $5.0
million, $24.9 million attributable to expenses deducted in the financial
statements not currently deductible for tax purposes and $5.0 million
attributable to Tax Reform Act of 1986 ("TRA") items (allowance for bad debts,
accrued vacation and capitalization of certain inventory costs for tax
purposes). Deferred tax liabilities included excess tax over book depreciation
of $2.3 million and $11.1 million related to employee benefits, principally
pensions.
At November 30, 1997, the Company had a net deferred tax asset of $62.8
million comprised of deferred tax assets of $84.0 million less deferred tax
liabilities aggregating $21.2 million. The principal deferred tax assets
included net operating loss carryforwards of $50.3 million, AMT credit
carryforwards of $5.7 million, $22.4 million attributable to expenses deducted
in the financial statements not currently deductible for tax purposes and $5.5
million attributable to TRA items. Deferred tax liabilities included excess
tax over book depreciation of $2.0 million and $11.6 million related to
employee benefits, principally pensions.
As of November 30, 1997, the Company had approximately $144 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 $5.7 million of AMT tax credit carryforwards can be carried
forward indefinitely.
LEASES
The Company and its subsidiaries lease office space, manufacturing,
warehouse and distribution facilities, showrooms and outlet stores,
automobiles, computers and other equipment under various noncancellable
operating leases. A number of the leases contain renewal options ranging up to
10 years.
At November 30, 1997, total minimum rentals under noncancellable operating
leases were as follows (000's omitted):
YEARS AMOUNT
----- -------
1998............................. $ 6,367
1999............................. 5,889
2000............................. 4,696
2001............................. 3,509
2002............................. 3,235
Thereafter....................... 13,729
-------
Total minimum rentals due........ $37,425
=======
Rental expense, including rentals under short term leases, aggregated $11.2
million, $10.3 million and $11.1 million in fiscal 1997, 1996 and 1995,
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 amounts negotiated
between the union and the
26
participating industry employers. Pension costs relating to multi-employer
plans were approximately $7.6 million in 1997, $7.9 million in 1996 and $8.5
million in 1995. 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%. Through fiscal 1997, approximately $11.6 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 $60
million as of November 30, 1997. 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 Company sponsored pension plan is a non-contributory defined benefit
pension plan covering substantially all eligible non-union employees and
certain union employees who have elected to participate in the plan. Under
this pension plan, non-union retirement benefits are a function of years of
service and average compensation levels during the highest five consecutive
salary years occurring during the last ten years before retirement; union
employee benefits are based on collectively bargained amounts. To the extent
that the calculated retirement benefit under the formula specified in the plan
exceeds the maximum allowable under the provisions of the tax regulations, the
excess is provided on 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 ($160,000 limitation for
1997).
Company contributions, if any, are intended to provide for benefits
attributed to service to date and also for those expected to be earned in the
future. It is the Company's policy to fund the plans on a current basis to the
extent deductible under existing tax laws and regulations. There were no
employer contributions allowed or made in each of the three years ended
November 30, 1997.
Pension data covering the plan for the three years ended November 30, 1997
included the following components in accordance with Statement of Financial
Accounting Standards No. 87--Employers' Accounting for Pensions (000's
omitted):
1997 1996 1995
-------- -------- --------
Service cost--benefits earned during the
period................................... $ (3,820) $ (3,273) $ (3,250)
Interest cost on projected benefit
obligation............................... (8,300) (7,995) (7,851)
Return on plan assets..................... 28,845 28,537 33,058
Net amortization and deferral............. (12,821) (15,082) (18,534)
-------- -------- --------
Net periodic pension income............... $ 3,904 $ 2,187 $ 3,423
======== ======== ========
27
The above amounts are prior to consideration of periodic pension expense of
$1.5 million in 1997, $1.3 million in 1996 and $.9 million in 1995 related to
the Company's non-qualified supplemental pension plan covering certain
employees providing for incremental pension payments from the Company's funds
so that total pension payments equal amounts that would have been payable from
the Company's principal pension plan if it were not for the limitations
imposed by income tax regulations. The related amounts recognized in the
consolidated balance sheet at November 30, 1997 and 1996 were $6.5 million and
$5.0 million, respectively.
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, 1997, the plan assets included 971,012 shares of
the Company's stock with a market value of approximately $7.9 million.
