Back to GetFilings.com
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 August 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
(Exact name of registrant as specified in its charter)
Delaware 36-3217140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
101 North Wacker Drive
Chicago, Illinois 60606
(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 September 30, 2002 there were 34,223,986 shares of the Company's common
stock outstanding.
HARTMARX CORPORATION
INDEX
Page
Number
------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statement of Earnings
for the three months and nine months ended
August 31, 2002 and August 31, 2001. 3
Unaudited Condensed Consolidated Balance Sheet
as of August 31, 2002, November 30, 2001 and
August 31, 2001. 4
Unaudited Condensed Consolidated Statement of Cash
Flows for the nine months ended August 31, 2002
and August 31, 2001. 6
Notes to Unaudited Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
Item 4. Controls and Procedures. 19
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures 20
Section 302 Certification of Chief Executive Officer. 21
Section 302 Certification of Chief Financial Officer. 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 Nine Months Ended
August 31, August 31,
----------------------------- ------------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
Net sales $ 149,085 $ 159,692 $ 419,287 $ 446,927
Licensing and other income 494 1,072 1,752 2,130
----------- ------------ ------------ ------------
149,579 160,764 421,039 449,057
----------- ------------ ------------ ------------
Cost of goods sold 106,918 121,447 302,534 329,998
Selling, general and administrative expenses 35,859 40,866 108,487 119,711
----------- ------------ ------------ ------------
142,777 162,313 411,021 449,709
----------- ------------ ------------ ------------
Earnings (loss) before settlement re: termination
of systems project, restructuring charge, interest,
taxes and extraordinary item 6,802 (1,549) 10,018 (652)
Settlement re: termination of systems project - - 4,500 -
Restructuring charge - (5,892) (870) (8,500)
----------- ------------ ------------ ------------
Earnings (loss) before interest, taxes and
extraordinary item 6,802 (7,441) 13,648 (9,152)
Interest expense 3,862 3,494 12,428 10,143
----------- ------------ ------------ ------------
Earnings (loss) before taxes and extraordinary item 2,940 (10,935) 1,220 (19,295)
Tax (provision) benefit (1,160) 4,315 (480) 7,620
----------- ------------ ------------ ------------
Earnings (loss) before extraordinary item 1,780 (6,620) 740 (11,675)
Extraordinary item, net (1,695) - (1,695) (69)
----------- ------------ ------------ ------------
Net earnings (loss) $85 ($6,620) ($955) ($11,744)
=========== ============ ============ ============
Earnings (loss) per share (basic and diluted):
Before extraordinary item $ .05 $(.22) $ .02 $(.39)
After extraordinary item $ - $(.22) $(.03) $(.39)
Dividends per common share $ - $ - $ - $ -
Average shares outstanding:
Basic 34,113 30,067 33,354 29,958
Diluted 34,207 30,067 33,446 29,958
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000's omitted)
August 31, Nov. 30, August 31,
CURRENT ASSETS 2002 2001 2001
------------- ------------ -------------
Cash and cash equivalents $ 4,626 $ 1,555 $ 1,179
Accounts receivable, less allowance for doubtful 157,338 143,261 153,103
accounts of $10,420, $10,335 and $10,721
Inventories 103,801 149,613 174,590
Prepaid expenses 9,140 8,293 8,688
Recoverable and deferred income taxes 19,900 19,900 17,899
------------- ------------ -------------
Total current assets 294,805 322,622 355,459
------------- ------------ -------------
INVESTMENTS AND OTHER ASSETS, INCLUDING GOODWILL
31,618 29,437 27,974
------------- ------------ -------------
DEFERRED INCOME TAXES 45,576 43,304 43,879
------------- ------------ -------------
PREPAID AND INTANGIBLE PENSION ASSET 52,360 14,462 16,436
------------- ------------ -------------
PROPERTIES
Land 1,979 2,008 2,179
Buildings and building improvements 36,353 36,565 42,299
Furniture, fixtures and equipment 99,195 102,314 109,334
Leasehold improvements 24,806 23,786 21,413
------------- ------------ -------------
162,333 164,673 175,225
Accumulated depreciation and amortization (128,850) (128,982) (139,988)
------------- ------------ -------------
Net properties 33,483 35,691 35,237
------------- ------------ -------------
TOTAL ASSETS $ 457,842 $ 445,516 $ 478,985
============= ============ =============
(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)
August 31, Nov. 30, August 31,
2002 2001 2001
------------- ------------ ------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 25,572 $ 25,000 $ 35,328
Accounts payable and accrued expenses 76,833 86,995 112,126
------------- ------------ ------------
102,405 111,995 147,454
Total current liabilities
------------- ------------ ------------
LONG-TERM DEBT, less current maturities 119,670 146,553 142,561
------------- ------------ ------------
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 August 31,
2002, 36,280,064 shares issued at November 30, 2001
and 36,317,564 shares issued at August 31, 2001.
