SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934
------
For quarterly period ended May 31, 2002
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
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(Exact name of registrant as specified in its charter)
Delaware 36-3217140
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
101 North Wacker Drive
Chicago, Illinois 60606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 312/372-6300
------------
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
------- --------
At June 30, 2002 there were 34,088,245 shares of the Company's common stock
outstanding.
HARTMARX CORPORATION
INDEX
Page
Number
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statement of Earnings
for the three months and six months ended
May 31, 2002 and May 31, 2001. 3
Unaudited Condensed Consolidated Balance Sheet
as of May 31, 2002, November 30, 2001 and
May 31, 2001. 4
Unaudited Condensed Consolidated Statement of
Cash Flows for the six months ended May 31, 2002
and May 31, 2001. 6
Notes to Unaudited Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Results of Votes of Security Holders. 22
Item 6. Exhibits and Reports on Form 8-K. 23
Signatures 23
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
HARTMARX CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS
(000's omitted, except per share data)
Three Months Ended Six Months Ended
May 31, May 31,
----------------------------- ------------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
Net sales $ 130,581 $ 146,078 $ 270,202 $ 287,235
Licensing and other income 449 374 1,258 1,058
--------- --------- --------- ---------
131,030 146,452 271,460 288,293
--------- --------- --------- ---------
Cost of goods sold 94,132 106,738 195,616 208,551
Selling, general and administrative expenses 36,967 41,207 72,628 78,845
--------- --------- --------- ---------
131,099 147,945 268,244 287,396
--------- --------- --------- ---------
Earnings (loss) before settlement re: termination
of systems project, restructuring charge, interest,
taxes and extraordinary item (69) (1,493) 3,216 897
Settlement re: termination of systems project 4,500 -- 4,500 --
Restructuring charge (870) (2,013) (870) (2,608)
--------- --------- --------- ---------
Earnings (loss) before interest, taxes and
extraordinary item 3,561 (3,506) 6,846 (1,711)
Interest expense 4,396 3,374 8,566 6,649
--------- --------- --------- ---------
Loss before taxes and extraordinary item (835) (6,880) (1,720) (8,360)
Tax benefit 330 2,720 680 3,305
--------- --------- --------- ---------
Loss before extraordinary item (505) (4,160) (1,040) (5,055)
Extraordinary item, net -- (69) -- (69)
--------- --------- --------- ---------
Net loss ($ 505) ($ 4,229) ($ 1,040) ($ 5,124)
========= ========= ========= =========
Loss per share (basic and diluted):
Before extraordinary item ($ .01) ($ .14) ($ .03) ($ .17)
========= ========= ========= =========
After extraordinary item ($ .01) ($ .14) ($ .03) ($ .17)
========= ========= ========= =========
Dividends per common share $ -- $ -- $ -- $ --
========= ========= ========= =========
Average shares outstanding:
Basic and diluted 33,818 29,972 32,925 29,903
========= ========= ========= =========
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000's omitted)
May 31, 2002 Nov. 30, May 31,
CURRENT ASSETS 2001 2001
------------- ------------ -------------
Cash and cash equivalents $ 2,368 $ 1,555 $ 626
Accounts receivable, less allowance for doubtful 117,140 143,261 122,751
accounts of $9,773, $10,335 and $9,311
Inventories 119,864 149,613 177,394
Prepaid expenses 11,329 8,293 8,022
Recoverable and deferred income taxes 19,900 19,900 17,899
--------- --------- ---------
Total current assets 270,601 322,622 326,692
--------- --------- ---------
INVESTMENTS AND OTHER ASSETS, INCLUDING GOODWILL
29,615 29,437 11,054
--------- --------- ---------
DEFERRED INCOME TAXES 45,405 43,304 39,406
--------- --------- ---------
PREPAID AND INTANGIBLE PENSION ASSET 54,645 14,462 18,352
--------- --------- ---------
PROPERTIES
Land 1,980 2,008 2,289
Buildings and building improvements 36,439 36,565 42,773
Furniture, fixtures and equipment 102,776 102,314 108,447
Leasehold improvements 25,091 23,786 19,820
--------- --------- ---------
166,286 164,673 173,329
Accumulated depreciation and amortization (131,982) (128,982) (138,062)
--------- --------- ---------
Net properties 34,304 35,691 35,267
--------- --------- ---------
TOTAL ASSETS $ 434,570 $ 445,516 $ 430,771
========= ========= =========
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted, except per share data)
May 31, Nov. 30, May 31,
2002 2001 2001
------------- ------------ -----------
CURRENT LIABILITIES
Current maturities of long-term debt $ 25,562 $ 25,000 $ 15,080
Accounts payable and accrued expenses 74,653 86,995 89,777
--------- --------- ---------
100,215 111,995 104,857
Total current liabilities
--------- --------- ---------
LONG-TERM DEBT, less current maturities 99,111 146,553 131,003
--------- --------- ---------
MINIMUM PENSION LIABILITY 44,258 -- --
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 shares authorized and unissued -- -- --
Common shares, $2.50 par value; 75,000,000 shares