The following sets forth the funded status of the principal pension plan at
November 30 (000's omitted):
NOVEMBER 30,
--------------------
1997 1996
--------- ---------
Actuarial present value of benefit obligations:
Vested benefits.................................. $(104,198) $ (96,497)
Non-vested benefits.............................. (829) (385)
--------- ---------
Accumulated benefit obligation................... (105,027) (96,882)
Effect of projected future compensation levels... (12,831) (11,608)
--------- ---------
Projected benefit obligation....................... (117,858) (108,490)
Plan assets, at fair value....................... 194,258 173,801
--------- ---------
Plan assets in excess of projected benefit
obligation...................................... 76,400 65,311
Unrecognized net gain............................ (41,711) (34,357)
Unrecognized prior service cost.................. (773) (942)
--------- ---------
Prepaid pension cost........................... $ 33,916 $ 30,012
========= =========
The weighted average discount rate used in determining the projected benefit
obligation was 7.5% in 1997 and 8.0% in 1996. The assumed rate of increase in
future compensation levels was 5.5% in 1997 and 1996, and the expected long
term rate of return on the Company sponsored plan assets was 8.75% in 1997 and
1996.
Savings Investment and Employee Stock Ownership Plans
The Company offers a qualified defined contribution plan, the Hartmarx
Savings-Investment Plan ("SIP"), which is a combined salary reduction plan
under Section 401(k) of the Internal Revenue Code and an after-tax savings
plan. Eligible participants in SIP can invest from 1% to 16% of earnings among
several investment alternatives, including a Company stock fund. Employees
participating in this plan automatically participate in the ESOP.
Participation in SIP is required to earn retirement benefits under the
Company's principal pension plan. An employer contribution is made through the
ESOP, based on the employee's level of participation, and 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.
28
The Company's annual expense was $1.2 million in 1997, $1.3 million in 1996
and $2.1 million in 1995. The Company's annual contributions were $2.1 million
in each of the respective years. At November 30, 1997, the assets of SIP and
ESOP funds had a market value of approximately $63.1 million, of which
approximately $16.2 million was invested in 1,966,985 shares of the Company's
common stock.
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 electing to
receive the coverage make contributions to 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.
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
29
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.
During 1997, long term incentive plan restricted stock awards for 142,500
shares were made to eighteen executives. These awards vest at the earliest of
ten years from the date of grant, age 65 retirement, the Company's stock price
exceeding $11.50 for thirty consecutive calendar days or as otherwise
authorized by the Compensation Committee of the Board of Directors. During
1996, long term incentive plan restricted stock awards for 132,500 shares were
made to 20 executives, of which awards for 10,000 shares were cancelled during
1997 pertaining to executives no longer with the Company. 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 calendar days or as
otherwise authorized by the Compensation Committee of the Board of Directors.
As of November 30, 1997, none of the awards had vested. 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, 1997 is as follows:
PRICE PER SHARE
NUMBER OF -----------------------
SHARES RANGE AVERAGE
--------- --------------- -------
Balance at November 30, 1994........... 1,451,800 $5.25 to $30.81 $ 9.53
Granted.............................. 994,500 $5.25 5.25
Expired or terminated................ (182,132) $5.25 to $30.81 23.80
---------
Balance at November 30, 1995 2,264,168 $5.25 to $30.81 6.50
Granted.............................. 249,000 $5.94 5.94
Expired or terminated................ (97,823) $5.25 to $30.81 9.48
---------
Balance at November 30, 1996........... 2,415,345 $5.25 to $30.81 6.32
Granted.............................. 378,000 $7.72 to $ 8.06 7.74
Exercised............................ (216,940) $5.25 to $ 6.88 5.66
Expired or terminated................ (100,218) $5.25 to $30.81 12.05
---------
Balance at November 30, 1997........... 2,476,187 $5.25 to $30.81 6.37
=========
Stock options outstanding at November 30, 1997 included 54,166 shares
granted in tandem with stock appreciation rights. At November 30, 1997,
2,741,187 shares were reserved for options and restricted stock awards
outstanding and 35,921 shares were available for future stock options and/or
restricted stock awards (517,469 shares available at November 30, 1996).