92,001 90,700 90,794
Capital surplus 69,154 80,236 80,909
Retained earnings 45,839 46,794 48,979
Unearned employee benefits (3,869) (3,931) (4,334)
Common shares in treasury, at cost,
2,629,718 shares at August 31, 2002,
6,076,646 shares at November 30, 2001 and
6,197,417 shares at August 31, 2001. (11,600) (26,801) (27,334)
Accumulated other comprehensive income (loss) (16) (30) (44)
------------- ------------ ------------
Total shareholders' equity 191,509 186,968 188,970
------------- ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 457,842 $ 445,516 $ 478,985
============= ============ ============
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000's omitted)
Increase (Decrease) in Cash and Cash Equivalents Nine Months Ended August 31,
-------------------------------------
Cash Flows from operating activities: 2002 2001
------------- -------------
Net loss $ (955) $ (11,744)
Reconciling items to adjust net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 4,727 5,709
Amortization of long-lived assets, debt discount and
unearned employee benefits 5,068 1,732
Non-cash extraordinary item, net 1,491 69
Changes in:
Receivables, inventories, prepaids and other assets 29,817 (8,566)
Accounts payable and accrued expenses (7,414) (18,995)
Taxes and deferred taxes on earnings (1,307) (8,889)
------------- -------------
Net cash provided by (used in) operating activities 31,427 (40,684)
------------- -------------
Cash Flows from investing activities:
Capital expenditures (2,819) (5,661)
Cash paid for acquisition (2,156) (7,631)
Cash proceeds from sale of assets 1,881 -
------------- -------------
Net cash used in investing activities (3,094) (13,292)
------------- -------------
Cash Flows from financing activities:
Borrowings under new Credit Facility 85,958 -
Borrowings (payments) under previous Credit Facility (84,976) 47,353
Payment of 10 7/8% senior subordinated notes
in connection with note exchange (9,404) -
Purchase of 10 7/8% senior subordinated notes - (27,235)
Proceeds from mortgage financing - 17,375
(Payment of) proceeds from term loan (15,000) 15,000
Payment of other debt (404) (200)
Financing fees and expenses re: new Credit Facility (2,280) -
Other equity transactions 844 1,107
------------- -------------
Net cash provided by (used in) financing activities (25,262) 53,400
------------- -------------
Net increase (decrease) in cash and cash equivalents 3,071 (576)
Cash and cash equivalents at beginning of period 1,555 1,755
------------- -------------
Cash and cash equivalents at end of period $ 4,626 $ 1,179
============= =============
Supplemental cash flow information:
Net cash paid during the period for:
Interest $ 12,900 $ 12,100
Income taxes 1,600 1,200
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. At August 31,
2002, options to purchase 3,047,596 shares of the Company's common stock were
outstanding at prices ranging from $2.50 to $8.09. None of these options were
included in the computation of diluted earnings per share, as the average
market price per share of the Company's common stock was below $2.50. 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):
August 31, Nov. 30, August 31,
2002 2001 2001
------------- ----------- -------------
Borrowings under new Credit Facility $ 85,958 $ - $ -
Borrowings under previous Credit Facility - 84,976 91,082
Term loan - 15,000 15,000
12 1/2% senior unsecured notes, net 22,832 - -
10 7/8% senior subordinated notes, net - 34,721 34,714
Industrial development bonds 17,250 17,250 17,293
Mortgages and other debt 19,202 19,606 19,800
------------- ----------- -------------
Total debt 145,242 171,553 177,889
Less - current 25,572 25,000 35,328
------------- ----------- -------------
Long-term debt $ 119,670 $ 146,553 $ 142,561
============= =========== =============
On January 16, 2002, the Company completed an exchange offer for its then
outstanding 10 7/8% senior subordinated notes ("Notes") due in January 2002,
originally issued as part of a $100 million public offering in March 1994. 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 then
outstanding 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 (effective interest rate on the New Notes was
approximately 22%), which at August 31, 2002 was $22.8 million, reflecting
unamortized debt discount of $2.5 million. The New Notes are callable at face
value in whole or in part at any time prior to maturity.