authorized; 36,800,564 shares issued at May 31,
2002, 36,280,064 shares issued at November 30, 2001
and 36,317,564 shares issued at May 31, 2001
92,001 90,700 90,794
Capital surplus 69,680 80,236 81,369
Retained earnings 45,754 46,794 55,599
Unearned employee benefits (4,306) (3,931) (4,677)
Common shares in treasury, at cost,
2,749,952 shares at May 31, 2002,
6,076,646 shares at November 30, 2001 and
6,303,144 shares at May 31, 2001 (12,130) (26,801) (27,800)
Accumulated other comprehensive income (loss) (13) (30) (374)
--------- --------- ---------
Total shareholders' equity 190,986 186,968 194,911
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 434,570 $ 445,516 $ 430,771
========= ========= =========
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000's omitted)
Six Months Ended May 31,
------------------------------------
2002 2001
------------- ------------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from operating activities:
Net loss $ (1,040) $ (5,124)
Reconciling items to adjust net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 3,207 3,747
Amortization of long lived assets, debt discount and
unearned employee benefits 3,200 1,132
Changes in:
Receivables, inventories, prepaids and other assets 53,120 8,069
Accounts payable and accrued expenses (9,684) (22,531)
Taxes and deferred taxes on earnings (2,111) (4,361)
Extraordinary item, net -- 69
-------- --------
Net cash provided by (used in) operating activities 46,692 (18,999)
-------- --------
Cash Flows from investing activities:
Capital expenditures (1,967) (3,068)
Cash paid for acquisition (2,156) --
Cash proceeds from sale of assets 1,444 --
-------- --------
Net cash used in investing activities (2,679) (3,068)
-------- --------
Cash Flows from financing activities:
Increase (decrease) in borrowings under Credit Facility (34,126) 30,421
Payment of 10 7/8% senior subordinated notes
in connection with note exchange (9,404) --
Purchase of 10 7/8% senior subordinated notes -- (27,236)
Proceeds from mortgage financing -- 17,375
Payment of debt (268) (66)
Other equity transactions 598 444
-------- --------
Net cash provided by (used in) financing activities (43,200) 20,938
-------- --------
Net increase (decrease) in cash and cash equivalents 813 (1,129)
Cash and cash equivalents at beginning of period 1,555 1,755
-------- --------
Cash and cash equivalents at end of period $ 2,368 $ 626
======== ========
Supplemental cash flow information: Net cash paid during the period for:
Interest $ 8,000 $ 7,300
Income taxes 1,400 1,100
Non-cash financing transaction:
Pursuant to the January 16, 2002 exchange of the Company's new 12 1/2%
senior unsecured notes, cash and stock for the maturing 10 7/8% senior
subordinated notes, as more fully described in the Notes to Unaudited
Consolidated Financial Statements, the Company exchanged $25,321,000 in
debt and issued 2,949,495 shares of treasury stock.
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying financial statements are unaudited, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of
operations, financial position and cash flows for the applicable period
presented. Results of operations for any interim period are not necessarily
indicative of results for any other periods or for the full year. These
unaudited interim financial statements should be read in conjunction with
the financial statements and related notes contained in the Annual Report
on Form 10-K for the year ended November 30, 2001. Certain prior year
amounts have been reclassified to conform to the current year's
presentation.
Note 2
The calculation of basic earnings per share for each period is based on the
weighted average number of common shares outstanding. The calculation of
diluted earnings per share reflects the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into common stock using the treasury stock method. None of the
2,500,000 authorized preferred shares for Hartmarx Corporation have been
issued.
Note 3
Long-term debt comprised the following (000's omitted):
May 31, Nov. 30, May 31,
2002 2001 2001
------------ ------------ ------------
Borrowings under Credit Facility $ 50,850 $ 84,976 $ 74,150
Term loan 15,000 15,000 --
12 1/2% senior unsecured notes, net 22,235 -- --
10 7/8% senior subordinated notes, net -- 34,721 34,706
Industrial development bonds 17,250 17,250 17,315
Mortgages and other debt 19,338 19,606 19,912
-------- -------- --------
Total debt 124,673 171,553 146,083
Less - current 25,562 25,000 15,080
-------- -------- --------
Long-term debt $ 99,111 $146,553 $131,003
======== ======== ========
In March 1994, the Company entered into a then three-year financing
agreement providing for a senior credit facility ("Credit Facility") with a
group of lenders at which time it also issued $100 million principal amount
of 10 7/8% Senior Subordinated Notes due January 15, 2002 ("Notes") in a
public offering. The Credit Facility currently provides for maximum
revolving borrowings of $200 million (subject to the borrowing base
calculations and minimum excess availability requirements), including a $50
million letter of credit sub-facility. The Credit Facility currently is in
effect through June 2003.
Several amendments to the Company's Credit Facility were completed during
2001 to address (i) operating results which required revisions to certain
financial covenants, (ii) additional financing resources required relating
to the acquisition of the Consolidated Apparel Group, L.L.C. ("CAG") and
(iii) financing alternatives regarding the January 15, 2002 maturity of the
$34.7 million of outstanding Notes. A December 13, 2001 amendment, among
other things, authorized the completion of an exchange offer for the
Company's Notes and adjusted various covenants to reflect anticipated
business conditions to provide borrowing availability which the Company
believes will be sufficient to fund its operations after making the cash
payments to the holders of the Notes who exchanged their Notes in the
exchange offer and to those who were paid upon maturity of the notes. The
exchange offer was accepted by holders of 91.2% of the Notes and completed
on January 16, 2002. For each $1,000 principal amount of Notes outstanding,
the Company paid $200 in cash and issued $800 principal amount of new 12
1/2% senior unsecured notes ("New Notes") due September 15, 2003 and 93
shares of common stock. Upon completion of the exchange offer, all of the
$34.7 million of Notes were retired and $25.3 million face value of New
Notes and 2.9 million shares of common stock were issued. The New Notes
have been recorded at estimated fair value, which at May 31, 2002 was $22.2
million, reflecting unamortized debt discount of $3.1 million.
The Credit Facility includes various other events of default and contains
certain restrictions on the operation of the business, including covenants
pertaining to capital expenditures, asset sales, operating leases and
incurrence or existence of additional indebtedness and liens, as well as
other customary covenants, representations and warranties, and events of
default. As of May 31, 2002, the Company was in compliance with all
covenants under the Credit Facility and its other borrowing agreements. The
Company expects that it will satisfy the various provisions of its Credit
Facility, as amended, and its other borrowing agreements; however, there
can be no assurance that the Company will remain in compliance with its
financial covenants.
Note 4
Inventories at each date consisted of (000's omitted):
May 31, Nov. 30, May 31,
2002 2001 2001
---------------- ---------------- -----------------
Raw materials $ 46,674 $ 46,227 $ 56,003
Work-in-process 5,674 7,758 14,339
Finished goods 67,516 95,628 107,052
-------- -------- --------
$119,864 $149,613 $177,394
======== ======== ========
Inventories are stated at the lower of cost or market. At May 31, 2002,
November 30, 2001 and May 31, 2001, approximately 50%, 48% and 52% 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.
Note 5
The Company is engaged in the manufacturing and marketing of apparel. The
Company's customers comprise major department and specialty stores, value
oriented retailers and direct mail companies. The Company 's Men's Apparel
Group designs, manufactures and markets tailored clothing, slacks,
sportswear and dress furnishings; the Women's Apparel Group markets women's
career apparel, sportswear and accessories to both retailers and to
individuals who purchase women's apparel through a direct mail catalog.
Information on the Company's operations and total assets for the three and
six months ended and as of May 31, 2002 and 2001 is summarized as follows
(in millions):
Men's Women's
Apparel Apparel
Three Months Ended May 31, Group Group Adj. Consol.
--------------- -------------- ----------- ----------------
2002
Sales $ 119.1 $ 11.5 $ -- $ 130.6
Earnings (loss) before taxes 2.2 (0.1) (2.9) (0.8)
2001
Sales $ 132.9 $ 13.2 $ -- $ 146.1
Earnings (loss) before taxes and
extraordinary item 0.1 (0.3) (6.7) (6.9)
Six Months Ended May 31,
2002
Sales $ 246.6 $ 23.6 $ -- $ 270.2
Earnings (loss) before taxes 8.2 (0.2) (9.7) (1.7)
Total assets 267.3 34.1 133.2 434.6
2001
Sales $ 259.8 $ 27.4 $ -- $ 287.2
Earnings (loss) before taxes and
extraordinary item 4.3 0.3 (13.0) (8.4)
Total assets 310.4 33.1 87.3 430.8
For the periods ended May 31, 2002 and 2001, Men's Apparel Group results
include restructuring charges as follows (in millions):
May 31,
---------------------------------
2002 2001
------------ ------------
Three months $0.9 $2.0
Six months 0.9 2.6
During the three and six month periods ended May 31, 2002 and 2001, there
were no intergroup sales and there was no change in the basis of
measurement of group earnings or loss.
Operating expenses incurred by the Company in generating sales are charged
against the respective group; indirect operating expenses are allocated to
the groups benefitted. Group results exclude any allocation of general
corporate expense, interest expense or income taxes.
Amounts included in the "adjustment" column for earnings (loss) before
taxes consist principally of interest expense, general corporate expenses
and in 2002, the settlement re: termination of systems project. Adjustments
of total assets are for cash, recoverable and deferred income taxes,
investments, other assets, including the intangible pension asset at May
31, 2002, and corporate properties. The Men`s Apparel Group total assets
include goodwill related to acquisitions.
Note 6
During the third quarter of 2001, the Company acquired certain assets,
properties and operations of the Consolidated Apparel Group, L.L.C.
("CAG"), a privately held marketer of popular priced sportswear. The
acquisition was consistent with the Company's previously stated strategy to
expand its apparel offerings in non-tailored product categories. The
purchase price of the assets acquired was $18 million plus the assumption
of debt and other specified payables and accruals. Additional contingent
consideration is payable to the seller based upon the achievement of
specified levels of earnings before interest and taxes of the business
during five annual periods within a specified period beginning July 1,
2001, or upon a change in control. Such contingent consideration is
considered as additional purchase price when earned and, accordingly,
reflected as goodwill. CAG's results of operations have been included in
the Company's financial statements since the date of the acquisition.
Pursuant to the terms of the purchase agreement, contingent consideration
of $1.8 million earned for the initial period ended November 30, 2001 and
recorded as additional goodwill as of that date was paid to the seller
during the first quarter of fiscal 2002.
Note 7
During fiscal 2001, the Company initiated a number of gross margin
improvement and cost reduction actions in response to the weak sales of
apparel at retail and reduced consumer confidence. These actions included
the wind-up of certain moderate tailored clothing operations, the closing
of six facilities engaged in fabric cutting and sewing operations, one
distribution center, several administrative offices, early voluntary
retirement programs and other administrative workforce reductions. The
accompanying consolidated statement of earnings for the three and six
months ended May 31, 2001 reflects a restructuring charge of $2.0 million
for the three months and $2.6 million for the six months, representing
costs for severance and related fringe benefits and estimated closing costs
for owned facilities or exit costs for leased facilities.
The accompanying consolidated statement of earnings for the three and six
months ended May 31, 2002 reflects one time costs of $.9 million associated
with closing one sewing facility.
The $.9 million restructuring charge in fiscal 2002 and remaining liability
balance at May 31, 2002 consisted of the following (000's omitted):
Lease Adjustment of
Severance Termination Long-lived
and and Facility Assets
Benefits Closing Costs Total
---------------- ----------------- ---------------- ---------------
Balance at November 30, 2001 $ 1,165 $ 3,427
Plus: Provision during 2002 642 158 $ 70 $ 870
Less: Payments during 2002 (1,784) (731)
-------------- ---------------
Balance at May 31, 2002 $ 23 $ 2,854
============== ===============
Note 8
Comprehensive income, which includes all changes in the Company's equity
during the period, except transactions with stockholders, was as follows
(000's omitted):
Six Months Ended
-------------------------------------
May 31, May 31,
2002 2001
--------------- ---------------
Net loss $(1,040) $(5,124)
Other comprehensive income (loss):
Change in fair value of foreign 17 (68)
currency hedge contracts, net of tax
------- -------
Comprehensive loss $(1,023) $(5,192)
======= =======
Accumulated Other Comprehensive Income (Loss) consists of the following
(000's omitted):
As of November 30, 2001 $ (30)
Current period change in fair value of foreign exchange
contracts, net of tax 17
-------
As of May 31, 2002 $ (13)
=======
Note 9
Following the substantial completion of the various restructuring and cost
reduction actions, the Company reviewed its actuarial assumptions relating
to its defined benefit and non-qualified supplemental pension plans as of
May 31, 2002. The following sets forth the information related to the
change in the benefit obligation and change in plan assets for the
Company's defined benefit and non-qualified supplemental pension plans as
of May 31, 2002 and the related pension expense for the six months ended
May 31, 2002 and 2001 (000's omitted):
Change in Benefit Obligation
Benefit obligation at beginning of year $ 222,815
Service cost 2,795
Interest cost 7,289
Actuarial (gain) or loss (8,104)
Benefits paid (6,974)
---------
Benefit obligation at May 31, 2002 217,821
---------
Change in Plan Assets
Fair value of plan assets at beginning of year 169,202
Contribution 624
Actual return on plan assets 7,730
Benefits paid (6,974)
---------
Fair value of plan assets at May 31, 2002 170,582
---------
Funded status (47,239)
Unrecognized net actuarial (gain) or loss 10,187
Unrecognized prior service cost 47,496
---------
Prepaid benefit cost at May 31, 2002 $ 10,444
=========
Components of net periodic pension expense are as follows (000's omitted):
Six Months Ended
------------------------------
May 31, 2002 May 31, 2001
------------ ------------
Service cost $ 2,795 $ 2,601
Interest cost 7,289 6,581
Expected return on plan assets (7,156) (7,308)
Net amortization 1,674 1,323
------- -------
Net periodic pension expense $ 4,602 $ 3,197
======= =======
At May 31, 2002, the accompanying condensed consolidated balance sheet also
reflects a non-cash "intangible pension asset" and an offsetting "minimum
pension liability" of $44.3 million, based upon the updated annual
actuarial valuation.
As of
------------------------------
May 31, Nov. 30,
Weighted-Average Assumptions 2002 2001
------------- -------------
Discount rate 7.00% 6.75%
Expected return on plan assets 8.75% 8.75%
Rate of compensation increase 4.00% 4.25%
Note 10
Effective December 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". Upon adoption of the new standard, the Company ceased amortizing
goodwill relating to acquisitions prior to June 30, 2001, of which the net
carrying amount was approximately $1.3 million. The required analysis
performed as proscribed under FAS 142 indicated that there was no
impairment of the recorded goodwill. Goodwill amortization in the three
months and six months ended May 31, 2001 was less than $.1 million.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS 145 is applicable for
the Company's 2003 fiscal year beginning December 1, 2002. SFAS 145
addresses, among other things, any gain or loss on the extinguishment of
debt that was classified as an extraordinary item in prior periods that
does not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. Accordingly, should the Company
extinguish or refinance any of its debt in the remainder of its fiscal year
ending November 30, 2002, any gain or loss on such extinguishment or
refinancing would be reported as an extraordinary item. Effective December
1, 2002, any gain or loss on extinguishment of debt that does not meet the
criteria of Opinion 30, as amended, will be recorded in results of
operations and prior period extraordinary items will be reclassified, as
appropriate.
HARTMARX CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
November 30, 2001 to May 31, 2002
- ---------------------------------
Since November 30, 2001, net accounts receivable decreased $26.1 million or
18% to $117.1 million, reflecting the seasonal change from tailored
clothing shipments in the Men's Apparel Group. Inventories of $119.9
million declined $29.7 million or 20% reflecting the actions to reduce
inventory commitments in light of the generally lackluster environment at
retail for apparel products and de-emphasis or elimination of certain
brands or programs not offering the prospects of adequate profitability
over the long term, partially offset by seasonal factors preceding
anticipated tailored clothing shipments in the third quarter. Net
properties decreased $1.4 million to $34.3 million as depreciation expense
exceeded capital additions. Accounts payable and accrued expenses declined
$12.3 million reflecting normal seasonal payments, the reduced inventory
commitments and payments related to the restructuring. Total debt,
including current maturities, decreased $46.9 million to $124.7 million, as
the seasonal increase in working capital requirements that would ordinarily
result was more than offset by the actions taken to reduce inventories.
Total debt represented 39% of total capitalization at May 31, 2002 compared
to 48% at November 30, 2001.
In addition to the information provided below relating to debt, credit
facilities, guarantees, future commitments, liquidity and risk factors, the
reader should also refer to the Company's Annual Report on Form 10-K for
the year ended November 30, 2001.
In March 1994, the Company entered into the Credit Facility with a group of
lenders for an initial $175 million commitment and three-year term, at
which time it also issued $100 million principal amount of Notes in a
public offering. The Credit Facility currently provides for maximum
revolving borrowings of $200 million (subject to borrowing base
calculations and minimum excess availability requirements), including a $50
million letter of credit sub-facility. The Credit Facility is in effect
through June 2003.
Several amendments to the Company's Credit Facility were completed during
2001 to address (i) operating results which required revisions to certain
financial covenants and minimum excess availability levels, (ii) additional
financing resources required related to the CAG acquisition, and (iii)
financing alternatives regarding the January 15, 2002 maturity of the $34.7
million of outstanding Notes. A December 13, 2001 Credit Facility
amendment, among other things, authorized the completion of an exchange
offer for the Notes, adjusted various covenants to reflect anticipated
business conditions to provide borrowing availability which the Company
believes will be sufficient to fund its operations after making the cash
payments to the holders of the Notes who exchanged their Notes in the
exchange offer and to those who were paid upon maturity of the notes. The
exchange offer was accepted by holders of 91.2% of the Notes and completed
on January 16, 2002. For each $1,000 principal amount of Notes outstanding,
the Company paid $200 in cash and issued $800 principal amount of new 12
1/2% senior unsecured notes ("New Notes") and 93 shares of common stock.
Upon completion of the exchange offer, $25.3 million face value of New
Notes due September 15, 2003 and 2.9 million additional common shares were
issued and all of the $34.7 million of Notes were retired.
The Credit Facility contains certain restrictions on the operation of its
business, including covenants pertaining to capital expenditures, asset
sales, operating leases and incurrence or existence of additional
indebtedness and liens, as well as other customary covenants,
representations and warranties, and events of default. As of May 31, 2002,
the Company was in compliance with all covenants under the Credit Facility
and its other borrowing agreements. The Company expects it will satisfy the
various covenants under its Credit Facility, as amended, and its other
borrowing agreements; however, there can be no assurance that the Company
will remain in compliance with its financial covenants.
There are a number of factors which can affect the Company's ability to (i)
remain in compliance with the financial covenants currently contained in
its Credit Facility, and to a lesser extent, in its other borrowing
arrangements or, alternatively, (ii) to obtain replacement financing for
its Credit Facility. The following summarizes the most significant items:
> The apparel environment is cyclical, and the level of consumer
spending on apparel can decline during recessionary periods when
disposable income declines. The tailored clothing market relating
to suits has experienced unit declines over the past several
years. If the tailored clothing market continues to decline, sales
and profitability would be adversely affected.
> Continuation of widespread casual dressing in the workplace could
further reduce the demand for tailored clothing products,
especially for tailored suits. While the Company markets several
sportswear and casual product lines, consumer receptiveness to
these casual and sportswear product offerings may not offset the
declines in the tailored clothing unit sales.
> The Company's customers include major U.S. retailers (certain of
which are under common ownership and control), several of whom
reported declines in sales during various monthly periods of 2001,
as well as into fiscal 2002. A decision by the controlling
management of a group of stores or any other significant customer,
whether motivated by competitive conditions, financial
difficulties or otherwise, to decrease the amount of merchandise
purchased from the Company, or change their manner of doing
business could have a material adverse effect on the Company's
financial conditions and results of operations.
> The completion on January 16, 2002 of the previously described
exchange offer satisfied the principal debt service requirement
for fiscal 2002 and no additional financing or liquidity proceeds
are required under the Credit Facility. The Company's Credit
Facility requires, among other things, that the Company maintain
cumulative consolidated adjusted earnings before interest, taxes,
depreciation and amortization and other specified non-cash items
at or above a prescribed minimum for designated periods. If the
Company is not able to maintain its minimum cumulative adjusted
earnings amount, particularly if current recessionary economic
trends persist or if there is insufficient cash flow and capital
resources to meet debt service obligations, the Company would need
its lenders to approve a modification of such earnings covenants,
to refinance or further restructure its debt obligations or to
obtain additional equity capital. While the Company believes
alternative sources of financing are available, there can be no
assurance that alternative financing would be available and if so,
on acceptable terms.
The Company's various borrowing arrangements are either fixed rate or
variable rate borrowing arrangements. None of the arrangements have rating
agency "triggers" which would impact either the borrowing rate or borrowing
commitment. The Company has not entered into off balance sheet financing
arrangements, other than operating leases, and has made no financial
commitments or guarantees with any unconsolidated subsidiaries or special
purpose entities. All of the Company's subsidiaries are wholly owned and
included in the accompanying unaudited consolidated financial statements.
There have been no related party transactions nor any other transactions
which have not been conducted on an arm's-length basis.
At May 31, 2002, availability under the Credit Facility was approximately
$50 million compared to the $15 million required to be maintained. At May
31, 2002, the Company had approximately $19 million of letters of credit
outstanding, relating to either contractual commitments for the purchase of
inventories from unrelated third parties or for such matters as workers'
compensation requirements in lieu of cash deposits. Such letters of credit
are issued pursuant to the Company's $200 million Credit Facility and are
considered as usage for purposes of determining the maximum available
credit line and excess availability. The Company has also entered into
surety bond arrangements aggregating $8.3 million with unrelated parties
for the purposes of satisfying workers' compensation deposit requirements
of various states where the Company has operations. At May 31, 2002, there
were an aggregate of $.8 million of outstanding foreign exchange contracts
primarily related to anticipated licensing revenues to be received in the
next twelve months. The Company has not committed to and has not provided
any guarantees of other lines of credit, stand-by letters of credit,
repurchase obligations, etc., to any other third party.
May 31, 2001 to May 31, 2002
- ----------------------------
Net accounts receivable of $117.1 million decreased $5.6 million or 5%,
principally reflecting the lower sales compared to the prior period.
Inventories of $119.9 million declined $57.5 million or 32%, reflecting the
previously described actions taken to reduce inventories. Current period
inventories included approximately $6 million attributable to CAG. Net
properties of $34.3 million decreased $1.0 million, as the $.7 million
attributable to CAG and capital additions were more than offset by higher
depreciation expense and reductions related to the closing or disposition
of certain facilities associated with 2001 restructuring actions. Accounts
payable and accrued expenses of $74.7 million declined $15.1 million
primarily reflecting the lower inventory levels. Debt levels are being
favorably impacted by the reduced inventories and other restructuring
actions. At November 30, 2001 total debt had been $46 million higher than
the year earlier amount. By May 31, 2002 total debt was $21.4 million lower
than the year earlier amount, representing 39% of total capitalization at
May 31, 2002 compared to 43% at May 31, 2001.
Results of Operations
Second Quarter 2002 Compared to Second Quarter 2001
- ---------------------------------------------------
Second quarter consolidated sales were $130.6 million compared to $146.1
million in 2001, reflecting lower tailored clothing Spring `02 advance
order shipments partially offset by higher in-stock tailored clothing
shipments and increased sportswear sales. Current period revenues included
approximately $8 million related to the acquisition of CAG. Women's Apparel
Group revenues, which represented 9% and 9% of consolidated sales in 2002
and 2001, respectively, decreased approximately $1.7 million. Aggregate
sportswear and other non-tailored clothing product categories represented
approximately 45% of total second quarter revenues compared to 38% a year
ago.
The consolidated gross margin percentage to sales improved to 27.9% from
26.9% last year, reflecting the favorable impact from the restructuring
actions taken last year and improved sourcing. Consolidated selling,
general and administrative expenses declined to $37.0 million in the
current period from $41.2 million in 2001 and the ratio to sales was 28.3%
in 2002 compared to 28.2% in 2001. Overall expense reductions emanating
from the various 2001 restructuring actions are being realized as
anticipated. The current period also reflected $2.9 million of incremental
expenses related to the inclusion of CAG and the Hickey-Freeman retail
store in New York City, which opened in October 2001.
Earnings before interest, taxes and extraordinary item ("EBIT") were $3.6
million in 2002 compared to a loss of $3.5 million in 2001. EBIT
represented 2.7% of net sales in 2002 and a negative 2.4% of net sales in
2001. The current period included settlement proceeds of $4.5 million
related to a legal action initiated in 1999 against the provider of an
enterprise resource planning software ("settlement proceeds"), as well as a
$.9 million restructuring charge, primarily related to the closing of one
manufacturing facility. The prior period included a restructuring charge of
$2.0 million. Interest expense was $4.4 million this period compared to
$3.4 million last year; the current period reflected $1.1 million of
non-cash interest, including $.6 million of debt discount amortization
related to the New Notes. The consolidated pre-tax loss was $.8 million
this year compared to a loss of $6.9 million last year. After reflecting
the applicable tax benefit, the consolidated net loss was $.5 million this
period compared to a loss of $4.2 million last year. The basic and diluted
loss per share was $.01 compared to a loss of $.14 per share in 2001.
Six Months 2002 Compared to Six Months 2001
- -------------------------------------------
Consolidated sales decreased $17.0 million or 6% to $270.2 million from
$287.2 million in 2001, principally attributable to the Men's Apparel
Group. Within the Men's Apparel Group, tailored clothing product revenues
represented the principal component of the decline, reflecting both lower
tailored clothing Spring `02 advance orders and previously stated plans to
reduce revenues in lower profit potential moderate priced tailored clothing
product categories, partially offset by the inclusion of $14.7 million
attributable to CAG, higher in-stock clothing shipments and increased
sportswear product sales. Women's Apparel Group revenues, which represented
9% and 10% of consolidated sales in 2002 and 2001, respectively, decreased
approximately $3.8 million. Aggregate sportswear and other non-tailored
clothing product categories, including women's, represented 41% of first
half sales versus 38% a year ago.
The consolidated gross margin percentage to sales was 27.6% compared to
27.4% last year, reflecting product mix changes and improved sourcing
principally offset by disposition of surplus inventories. Consolidated
selling, general and administrative expenses were $72.6 million in the
current period compared to $78.8 million in 2001, and represented 26.9% of
sales in 2002 compared to 27.4% of sales in 2001. The current year included
$5.9 million of incremental expenses related to the inclusion of CAG and
the Hickey-Freeman retail store.
EBIT was $6.8 million in 2002 compared to a loss of $1.7 million in 2001
and represented 2.5% of sales in 2002 compared to a negative .6% of sales
in 2001. Results included the settlement proceeds this year partially
offset by restructuring charges of $.9 million; the prior year's results
included restructuring charges of $2.6 million. Interest expense increased
to $8.6 million from $6.6 million last year; the current period reflected
$1.9 million of non-cash interest, including $.9 million of debt discount
amortization related to the New Notes. The consolidated pre-tax loss was
$1.7 million this year compared to a loss of $8.4 million last year. After
reflecting the applicable tax benefit, the consolidated net loss was $1.0
million or $.03 per basic and diluted share this year compared to a loss of
$5.1 million or $.17 per share last year.
Second half revenues are expected to be comparable to the second half of
2001, reflecting Fall `02 advance orders trending higher in the better and
luxury price-point tailored clothing product categories. The expected
expense savings from the restructuring actions are being realized. Based on
current conditions, it is anticipated that the Company will achieve pre-tax
profitability for the second half and full year ended November 30, 2002.
This quarterly report on Form 10-Q contains forward-looking statements made
in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The statements could be significantly
impacted by such factors as the level of consumer spending for men's and
women's apparel, the prevailing retail environment, the Company's
relationships with its suppliers, customers, lenders, licensors and
licensees, actions of competitors that may impact the Company's business
and the impact of unforeseen economic changes, such as interest rates, or
in other external economic and political factors over which the Company has
no control. The reader is also directed to the Company's 2001 Annual Report
on Form 10-K for additional factors that may impact the Company's results
of operations and financial condition. Forward-looking statements are not
guarantees as actual results could differ materially from those expressed
or implied in forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------------------
The Company does not hold financial instruments for trading purposes or
engage in currency speculation. The Company enters into foreign exchange
forward contracts from time to time to limit the currency risks associated
with purchase obligations or anticipated receipts of licensing income
denominated in foreign currencies. Foreign exchange contracts are generally
for amounts not to exceed forecasted purchase obligations or receipts 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
typically settled by actual delivery of goods or receipt of funds. The
effects of movements in currency exchange rates on these instruments, which
have not been significant, are recognized in earnings in the period in
which the purchase obligations are satisfied or funds are received. As of
May 31, 2002, the Company had entered into foreign exchange contracts,
aggregating approximately $.8 million corresponding to approximately 100
million yen, primarily related to anticipated licensing revenues to be
received in the next twelve months.
The Company is subject to the risk of fluctuating interest rates in the
normal course of business, primarily as a result of borrowings under its
Credit Facility, which bear interest at variable rates. The variable rates
may fluctuate over time based on economic conditions, and the Company could
be subject to increased interest payments if market interest rates rise
rapidly. In the last three years, the Company has not used derivative
financial instruments to manage interest rate risk.
Part II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
The various actions commenced against the Company following the August 13,
2001 announcement by The Lincoln Company LLC ("Lincoln") of its intention
to commence a tender offer for all of the Company's outstanding shares of
common stock (which was subsequently withdrawn on October 1, 2001) have
been dismissed without prejudice pursuant to stipulation between the
parties.
Those actions, as described in the Company's November 30, 2001 10-K report,
were filed in the Chancery Court of the State of Delaware in August 2001:
Harbor Finance Partners v. Samaual A.T. Bakhsh, et al., Civil Action No.
19055; Sandra Summerfield v. Elbert O. Hand, et al., Civil Action No.
19060; Boris Dorfman v. Elbert O. Hand, et al., Civil Action No. 19070; and
Miriam Thurm v. Elbert O. Hand, et al., Civil Action No. 19086. Another
purported class action captioned Robert Crockett vs. Hartmarx Corporation,
et al., No. 01 CH 14297, was filed in the Circuit Court of Cook County,
Illinois, County Department, Chancery Division, against the Company and its
directors in August 2001. The Harbor Finance Partners action was dismissed
on May 6, 2002; the Summerfield, Dorfman, Thurm and Crockett actions were
dismissed on April 9, 2002.
Item 4 - Results of Votes of Security Holders
The annual meeting of the stockholders of the Registrant was held on April
11, 2002. The Directors listed in the Registrant's Proxy Statement for the
Annual Meeting of Stockholders dated February 26, 2002 were elected for one
year terms with voting for each as follows:
Director For Abstentions
- ------------------------------ ---------------- ------------------
Samawal A. T. Bakhsh 23,033,561 5,487,878
Jeffrey A. Cole 21,899,800 6,621,639
Raymond F. Farley 23,249,794 5,271,645
Elbert O. Hand 21,800,314 6,721,125
Donald P. Jacobs 22,079,477 6,441,962
Charles Marshall 23,389,515 5,131,924
Homi P. Patel 23,347,407 5,174,032
Michael B. Rohlfs 23,466,924 5,054,515
Stuart L. Scott 22,036,678 6,484,761
The reappointment of PricewaterhouseCoopers LLP as independent auditors was
ratified with 27,491,324 shares for, 887,665 shares opposed and 142,450
shares abstaining.
With respect to the advisory and non-binding stockholder proposals
concerning (i) the redemption, repeal and termination of all of the Rights
distributed under the Stockholder Rights Plan ("Rights Plan") and (ii)
amending the Company's Restated Certificate of Incorporation, By-Laws and
related governing instruments in order to provide for cumulative voting in
the election of directors ("Cumulative Voting"), the voting for each was as
follows:
Rights Plan Cumulative
Voting
---------------- ----------------
In favor 12,735,358 11,726,288
Opposed 4,763,649 10,681,932
Abstaining 5,934,056 400,577
Broker non-votes 5,088,376 5,712,642
Item 6 -- Exhibits and Reports on Form 8-K
(A) Exhibits:
3-B By-laws of the Company, as amended to the date hereof.
4-C-8 Eighth Amendment to the Amended and Restated Credit
Facility dated May 14, 2002.
4-C-9 Ninth Amendment to the Amended and Restated Credit Facility
dated June 15, 2002.
10-F-4 Letter Amendment dated April 11, 2002 to Employment
Agreement and Severance Agreement between the Company and
Elbert O. Hand.
10-F-5 Letter Amendment dated April 11, 2002 to Employment
Agreement and Severance agreement between the Company and
Homi B. Patel.
(B) On May 13, 2002, the Company filed a Form 8-K relating to
fulfilling the requirement to obtain $10 million of additional
liquidity proceeds by June 30, 2002, as provided under its Senior
Credit Facility.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTMARX CORPORATION
July 12, 2002 By /s/ GLENN R. MORGAN
-----------------------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
July 12, 2002 By /s/ ANDREW A. ZAHR
-----------------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)