Information on exercisable employee stock options at each date is as
follows:
OPTIONS AVERAGE
DATE EXERCISABLE PRICE
---- ----------- -------
November 30, 1997..................................... 1,963,591 $6.17
November 30, 1996..................................... 1,712,812 $6.64
November 30, 1995..................................... 1,191,724 $7.56
30
Information on employee stock options outstanding and exercisable at
November 30, 1997 is as follows:
WEIGHTED AVERAGE
----------------
REMAINING WEIGHTED
NUMBER LIFE IN NUMBER AVERAGE
RANGE OF PRICES OUTSTANDING YEARS PRICE EXERCISABLE PRICE
--------------- ----------- --------- ------ ----------- --------
$5.25......................... 1,150,526 6.9 $ 5.25 1,035,263 $ 5.25
$5.69 to $7.06................ 880,189 5.6 6.39 860,856 6.39
$7.72 to $8.06................ 378,000 9.6 7.74 -- --
$10.81 to $30.81.............. 67,472 0.9 17.48 67,472 17.48
--------- ------ --------- ------
2,476,187 $ 6.37 1,963,591 $ 6.17
========= ====== ========= ======
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. DSOs are exercisable in full six
months after the date of grant or earlier in the event of death, disability or
termination of services. 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. Information regarding director stock
option activity for the three years ended November 30, 1997 is as follows:
1997 1996 1995
-------------- -------------- --------------
AVG. AVG. AVG.
SHARES PRICE SHARES PRICE SHARES PRICE
------- ----- ------- ----- ------- -----
Balance beginning of year......... 313,986 $5.09 270,374 $5.33 207,248 $5.90
Granted:
Fair Market Value............... 18,664 7.50 24,888 5.63 34,617 5.56
$1.00 Option.................... 13,460 1.00 17,974 1.00 30,696 1.00
DDSA............................ 1,200 -- 1,200 -- 1,650 --
Exercises:
Fair Market Value............... (40,760) 6.01 -- -- -- --
$1.00 Option.................... (31,608) 1.00 -- -- (3,837) 1.00
DDSA............................ (4,338) -- (450) -- -- --
------- ----- ------- ----- ------- -----
Balance end of year............... 270,604 $5.45 313,986 $5.09 270,374 $5.33
======= ===== ======= ===== ======= =====
At November 30, 1997, 180,651 shares were available for future DSOs and
DDSAs.
The weighted average fair value of options granted was estimated to be
$11.98, $8.89 and $7.29 in 1997, 1996 and 1995, respectively. The fair value
of each option granted in the respective year is estimated at the date of
grant using the Black-Scholes option-pricing model utilizing expected
volatility calculations based on historical data from December 1, 1992 (22% to
36%), 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 (5.99% to
6.94%). The expected lives are between five and ten years and no dividends are
assumed.
Pro-forma information related to stock based compensation is as follows (in
millions):
1997 1996 1995
------ ------ ------
Additional compensation expense..................... $ 1.0 $ 1.5 $ 0.5
Pro forma net earnings, before discontinued
operation and extraordinary gain................... 24.5 22.9 21.1
Pro forma earnings per share, before discontinued
operation and extraordinary gain................... .72 .69 .65
31
LEGAL PROCEEDINGS
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and lawsuits in the
aggregate will not have a material adverse effect on the Company's financial
position or results of operations.
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 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, 1997 is summarized as follows (in millions):
1997
------------------------------
MEN'S WOMEN'S
APPAREL APPAREL
GROUP GROUP ADJ. CONSOL.
------- ------- ----- -------
Sales............................................ $658.5 $59.6 -- $718.1
Earnings (loss) before taxes..................... 36.3 6.7 (26.5) 16.5
Gross assets at year end......................... 349.4 25.6 95.4 470.4
Depreciation and amortization.................... 6.9 0.4 0.4 7.7
Property additions............................... 9.6 0.2 0.3 10.1
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
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. Adjustments
of depreciation and amortization and net property additions are for corporate
properties.
32
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Selected quarterly financial and common share information for each of the
four quarters in fiscal 1997 and 1996 is as follows (000's omitted):
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER(2)
---- -------- -------- -------- ---------
Sales............................ $177,118 $169,735 $185,883 $185,399
Gross profit..................... 40,385 41,030 47,030 45,687
Earnings before taxes............ 2,170 515 6,625 7,235
Net earnings..................... 1,345 320 4,105 19,470
Earnings per share............... .04 .01 .12 .57
1996(1)
-------
Sales............................ $150,859 $134,253 $164,905 $160,163
Gross profit..................... 33,874 32,096 38,684 41,993
Earnings (loss) before taxes and
extraordinary gain.............. (2,570) (2,805) 5,047 6,858
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:
before extraordinary gain...... (.05) (.05) .09 .73
after extraordinary gain....... (.03) (.05) .09 .73
- --------
(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) Net earnings in the fourth quarter of each year include non-cash income
tax benefits related to recognition of net operating loss carryforwards of
$8.7 million in 1997 and $17.3 million in 1996. If the Company's normal
tax provision rate of 38% were utilized, earnings per share would have
been $.13 in each period.