Effective August 30, 2002, the Company entered into a new $200 million senior
revolving credit facility ("Credit Facility"). All borrowings under the
replaced facility, including the $15 million 10.25% term loan then
outstanding, were repaid prior to their June 2003 maturity. As further
discussed in Note 10 to the accompanying Notes to Unaudited Consolidated
Financial Statements, the Company recorded an extraordinary charge of $1.7
million or $.05 per share associated with the refinancing. The new Credit
Facility has a three and one-half year term with an additional one year
renewal at the Company's option, and also provides for a $50 million letter of
credit sub-facility. Interest rates under the new facility are based on either
LIBOR or prime as the benchmark rate and on the level of excess availability.
The weighted average interest rate was approximately 5% at August 31, 2002,
based on prime rate loans, and 4.3% at October 14, 2002, based on LIBOR and
prime rate loans. Eligible receivables and inventories provide the principal
collateral for the borrowings, along with certain other tangible and
intangible assets of the Company. Among other things, the Credit Facility
permits the retirement of the New Notes in whole or in part prior to their
September 2003 maturity subject to minimum excess availability levels after
giving effect to such retirements.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. As of August 31, 2002,
the Company was in compliance with all covenants under the Credit Facility and
its other borrowing agreements.
Note 4
Inventories at each date consisted of (000's omitted):
August 31, November 30, August 31,
2002 2001 2001
---------------- ---------------- -----------------
Raw materials $ 40,054 $ 46,227 $ 53,164
Work-in-process 4,342 7,758 9,595
Finished goods 59,405 95,628 111,831
---------------- ---------------- -----------------
$ 103,801 $ 149,613 $ 174,590
================ ================ =================
Inventories are stated at the lower of cost or market. At August 31, 2002,
November 30, 2001 and August 31, 2001, approximately 46%, 48% and 45% 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
nine months ended and as of August 31, 2002 and 2001 is summarized as follows
(in millions):
Men's Women's
Apparel Apparel
Three Months Ended August 31, Group Group Adj. Consol.
----------- ---------- ---------- ----------------
2002
Sales $137.3 $11.8 - $149.1
Earnings (loss) before taxes and
extraordinary item 10.1 0.3 (7.5) 2.9
2001
Sales $146.2 $13.5 - $159.7
Earnings (loss) before taxes and
extraordinary item (5.6) 0.6 (5.9) (10.9)
Nine Months Ended August 31, 2002
Sales $383.9 $35.4 - $419.3
Earnings (loss) before taxes and
extraordinary item 18.3 0.1 (17.2) 1.2
Total assets 291.6 33.5 132.7 457.8
2001
Sales $406.0 $40.9 - $446.9
Earnings (loss) before taxes and
extraordinary item (1.3) 0.9 (18.9) (19.3)
Total assets 349.5 38.1 91.4 479.0
For the periods ended August 31, 2002 and 2001, Men's Apparel Group results
include restructuring charges as follows (in millions):
August 31,
---------------------------------
2002 2001
------------ ------------
Three months $ - $5.9
Nine months 0.9 8.5
During the three and nine month periods ended August 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 a systems project. Adjustments of
total assets are for cash, recoverable and deferred income taxes, investments,
other assets, including the intangible pension asset at August 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 unaudited consolidated
statement of earnings for the three and nine months ended August 31, 2001
reflects a restructuring charge of $5.9 million for the three months and $8.5
million for the nine months, representing costs for severance and related
fringe benefits and estimated closing costs for owned facilities or exit costs
for leased facilities.
The accompanying unaudited consolidated statement of earnings for the nine
months ended August 31, 2002 reflects one time costs of $.9 million, primarily
associated with closing one additional sewing facility during the second
quarter of fiscal 2002.
The $.9 million restructuring charge in fiscal 2002 and remaining liability
balance at August 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 765 266 $ (161) $ 870
Less: Payments during 2002 (1,722) (1,059)
-------------- --------------
Balance at August 31, 2002 $ 208 $ 2,634
============== ==============
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):
Nine Months Ended
--------------------------------
August 31, August 31,
2002 2001
------------ ---------------
Net loss $ (955) $ (11,744)
Other comprehensive income (loss):
Change in fair value of foreign
currency hedge contracts, net of tax 14 262
------------ ---------------
Comprehensive loss $ (941) $ (11,482)
============ ===============
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 14
---------
As of August 31, 2002 $ (16)
=========
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. Net periodic pension expense for the three months and nine months ended
August 31, 2002 and 2001 was as follows (000's omitted):
2002 2001
------------ ------------
Three months ended August 31, $ 2,282 $ 1,925
Nine months ended August 31, 6,884 5,122
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 nine months
ended August 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, the loss of $1.7 million, net of income taxes, relating to the
refinancing of the Company's Credit Facility, consisting principally of
unamortized fees and expenses, was reported as an extraordinary item for the
three months and nine months ended August 31, 2002. Should the Company
extinguish or refinance any of its debt in the remainder of its fiscal year
ending November 30, 2002, any net gain or loss on such extinguishment or
refinancing would also 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 reflected in the
consolidated statement of earnings (loss) before taxes and extraordinary item
and prior period extraordinary items will be reclassified in the consolidated
statement of earnings (loss) before taxes and extraordinary item.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", which
modified certain of the accounting for restructuring related costs. SFAS 146
is effective for restructuring actions initiated after December 31, 2002,
although early adoption is permitted. SFAS 146 addresses, among other things,
recording a liability for a cost associated with an exit or disposal activity
when the liability is incurred and that fair value is the objective for
initial measurement of the liability. Costs incurred in the future related to
an exit or disposal activity, if any, will be recorded in accordance with
SFAS 146.
HARTMARX CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
November 30, 2001 to August 31, 2002
Since November 30, 2001, net accounts receivable increased $14.1 million or
9.8% to $157.4 million, primarily reflecting the seasonal change from tailored
clothing shipments in the Men's Apparel Group. Inventories of $103.8 million
declined $45.8 million or 31% 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. Net
properties decreased $2.2 million to $33.5 million as depreciation expense
exceeded capital additions. Accounts payable and accrued expenses declined
$10.2 million reflecting the reduced inventory commitments, normal seasonal
payments and payments related to the restructuring. Total debt, including
current maturities, decreased $26.3 million to $145.2 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
43% of total capitalization at August 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.
On January 16, 2002, the Company completed an exchange offer for its then
outstanding 10 7/8% senior subordinated notes ("Notes") due in January 2002,
originally issued as part of a $100 million public offering in March 1994. 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 then
outstanding 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 (effective interest rate on the New Notes was
approximately 22%), which at August 31, 2002 was $22.8 million, reflecting
unamortized debt discount of $2.5 million. The New Notes are callable at face
value in whole or in part at any time prior to maturity.
Effective August 30, 2002, the Company entered into a new $200 million senior
revolving credit facility ("Credit Facility"). All borrowings under the
replaced facility, including the $15 million 10.25% term loan then
outstanding, were repaid prior to their June 2003 maturity. The new Credit
Facility has a three and one-half year term with an additional one year
renewal at the Company's option, and also provides for a $50 million letter of
credit sub-facility. Interest rates under the new facility are based on either
LIBOR or prime as the benchmark rate and on the level of excess availability.
The weighted average interest rate was approximately 5% at August 31, 2002,
based on prime rate loans, and 4.3% at October 14, 2002, based on LIBOR and
prime rate loans. Eligible receivables and inventories provide the principal
collateral for the borrowings, along with certain other tangible and
intangible assets of the Company. Among other things, the Credit Facility
permits the retirement of the New Notes in whole or in part prior to their
September 2003 maturity, subject to minimum excess availability levels after
giving effect to such retirements; retirement of a portion of the outstanding
New Notes prior to the end of 2002 is currently under consideration.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. As of August 31, 2002,
the Company was in compliance with all covenants under the Credit Facility and
its other borrowing agreements.