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 1998 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 1998 Annual Meeting is incorporated herein by
reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained in the Proxy Statement for the 1998 Annual Meeting
under the captions "Security Ownership's of Directors and Officers" on page 17
and "Ownership of Common Stock" on page 18 is incorporated herein by
reference.
33
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained in the Proxy Statement for the 1998 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
No reports on Form 8-K were filed in the fourth quarter of 1997.
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).
4-C-6 Amendment No. 6 dated October 15, 1997 to the Credit Agreement.
35
EXHIBIT
NO.
AND
APPLICABLE
SECTION
OF
601 OF
REGULATION
S-K
- ----------
*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 COMMITTEE--Executive Compensation
Program -Short-Term Incentives" on page 11 in the Proxy Statement of the Company
relating to the 1998 Annual Meeting), (1). **
*10-C Description of Hartmarx Long Term Incentive Plan (Information to be included under
the caption "REPORT OF THE COMPENSATION COMMITTEE--Executive Compensation
Program--Long-Term Incentives" on page 11 in the Proxy Statement of the Company
relating to the 1998 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, Wohlschlaeger, Condon 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, Wohlschlaeger, Condon 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.
(Exhibit 10-F-1 to Form 10-K for the year ended November 30, 1996), (1) **
*10-F-2 Employment Agreement dated August 1, 1996 between the Company and Homi B. Patel.
(Exhibit 10-F-2 to Form 10-K for the year ended November 30, 1996), (1) **
*10-F-3 Employment Agreement dated August 1, 1996 between the Company and Glenn R. Morgan.
(Exhibit 10-F-4 to Form 10-K for the year ended November 30, 1996), (1) **
*10-F-4 Employment Agreement dated July 1, 1997 between the Company and Frederick G.
Wohlschlaeger (Exhibit 10-A-1 to Form 10-Q for the period ended May 31, 1997), (1)
**
*10-G-1 Severance Agreement dated August 1, 1996 between the Company and Elbert O. Hand.
(Exhibit 10-G-1 to Form 10-K for the year ended November 30, 1996), (1) **
*10-G-2 Severance Agreement dated August 1, 1996 between the Company and Homi B. Patel.
(Exhibit
10-G-2 to Form 10-K for the year ended November 30, 1996), (1) **
*10-G-3 Severance Agreement dated August 1, 1996 between the Company and Glenn R. Morgan.
(Exhibit 10-G-4 to Form 10-K for the year ended November 30, 1996), (1) **
36
EXHIBIT
NO.
AND
APPLICABLE
SECTION
OF
601 OF
REGULATION
S-K
- ----------
*10-G-4 Severance Agreement dated July 1, 1997 between the Company and Frederick G.
Wohlschlaeger. (Exhibit 10-A-2 to Form 10-Q for the period ended May 31, 1997),
(1) **
*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-G-7 Amendment to Severance Agreement between the Company and Executive Officer James
E. Condon. **
*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 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-2 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/ Frederick G. Wohlschlaeger
By: _________________________________ and By: _________________________________
Glenn R. Morgan Frederick G. Wohlschlaeger
Executive Vice President and Chief Senior Vice President, General
Financial Officer Counsel and Secretary
Date: February 27, 1998
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/ Frederick G. Wohlschlaeger
By: _________________________________
Frederick G. Wohlschlaeger
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*Pursuant to Power of Attorney
Date: February 27, 1998
38
HARTMARX CORPORATION
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED NOVEMBER 30, 1997, 1996, AND 1995
(000'S OMITTED)
RESERVE FOR DOUBTFUL
ACCOUNTS
FISCAL YEAR ENDED
NOVEMBER 30,
----------------------
1997 1996 1995
------ ------ ------
Balance at beginning of year............................ $9,983 $7,920 $7,368
Charged to costs and expenses........................... 2,261 3,490 2,783
Reserve related to acquired business.................... -- 900 --
Deductions from reserves (1)............................ (2,441) (2,327) (2,231)
------ ------ ------
Balance at end of year.................................. $9,803 $9,983 $7,920
====== ====== ======
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(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, 33-30549 and 33-03169)
of Hartmarx Corporation of our report dated January 14, 1998 appearing on page
15 of this Form 10-K.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 27, 1998
F-1