There are a number of factors which can affect the Company's ability to remain
in compliance with the financial covenants currently contained in its Credit
Facility, and to a lesser extent, in its other borrowing arrangements. 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 and 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 Company believes its liquidity and expected cash flows are sufficient to
finance its operations. None of the Company's various borrowing 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 August 31, 2002, availability under the Credit Facility was in excess of
$60 million. At August 31, 2002, the Company had approximately $20 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 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 August 31, 2002, there were an aggregate
of $1.9 million of outstanding foreign exchange contracts primarily related to
anticipated inventory purchases to be made and licensing revenues to be
received in the next six months. The Company has not committed to and has not
provided any guarantees of other lines of credit, repurchase obligations,
etc., with respect to the obligations of any unrelated third party.
August 31, 2001 to August 31, 2002
Net accounts receivable were $157.4 million compared to $153.1 million a year
ago, an increase of 2.8%, attributable to the timing of collections.
Inventories of $103.8 million declined $70.8 million or 41% reflecting the
previously described actions taken to reduce inventories. Inventory reductions
began to take effect during the fourth quarter of last year, declining by $25
million during 2001's fourth quarter. Net properties of $33.5 million
decreased $1.8 million, as 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 $76.8 million declined $35.3 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 August 31, 2002 total debt was $32.6 million lower than the
year earlier amount, representing 43% of total capitalization at August 31,
2002 compared to 48% at August 31, 2001.
Results of Operations
Third Quarter 2002 Compared to Third Quarter 2001
Third quarter consolidated sales were $149.1 million compared to $159.7
million in 2001, reflecting the mediocre sales experienced by retailers in
general. Advance order tailored shipments were stronger in the higher price
point product categories but were more than offset by declines in other
products as well as lower in-stock business overall. Women's Apparel Group
revenues, which represented 8% of consolidated sales in both 2002 and 2001,
respectively, decreased approximately $1.7 million. Aggregate sportswear and
other non-tailored clothing product categories represented approximately 40%
of total third quarter revenues in each period.
The consolidated gross margin percentage to sales improved to 28.3% from 23.9%
last year, reflecting the favorable impact from the restructuring actions
taken last year along with ongoing programs to reduce manufacturing and
sourcing costs. Consolidated selling, general and administrative expenses
declined to $35.9 million in the current period from $40.9 million in 2001 and
the ratio to sales improved to 24.1% in 2002 compared to 25.6% in 2001.
Expense reductions emanating from the various 2001 restructuring actions are
being realized as anticipated. The current period also reflected $.7 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 $6.8
million in 2002 compared to a loss of $7.4 million in 2001. EBIT represented
4.6% of net sales in 2002 and a negative 4.7% of net sales in 2001. The prior
period included a restructuring charge of $5.9 million. Interest expense was
$3.9 million this period compared to $3.5 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. Pre-tax earnings were
$2.9 million this year compared to a loss of $10.9 million last year. After
reflecting the applicable tax provision or benefit, net earnings before
extraordinary item were $1.8 million this period compared to a loss of $6.6
million last year. The basic and diluted earnings per share was $.05 compared
to a loss of $.22 per share in 2001. The current period also included an
extraordinary charge of $1.7 million, net of tax benefit, or $.05 per share,
principally attributable to the write-off of unamortized financing fees under
the old Credit Facility.
Nine Months 2002 Compared to Nine Months 2001
Consolidated sales decreased $27.6 million or 6.2% to $419.3 million from
$446.9 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 advance orders and previously stated actions to reduce revenues in
lower profit potential moderate priced tailored clothing product categories,
partially offset by the inclusion of $13.6 million incremental sales
attributable to CAG, higher in-stock clothing shipments and increased
sportswear product sales. Women's Apparel Group revenues, which represented 8%
and 9% of consolidated sales in 2002 and 2001, respectively, decreased
approximately $5.5 million. Aggregate sportswear and other non-tailored
clothing product categories, including women's, represented 41% of
year-to-date sales versus 38% a year ago.
The consolidated gross margin percentage to sales was 27.8% compared to 26.2%
last year, reflecting the favorable impact from the restructuring actions
along with ongoing programs to improve margins from lower manufacturing and
sourcing costs, partially offset by disposition of surplus inventories earlier
in the year. Consolidated selling, general and administrative expenses were
$108.5 million in the current period compared to $119.7 million in 2001, and
represented 25.9% of sales in 2002 compared to 26.8% of sales in 2001. Expense
reductions anticipated from the restructuring are being realized; the current
year included $6.6 million of incremental expenses related to the inclusion of
CAG for the full year and the Hickey-Freeman retail store.
EBIT was $13.6 million in 2002 compared to a loss of $9.2 million in 2001 and
represented 3.3% of sales in 2002 compared to a negative 2.0% of sales in
2001. Year-to-date results for the current year included settlement proceeds
of $4.5 million related to a legal action initiated in 1999 against the
provider of an enterprise resource planning software, as well as a $.9 million
restructuring charge, primarily related to the closing of one manufacturing
facility. The prior year's results included restructuring charges of $8.5
million. Interest expense increased to $12.4 million from $10.1 million last
year; the current period reflected $2.9 million of non-cash interest,
including $1.5 million of debt discount amortization related to the New Notes.
The new Senior Credit Facility, effective August 30, 2002, among other things,
resulted in lower benchmark borrowing rates and the payment of the 10.25% term
loan. Based on recent overall borrowing levels and assuming the scheduled
retirement of the New Notes in September 2003, the new Senior Credit Facility
is expected to result in annualized cash interest savings exceeding $2.5
million.
Consolidated pre-tax earnings were $1.2 million this year compared to a loss
of $19.3 million last year. After reflecting the applicable tax provision or
benefit, consolidated net earnings before extraordinary item were $.7 million
or $.02 per basic and diluted share this year compared to a loss of $11.7
million or $.39 per share last year.
Fourth quarter revenues are expected to approximate the fourth quarter of
2001. 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 fourth quarter and full year ending
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 August 31, 2002, the Company had
entered into foreign exchange contracts, aggregating approximately $1.9
million corresponding to approximately 1.6 million Euros, primarily related to
inventory purchases in the next three months, and 46 million yen, primarily
related to anticipated licensing revenues to be received in the next six
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 new 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.
A 1% change in the effective interest rate on the Company's borrowings under
its new Credit Facility would impact interest expense by approximately $.7
million. In the last three years, the Company has not used derivative
financial instruments to manage interest rate risk.
Item 4 - Controls and Procedures
(A) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are
effective in bringing to their attention on a timely basis material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic filings under the Exchange
Act.
(B) Changes in Internal Controls. Since the Evaluation Date, there
have not been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
Part II -- OTHER INFORMATION
- - [PG NUMBER] -
Item 6 -- Exhibits and Reports on Form 8-K
(A) Exhibits:
4-C-1 Loan and Security Agreement dated August 30, 2002.
10-F-5 Letter Amendment dated August 8, 2002 to Employment Agreement
between the Company and Glenn R. Morgan.
10-F-6 Employment Agreement dated August 8, 2002 between the
Company and Taras R. Proczko.
10-F-7 Severance Agreement dated August 8, 2002 between the Company
and Taras R. Proczko.
99-1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbenes-Oxley Act
of 2002.
99-2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbenes-Oxley Act
of 2002.
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
October 15, 2002 By /s/ GLENN R. MORGAN
--------------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
October 15, 2002 By /s/ ANDREW A. ZAHR
--------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibits No. Description
4-C-1 Loan and Security Agreement dated August 30, 2002.
10-F-5 Letter Amendment dated August 8, 2002 to Employment
Agreement between the Company and Glenn R. Morgan.
10-F-6 Employment Agreement dated August 8, 2002 between the Company
and Taras R. Proczko.
10-F-7 Severance Agreement dated August 8, 2002 between the Company
and Taras R. Proczko.
99-1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbenes-Oxley Act
of 2002.
99-2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbenes-Oxley Act
of 2002.
CERTIFICATIONS
I, Homi B. Patel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hartmarx
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: October 15, 2002
/s/ Homi B. Patel
_______________________________
Homi B. Patel
President and Chief Executive Officer
CERTIFICATIONS
I, Glenn R. Morgan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hartmarx
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: October 15, 2002
/s/ Glenn R. Morgan
________________________________
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer