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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended August 31, 2003
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
incorporation or organization) Identification 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
------------
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark x/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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x/ No _____
-------
Indicate by check mark x/whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x/ No _____
--------
At September 30, 2003 there were 34,963,288 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, 2003 and August 31, 2002. 3
Unaudited Condensed Consolidated Balance Sheet
as of August 31, 2003, November 30, 2002 and
August 31, 2002. 4
Unaudited Condensed Consolidated Statement of Cash Flows
for the nine months ended August 31, 2003
and August 31, 2002. 6
Notes to Unaudited Consolidated Financial Statements. 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
ITEM 4. Controls and Procedures 22
PART II - OTHER INFORMATION
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 NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------------------- -----------------------------
2003 2002 2003 2002
----------- ------------ ------------ -----------
RESTATED RESTATED
Net sales $ 151,559 $ 149,291 $ 410,373 $ 419,207
Licensing and other income 560 494 1,532 1,752
----------- ------------ ------------ -----------
152,119 149,785 411,905 420,959
----------- ------------ ------------ -----------
Cost of goods sold 108,505 106,988 289,218 303,702
Selling, general and administrative expenses 35,736 36,246 106,822 109,114
Restructuring charge - - - 870
Settlement re: termination of systems project - - - (4,500)
----------- ------------ ------------ -----------
144,241 143,234 396,040 409,186
----------- ------------ ------------ -----------
Earnings before interest and taxes 7,878 6,551 15,865 11,773
Interest expense 1,773 3,862 5,540 12,428
Refinancing expense - 2,801 795 2,801
----------- ------------ ------------ -----------
Earnings (loss) before taxes 6,105 (112) 9,530 (3,456)
Tax (provision) benefit (2,565) 41 (3,915) 1,363
----------- ------------ ------------ -----------
Net earnings (loss) $ 3,540 $ (71) $ 5,615 $ (2,093)
=========== ============ ============ ===========
Basic and diluted earnings (loss) per share : $ .10 $ - $ .16 $ (.06)
=========== ============ ============ ===========
Dividends per common share - - - -
=========== ============ ============ ===========
Average shares outstanding:
Basic 34,143 34,113 33,990 33,354
======= ======= ======= ======
Diluted 34,639 34,113 34,326 33,354
======= ======= ======= =======
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000'S OMITTED)
AUG. 31, NOV. 30, AUG. 31,
2003 2002 2002
------------- ------------ -------------
CURRENT ASSETS RESTATED
Cash and cash equivalents $ 6,027 $ 6,854 $ 4,626
Accounts receivable, less allowance
for doubtful accounts of $10,202,
$8,984 and $10,270 146,652 126,221 154,495
Inventories 137,577 115,175 105,283
Prepaid expenses 6,840 6,540 8,369
Deferred income taxes 11,372 11,372 17,135
------------- ------------ -------------
Total current assets 308,468 266,162 289,908
------------- ------------ -------------
GOODWILL 22,548 21,660 21,088
------------- ------------ -------------
DEFERRED INCOME TAXES 58,551 61,722 49,796
------------- ------------ -------------
OTHER ASSETS 6,942 8,657 10,345
------------- ------------ -------------
PREPAID AND INTANGIBLE PENSION ASSET 58,708 64,527 52,360
------------- ------------ -------------
PROPERTIES
Land 1,980 1,980 1,979
Buildings and building improvements 36,286 36,223 36,353
Furniture, fixtures and equipment 103,849 101,302 99,204
Leasehold improvements 24,650 24,740 24,659
------------- ------------ -------------
166,765 164,245 162,195
Accumulated depreciation and amortization (137,319) (131,690) (128,952)
------------- ------------ -------------
Net properties 29,446 32,555 33,243
------------- ------------ -------------
TOTAL ASSETS $ 484,663 $ 455,283 $ 456,740
============= ============ =============
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000'S OMITTED)
AUG. 31, NOV. 30, AUG. 31,
2003 2002 2002
------------- ------------ -------------
CURRENT LIABILITIES RESTATED
Current maturities of long-term debt $ 20,611 $ 20,582 $ 25,572
Accounts payable and accrued expenses 72,767 83,875 77,959
------------- ------------ -------------
Total current liabilities 93,378 104,457 103,531
------------- ------------ -------------
LONG-TERM DEBT, less current maturities 135,472 102,782 119,670
------------- ------------ -------------
MINIMUM PENSION LIABILITY 69,473 69,473 44,258
------------- ------------ -------------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued - - -
Common shares, $2.50 par value; 75,000,000
shares authorized; 36,996,314 shares issued at
August 31, 2003, 36,800,564 shares issued at
November 30, 2002 and August 31, 2002. 92,491 92,001 92,001
Capital surplus 66,187 67,660 69,154
Retained earnings 52,185 46,570 43,611
Unearned employee benefits (1,766) (2,530) (3,869)
Common shares in treasury, at cost,
2,077,492 at August 31, 2003,
2,497,317 at November 30, 2002 and
2,629,718 at August 31, 2002. (9,164) (11,016) (11,600)
Accumulated other comprehensive income (loss) (13,593) (14,114) (16)
------------- ------------ -------------
Total shareholders' equity 186,340 178,571 189,281
------------- ------------ -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 484,663 $ 455,283 $ 456,740
============= ============ =============
(See accompanying notes to unaudited consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000'S OMITTED)
NINE MONTHS ENDED AUGUST 31,
-------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2003 2002
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES: RESTATED
Net earnings (loss) $ 5,615 $ (2,093)
Reconciling items to adjust net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 4,761 4,707
Amortization of long lived assets, debt discount and
unearned employee benefits 2,354 5,068
Non-cash charge re: refinancing expense 795 2,464
Changes in:
Receivables, inventories, prepaids and other assets (37,549) 29,446
Accounts payable and accrued expenses (9,329) (5,002)
Taxes and deferred taxes on earnings 2,832 (3,022)
------------- --------------
Net cash provided by (used in) operating activities (30,521) 31,568
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,744) (2,960)
Contingent payments re: acquisition (1,664) (2,156)
Cash proceeds from sale of assets 185 1,881
------------- --------------
Net cash used in investing activities (3,223) (3,235)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under new Credit Facility 42,724 85,958
Payments under previous Credit Facility - (84,976)
Payment of term loan - (15,000)
Payment of 12 1/2% Senior Unsecured Notes (10,341) -
Payment of 10 7/8% Senior Subordinated Notes,
in connection with note exchange - (9,404)
Payment of other debt (435) (404)
Financing fees and expenses re: new Credit Facility - (2,280)
Other equity transactions 969 844
------------- --------------
Net cash provided by (used in) financing activities 32,917 (25,262)
------------- --------------
Net increase (decrease) in cash and cash equivalents (827) 3,071
Cash and cash equivalents at beginning of period 6,854 1,555
------------- --------------
Cash and cash equivalents at end of period $ 6,027 $ 4,626
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION: Net cash paid during the period for:
Interest $ 5,800 $ 12,900
Income taxes 1,000 1,600
NON-CASH FINANCING TRANSACTION:
In January 2002, pursuant to the January 16, 2002 exchange of the
Company's 12 1/2% senior unsecured notes, cash and stock for the maturing
10 7/8% senior subordinated notes, 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, 2002. Certain prior year amounts have been reclassified to conform
to the current year's presentation. In accordance with SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" (as more fully described in Note 10),
results for 2002 reflect the reclassification related to the August 2002
refinancing of the Company's senior credit facility from extraordinary item to
a separate caption, "Refinancing Expense", in the accompanying Unaudited
Consolidated Statement of Earnings.
NOTE 2
As previously discussed in the Company's Annual Report on Form 10-K for the
year ended November 30, 2002, as a result of the fiscal 2002 year-end review
performed by the Company's internal auditors at its International Women's
Apparel subsidiary, the Company became aware of certain accounting
irregularities. The Company promptly notified both its Audit Committee and its
independent accountants. As a result of the review, the Company has restated
its previously issued financial statements for the years ended November 30,
2001 and November 30, 2000. Unaudited quarterly financial information for the
first three quarters of the year ended November 30, 2002 was also restated. The
restatements primarily arose from the correction of certain balance sheet and
income statement items, which among other things, relate to (1) the timing of
allowances granted to customers and (2) various other accruals and valuation
adjustments which were not recorded in the appropriate accounting period. The
effect of the restatement on the net loss for the three months ended August 31,
2002 was to decrease the previously reported net earnings of $.1 million to a
loss of $.1 million with no change in the diluted breakeven per share amount
and for the nine months ended August 31, 2002 was to increase the previously
reported net loss of $1.0 million to a loss of $2.1 million and increase the
diluted loss per share from $.03 to $.06.
The following table presents the amounts previously reported in the
Consolidated Statement of Earnings for the third quarter of fiscal 2002 and the
restated amounts (000's omitted, except per share amounts).
PREVIOUSLY
REPORTED* RESTATED
------------- -------------
Net sales $ 149,085 $ 149,291
Licensing and other income 494 494
Cost of goods sold 106,918 106,988
Selling, general and administrative expenses 35,859 36,246
------------- -------------
Earnings before interest, taxes and extraordinary loss 6,802 6,551
Interest expense 3,862 3,862
Refinancing expense - 2,801
------------- -------------
Earnings (loss) before taxes and extraordinary loss 2,940 (112)
Tax (provision) benefit (1,160) 41
------------- -------------
Earnings (loss) before extraordinary loss 1,780 (71)
Extraordinary loss, net (1,695) -
------------- -------------
Net earnings (loss) $ 85 $ (71)
============= =============
Earnings (loss) per share:
Before extraordinary loss $ .05 $ -
============= =============
After extraordinary loss $ - $ -
============= =============
* The amounts shown as previously reported for the third quarter of fiscal year
2002 are as reported in the Company's Quarterly Report on Form 10-Q for that
interim period. The restated amounts for net sales, earnings (loss) and
earnings (loss) per share were reported in the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 2002. Also, the previously reported
extraordinary loss incurred in the third quarter of 2002 related to the
refinancing of the Company's senior credit facility has been reclassified
pursuant to Statement of Financial Accounting Standards No. 145, "Recission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections".
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 2002, consolidated retained earnings have been
retroactively restated to reflect an increase of $4.8 million effective for
periods prior to December 1, 1999. This increase resulted from the reversal of
certain balance sheet accruals and valuation allowances established in prior
years for which specific needs were not required as of November 30, 1999. This
adjustment had no impact on earnings for the three and nine periods ended
August 31, 2002. Accordingly, at August 31, 2002, total assets as previously
reported were reduced by $1.1 million, total liabilities were increased by $1.1
million, total shareholders' equity and equity per share were reduced by $2.2
million and $.06, respectively, due to the above described items. A comparison
of the previously reported to restated amounts at August 31, 2002 are as
follows (000's omitted):
PREVIOUSLY
REPORTED RESTATED
------------- -------------
Accounts receivable, less allowances $ 157,338 $ 154,495
Inventories 103,801 105,283
Prepaid expenses 9,140 8,369
Deferred income taxes 65,476 66,931
Net properties 33,483 33,243
Prepaid and intangible pension asset 52,360 52,360
All other assets 36,244 36,059
Total assets $ 457,842 $ 456,740
============= =============
Accounts payable and accrued expenses $ 76,833 $ 77,959
Total debt 145,242 145,242
Minimum pension liability 44,258 44,258
Shareholders' equity 191,509 189,281
------------- -------------
Total liabilities and shareholders' equity $ 457,842 $ 456,740
============= =============
Unless otherwise expressly stated, all financial information in this Quarterly
Report on Form 10-Q is presented inclusive of these restatements.
NOTE 3
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, 2003 and 2002,
options to purchase 2,844,770 shares and 3,047,596 shares, respectively, of the
Company's common stock were outstanding at prices ranging from $2.50 to $8.09.
For the quarter ended August 31, 2003, options to purchase 1,853,499 shares
were included in the computation of diluted earnings per share utilizing the
treasury stock method as the average market price per share of the Company's
common stock was above the grant price for those options. For 2002, no 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 the grant price.
None of the 2,500,000 authorized preferred shares for Hartmarx Corporation have
been issued.
The Company accounts for its employee stock based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost related to stock options is reflected in net earnings, as all
options granted under those plans had an exercise price equal to or greater
than the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings (loss) and earnings
(loss) per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation (in millions, except per share data).
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
--------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ---------- -----------
Net earnings (loss) $ 3.5 $ (0.1) $ 5.6 $ (2.1)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (0.1) (0.1) (0.4) (0.3)
----------- ----------- ---------- -----------
Pro forma net earnings (loss) $ 3.4 $ (0.2) $ 5.2 $ (2.4)
=========== =========== ========== ===========
Earnings (loss) per share:
Basic and diluted - as reported $ .10 $ - $ .16 $ (.06)
=========== =========== ========== ===========
Basic and diluted - pro forma $ .10 $ - $ .15 $ (.07)
=========== =========== ========== ===========
The fair value of each option granted in the respective period is estimated at
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
NOTE 4
Long-term debt comprised the following (000's omitted):
AUG. 31, NOV. 30, AUG. 31,
2003 2002 2002
------------ ------------ ------------
Borrowings under Credit Facility $ 120,204 $ 77,480 $ 85,958
12 1/2% senior unsecured notes, net - 9,570 22,832
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 18,629 19,064 19,202
------------ ------------ ------------
156,083 123,364 145,242
Less - current 20,611 20,582 25,572
------------ ------------ ------------
Long-term debt $ 135,472 $ 102,782 $ 119,670
============ ============ ============
On January 16, 2002, the Company completed an exchange offer for its then
outstanding 10 7/8% senior subordinated notes ("Old 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 Old 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 Old 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
were recorded at estimated fair value, net of unamortized debt discount. The
New Notes were 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"), replacing a $200 million
facility scheduled to mature in June 2003. Among other things, the Credit
Facility resulted in lower borrowing rates. All borrowings under the replaced
facility, including the $15 million 10 1/4% term loan then outstanding, were
repaid. This refinancing resulted in a fiscal 2002 third quarter pre-tax charge
of $2.8 million, reflected as refinancing expense in the Unaudited Consolidated
Statement of Earnings. The new Credit Facility has a three and one-half year
term with an additional one year renewal at the Company's option (i.e., until
February 2007), and also provides for a $50 million letter of credit
sub-facility. Interest rates under the new facility are based on a spread in
excess of either LIBOR or prime as the benchmark rate and on the level of
excess availability. The weighted average interest rate was approximately 3.6%
at August 31, 2003, based on LIBOR and prime rate loans. The facility provides
for an unused commitment fee of 3/8% per annum based on the $200 million
maximum, less the outstanding borrowings and letters of credit issued. Eligible
receivables and inventories provide the principal collateral for the
borrowings, along with certain other tangible and intangible assets of the
Company.
On November 26, 2002, the Company retired $15 million face value of outstanding
New Notes. This resulted in a fiscal 2002 fourth quarter pre-tax refinancing
charge of $1.3 million, representing the write off of unamortized debt discount
and issue costs. On January 21, 2003, the Company retired the remaining $10.3
million face value of outstanding New Notes. This early retirement resulted in
a fiscal 2003 first quarter pre-tax charge of $.8 million, related to the
write-off of the remaining unamortized debt discount and issue costs, and
reflected as refinancing expense in the accompanying Unaudited Consolidated
Statement of Earnings.
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. During fiscal 2003 and
as of August 31, 2003, the Company was in compliance with all covenants under
the Credit Facility and its other borrowing agreements. At August 31, 2003, the
Company had approximately $21 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 borrowing availability. At August 31, 2003, borrowing
availability under the Credit Facility was approximately $58 million.
Mortgages and other debt includes the Company's ongoing guarantee of a $2.5
million industrial development bond, bearing interest at 8 1/2%, retained by a
former subsidiary and due September 1, 2007. The Company pays interest on this
debt semi-annually and there is no collateral for this debt.
NOTE 5
Inventories at each date consisted of (000's omitted):
AUG. 31, NOV. 30, AUG. 31,
2003 2002 2002
-------------- -------------- -------------
Raw materials $ 37,402 $ 43,007 $ 40,194
Work-in-process 8,134 7,312 4,342
Finished goods 92,041 64,856 60,747
-------------- -------------- -------------
$ 137,577 $ 115,175 $ 105,283
============== ============== =============
Inventories are stated at the lower of cost or market. At August 31, 2003,
November 30, 2002 and August 31, 2002, approximately 50%, 48% and 46% 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 6
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 and using the internet.
Information on the Company's operations and total assets for the three and nine
months ended and as of August 31, 2003 and 2002 is summarized as follows (in
millions):
MEN'S WOMEN'S
APPAREL APPAREL
GROUP GROUP ADJ. CONSOL.
--------------- -------------- ----------- -------------
THREE MONTHS ENDED AUGUST 31,
2003
Sales $ 136.0 $ 15.6 $ - $ 151.6
Earnings (loss) before taxes 9.6 1.3 (4.8) 6.1
2002
Sales $ 137.7 $ 11.6 $ - $ 149.3
Earnings (loss) before taxes 10.3 (0.1) (10.3) (0.1)
NINE MONTHS ENDED AUGUST 31,
2003
Sales $ 371.8 $ 38.6 $ - $ 410.4
Earnings (loss) before taxes 24.9 0.8 (16.2) 9.5
Total assets 311.2 29.0 144.5 484.7
2002
Sales $ 383.9 $ 35.3 $ - $ 419.2
Earnings (loss) before taxes 17.6 (1.1) (20.0) (3.5)
Total assets 294.2 27.0 135.5 456.7
For the nine months ended August 31, 2002, Men's Apparel Group results include
a restructuring charge of $.9 million.
During the three and nine month periods ended August 31, 2003 and 2002, 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, refinancing expense, general corporate
expenses and in 2002, the $4.5 million settlement re: termination of systems
project. Adjustments of total assets are for cash, recoverable and deferred
income taxes, investments, other assets and corporate properties, including the
intangible pension asset. The Men's Apparel Group total assets include goodwill
related to acquisitions.
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 affecting approximately 1,600 employees,
most of whom were production employees. During fiscal 2002, the Company closed
one additional sewing facility affecting approximately 150 production employees
and supervisors and realized favorable adjustments related to the fiscal 2001
provision for estimated realizable fair values of fixed assets which were sold
in 2002, as well as insignificant adjustments to the amounts provided in 2001.
The remaining restructuring liability balance at August 31, 2003, representing
lease obligations through November 2010, consisted of the following (000's
omitted):
Balance November 30, 2002 $ 1,450
Payments during 2003 (126)
------------
Balance at August 31, 2003 $ 1,324
============
NOTE 8
On September 25, 2003, the Company's Board of Directors approved and adopted an
amendment to its stockholder rights plan. The amendment provides that the
Rights Plan will automatically expire upon the closing price of the Company's
common stock exceeding the then current book value per share for sixty
consecutive calendar days. Nothing in the terms of this Rights Plan amendment
reflect any views or beliefs on the part of the Company's management or Board
of Directors as to the future trading prices of the Company's common stock or
the fairness or adequacy of any particular price that might be proposed to be
paid for the Company's common stock in a control transaction or otherwise.
NOTE 9
Comprehensive income (loss), 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
---------------------------------
AUG. 31, AUG. 31,
2003 2002
------------ -------------
Net earnings (loss) $ 5,615 $ (2,093)
Other comprehensive income:
Change in fair value of foreign exchange
contracts, net of tax 65 14
Currency translation adjustment, net of tax 456 -
------------ -------------
Comprehensive earnings (loss) $ 6,136 $ (2,079)
============ =============
Accumulated Other Comprehensive Income (Loss) consists of the following (000's
omitted):
As of November 30, 2002 $ (14,114)
Current period change in:
Fair value of foreign exchange contracts, net of tax 65
Currency translation adjustment, net of tax 456
-------------
As of August 31, 2003 $ (13,593)
=============
NOTE 10
Effective December 1, 2002, the Company adopted the Financial Accounting
Standards Board SFAS No. 143, "Accounting for Asset Retirement Obligations" and
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS 143 addresses financial accounting and reporting obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. Adoption of these statements has
had no effect on the Company's reported financial position, results of
operations, cash flows or financial statement disclosures.
Effective December 1, 2002, the Company adopted SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS 145, among other things, proscribes that any gain
or loss on extinguishment of debt that does not meet the criteria in Opinion
30, as amended, no longer be classified as an extraordinary item. Accordingly,
refinancing expense of $.8 million related to the January 2003 retirement of
the remaining $10.3 million of 12.5% Senior Unsecured Notes, representing the
write-off of unamortized debt discount and issue costs, has been reflected in a
separate caption in the determination of earnings before taxes in the Unaudited
Consolidated Statement of Earnings. The third quarter 2002 refinancing expense
of $2.8 million ($1.7 million net of tax) related to the refinancing of the
Company's Credit Facility in August 2002 reflected as an extraordinary item
when reporting financial results last year has been reclassified to a separate
caption in the determination of earnings before taxes in the Unaudited
Consolidated Statement of Earnings. Similarly, the extraordinary item recorded
in the fourth quarter of fiscal 2002 relating to the early retirement of New
Notes will be reclassified when full year results are reported for fiscal 2003.
Effective January 1, 2003, the Company adopted 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. 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. The Company did not have
any restructuring activities initiated after December 31, 2002, and adoption of
this statement has had no effect on the Company's reported financial position,
results of operations, cash flows or financial statement disclosures.
Effective January 1, 2003, the Company adopted FASB Interpretation No. 45 ("FIN
45") "Guarantor's Accounting and Disclosure Requirements for Guarantees
Including Indirect Guarantees of Indebtedness of Others". FIN 45 is applicable
for any guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for the Company's first quarter ended
February 28, 2003. FIN 45 elaborates on the disclosures required by a guarantor
in its interim and annual financial statements about obligations under certain
guarantees that it has issued. FIN 45 also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the
fair value of that obligation. Adoption of this statement has had no effect on
the Company's reported financial position, results of operations or cash flows.
In January 2003, the Financial Accounting Standards Board issued FIN 46
"Consolidation of Variable Interest Entities, An Interpretation of APB No. 51".
FIN 46 provides guidance on the identification of entities for which control is
achieved through means other than through voting rights ("variable interest
entities" or "VIE") and how to determine when and which business enterprises
should consolidate the VIE. This new model for consolidation applies to
entities (1) where the equity investors (if any) do not have a controlling
financial interest or (2) whose equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both
the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. FIN 46 applies immediately to
VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains
an interest after that date. It applies in the first fiscal year or interim
period beginning after June 15, 2003, to VIEs in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The interpretation
applies to the Company as of the beginning of fiscal 2003. As the Company does
not have any VIEs, adoption of this statement has had no effect on the
Company's reported financial condition, results of operations, cash flows or
financial statement disclosures.
As of December 1, 2002, the Company adopted the disclosure requirement of SFAS
No. 148, "Accounting for Stock Based Compensation--Transition and Disclosure".
For companies that have made the voluntary decision to change its method of
accounting for stock-based employee compensation to the fair-value method, SFAS
148 provides two additional alternative transition methods for recognizing
expense related to stock based compensation. SFAS 148 also amends the
disclosure requirements of SFAS 123 so that entities will have to (1) make more
prominent disclosures regarding the pro forma effects of using the fair-value
method of accounting for stock-based compensation, (2) present those
disclosures in a more accessible format in the footnotes to the annual
financial statements, and (3) include those disclosures in interim financial
statements. Should the Company voluntarily change its method of accounting for
stock based employee compensation, SFAS 148's transition guidance and
provisions for annual disclosures are effective for the Company's fiscal year
ending November 30, 2003. Adoption of this statement has had no effect on the
Company's reported financial position, results of operations or cash flows.
Effective June 1, 2003, the Company adopted SFAS No. 149, "Amendments of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149
amends SFAS 133 and certain other FASB standards for decisions made by the FASB
as part of the Derivatives Implementation Group process. Among other changes,
the standard clarifies the definition of a derivative financial instrument.
SFAS 149 is generally effective for contracts entered into or modified after
June 30, 2003. The provisions of SFAS 149 that relate to SFAS 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective dates. In addition, certain provisions of SFAS 149 that apply to
forward purchases or sales of when-issued securities or other securities that
do not yet exist are applicable to both existing contracts and new contracts
entered into after June 30, 2003. Adoption of this statement has had no effect
on the Company's reported financial position, results of operations, cash flows
or financial statement disclosures.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial instruments with Characteristics of Both
Liabilities and Equity". SFAS 150 establishes standards for issuers of
financial instruments with characteristics of both liabilities and equity
related to the classification and measurement of those instruments. It requires
the issuer to classify a financial instrument as a liability, or asset in some
cases, that was previously classified as equity. SFAS 150 applies to issuers'
classification and measurement of freestanding financial instruments, including
those that comprise more than one option or forward contract. It does not apply
to features that are embedded in a financial instrument that is not a
derivative in its entirety. The effective date of SFAS 150 is for financial
instruments entered into or modified after May 31, 2003. Otherwise, it is
effective for public entities at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 is to be implemented by reporting the
cumulative effect of a change in accounting principle for financial instruments
created prior to the issuance date of the standard and still in existence at
the beginning of the interim period of adoption. Restatement of prior years'
financial statements is not permitted. As the Company does not currently have
any of the financial instruments, as defined in SFAS 150, adoption of this
statement will have no effect on the Company's reported financial position,
results of operations, cash flows or financial statement disclosures.
HARTMARX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As previously discussed in the Company's Annual Report on Form 10-K for the
year ended November 30, 2002, during the fiscal 2002 year-end review performed
by the Company's internal auditors at its International Women's Apparel ("IWA")
subsidiary, the Company became aware of certain accounting irregularities. The
Company promptly notified both its Audit Committee and its independent
accountants. Under the direction and oversight of the Audit Committee and with
the assistance of outside legal advisors and accounting consultants, the
Company conducted an investigation into these and related accounting issues as
well as a more complete evaluation of accounting practices and internal control
processes throughout the Company. As a result of this process, the Company has
restated its previously issued financial statements for the years ended
November 30, 2001 and November 30, 2000. Unaudited quarterly financial
information for the first three quarters of the year ended November 30, 2002
was also restated.
The restatements primarily arose from the correction of certain balance sheet
and income statement items, which among other things, relate to (1) the timing
of allowances granted to customers and (2) various other accruals and valuation
adjustments which were not recorded in the appropriate accounting period. At
the direction of the Audit Committee, the Company has implemented enhancements
to its financial organization, systems and controls at its IWA subsidiary in
response to issues raised by the restatement. The effect of the restatement on
the net loss for the three months ended August 31, 2002 was to decrease the
previously reported net earnings of $.1 million to a loss of $.1 million with
no change in the diluted earnings per share, and for the nine months ended
August 31, 2002 was to increase the previously reported net loss of $1.0
million to a loss of $2.1 million and increase the diluted loss per share from
$.03 to $.06.
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 2002, consolidated retained earnings have been
retroactively restated to reflect an increase of $4.8 million effective for
periods prior to December 1, 1999. This increase resulted from the reversal of
certain balance sheet accruals and valuation allowances established in prior
years for which specific needs were not required as of November 30, 1999. This
adjustment had no impact on earnings for the period ended August 31, 2002.
Accordingly, at August 31, 2002, total assets as previously reported were
reduced by $1.1 million, total liabilities were increased by $1.1 million, and
total shareholders' equity and equity per share were reduced by $2.2 million
and $.06, respectively, due to the above described items.
Unless otherwise expressly stated, all financial information in this Quarterly
Report on Form 10-Q is presented inclusive of these restatements.
LIQUIDITY AND CAPITAL RESOURCES
NOVEMBER 30, 2002 TO AUGUST 31, 2003
Since November 30, 2002, net accounts receivable increased $20.4 million or 16%
to $146.7 million, principally reflecting the normal seasonal change from
tailored clothing shipments in the Men's Apparel Group. Inventories of $137.6
million increased $22.4 million or 19% reflecting earlier production or receipt
of finished products and higher in-stock inventory levels. Net properties
decreased $3.1 million to $29.4 million as depreciation expense exceeded
capital additions. Accounts payable and accrued expenses declined $11.1 million
primarily attributable to the timing of payments and other seasonal factors.
Total debt, including current maturities, increased $32.7 million to $156.1
million, reflecting seasonal increases in working capital requirements. Total
debt represented 46% of total capitalization at August 31, 2003 compared to 41%
at November 30, 2002.
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, 2002.
On January 16, 2002, the Company completed an exchange offer for its then
outstanding 10 7/8% senior subordinated notes ("Old 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 Old Notes outstanding, the Company
paid $200 in cash and issued $800 principal amount of 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 Old 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 were recorded at
estimated fair value, net of unamortized debt discount. The New Notes were
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"), replacing a $200 million
facility scheduled to mature in June 2003. Among other things, the Credit
Facility resulted in lower borrowing rates. All borrowings under the replaced
facility, including the $15 million 10 1/4% term loan then outstanding, were
repaid. The new Credit Facility has a three and one- half year term with an
additional one year renewal at the Company's option (i.e., until February
2007), and also provides for a $50 million letter of credit sub-facility.
Interest rates under the new facility are based on a spread in excess of either
LIBOR or prime as the benchmark rate and on the level of excess availability.
The weighted average interest rate was 3.6% at August 31, 2003, based on LIBOR
and prime rate loans. The facility provides for an unused commitment fee of
3/8% per annum, based on the $200 million maximum, less the outstanding
borrowings and letters of credit issued. Eligible receivables and inventories
provide the principal collateral for the borrowings, along with certain other
tangible and intangible assets of the Company. On November 26, 2002, $15
million face value of the New Notes were retired and the remaining $10.3
million of New Notes were retired on January 21, 2003. At August 31, 2003, the
stated interest rate on all borrowings on a weighted average basis was
approximately 4.5% at August 31, 2003 compared to 6.9% at August 31, 2002.
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. During fiscal 2003 and
as of August 31, 2003, the Company was in compliance with all covenants under
the Credit Facility and its other borrowing agreements.
There are several 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 certain of the most significant risk factors:
o 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.
o 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.
o 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 2002. The ten largest customers represented approximately 54% of
consolidated sales during fiscal 2002 with the largest customer representing
approximately 21% of sales. 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.
At August 31, 2003, the Company had approximately $21 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 borrowing availability. At August 31, 2003,
borrowing availability under the Credit Facility was approximately $58 million.
The Company has also entered into surety bond arrangements aggregating $11
million with unrelated parties, primarily for the purposes of satisfying
workers' compensation deposit requirements of various states where the Company
has operations. At August 31, 2003, there were an aggregate of approximately
$4.2 million of outstanding foreign exchange contracts primarily related to
anticipated inventory purchases to be made in the next twelve months and
anticipated licensing revenues to be received in the next nine 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 for
any unconsolidated entity or to any unrelated third party.
The Company believes its liquidity and expected cash flows are sufficient to
finance its operations. 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 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.
AUGUST 31, 2002 TO AUGUST 31, 2003
Net accounts receivable of $146.7 million at August 31, 2003 decreased $7.8
million or 5%, principally reflecting improved collections. Inventories of
$137.6 million increased $32.3 million or 31%, principally in the tailored
clothing product categories, attributable to lower than expected in-stock sales
and earlier production or receipt of finished product which adversely affected
both inventory and debt levels; last year's inventory levels also reflected
out-of-stock conditions in selected product categories. Net properties of $29.4
million decreased $3.8 million, as capital additions were more than offset by
higher depreciation expense. At August 31, 2003, total debt of $156.1 million
was $10.8 million higher than the year earlier amount. Debt levels have been
adversely impacted by the higher working capital requirements, partially offset
by higher cash earnings. Total debt represented 46% of total capitalization at
August 31, 2003 compared to 43% at August 31, 2002.
RESULTS OF OPERATIONS
THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002
Third quarter consolidated sales were $151.6 million compared to $149.3 million
in 2002; the 1.5% improvement reflected higher sales in the Women's Apparel
Group partially offset by a decline in the Men's Apparel Group. Within the
Men's Apparel Group, its 1.2% revenue decline reflected lower in-stock tailored
clothing sales partially offset by higher sportswear sales. Women's Apparel
Group revenues represented approximately 10% of consolidated sales in 2003 and
8% in 2002. Aggregate sportswear and other non-tailored clothing product
categories, including women's, represented approximately 43% of total third
quarter revenues compared to 40% a year ago.
The consolidated gross margin percentage to sales was 28.4% compared to 28.3%
last year. The slightly higher gross margin rate compared to last year
reflected an improved gross margin rate from a greater proportion of revenues
from non-tailored clothing product categories, largely offset by lower gross
margins attributable to certain tailored clothing inventories valued on LIFO.
Consolidated selling, general and administrative expenses declined to $35.7
million in the current period from $36.2 million in 2002 on the higher sales;
the ratio to sales was 23.6% in 2003 compared to 24.3% in 2002.
Consolidated earnings before interest and taxes (EBIT) were $7.9 million in
2003 compared to $6.6 million last year. The small Men's Apparel Group EBIT
decline was principally attributable to its decrease in revenues and gross
margins from tailored clothing products valued on LIFO. The improved EBIT in
the Women's Apparel Group reflected both higher revenues and improved operating
margins. Consolidated EBIT represented 5.2% of net sales in 2003 and 4.4% of
net sales in 2002, with the improvement attributable to the lower operating
expenses and higher sales. Interest expense was $1.8 million this period
compared to $3.9 million last year. The significant decline from last year's
third quarter was attributable to the drop in the weighted average interest
rate principally due to the now completed refinancing actions discussed
previously and the $.9 million lower non-cash amortization of debt discount and
financing fees. The prior period also included refinancing expense of $2.8
million related to the August 2002 refinancing of the Company's Credit
Facility. Pre-tax earnings were $6.1 million compared to a loss of $.1 million
last year. After reflecting the applicable tax provision or benefit,
consolidated net earnings were $3.5 million this period compared to a loss of
$.1 million last year. Basic and diluted earnings per share were $.10 in 2003
compared to breakeven in 2002.
NINE MONTHS 2003 COMPARED TO NINE MONTHS 2002
Consolidated sales were $410.4 million compared to $419.2 million in 2002; the
2.1% decline was 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 lower in-stock clothing shipments, partially offset by increased
sportswear product sales. Women's Apparel Group revenues, which represented
approximately 9% and 8% of consolidated sales in 2003 and 2002, respectively,
increased approximately $3.3 million. Aggregate sportswear and other non-
tailored clothing product categories, including women's, represented 43% of
nine month sales versus 41% a year ago.
The consolidated gross margin percentage to sales was 29.5% compared to 27.6%
last year, reflecting a greater proportion of revenues from non-tailored
product categories, an improved gross margin rate in most product categories,
and continued efficient manufacturing utilization, partially offset by an
adverse impact from certain tailored clothing inventories valued on LIFO.
Consolidated selling, general and administrative expenses were $106.8 million
in the current period compared to $109.1 million in 2002, and represented 26.0%
of sales in each year.
EBIT was $15.9 million in 2003 compared to $11.8 million in 2002 and
represented 3.9% of sales in 2003 compared to 2.8% of sales in 2002. Men's
Apparel Group EBIT improved from higher operating margins, partially offset by
the impact of lower sales. The Women's Apparel Group EBIT increase reflected
both higher sales and improved operating margins. The prior year consolidated
results were favorably impacted by $4.5 million settlement proceeds related to
a legal action initiated in 1999 against the provider of an enterprise resource
planning software, partially offset by a $.9 million restructuring charge,
primarily related to the closing of one manufacturing facility. Interest
expense decreased to $5.5 million from $12.4 million last year; the decline was
principally attributable to the refinancing actions discussed previously, which
resulted in lower average interest rates, and $2.3 million less non-cash
amortization of debt discount and financing fees. The current year-to-date
period also included $.8 million pre-tax refinancing expense related to the
write off of unamortized debt discount and issue costs from the January 2003
early retirement of the then outstanding $10.3 million of 12 1/2% senior
unsecured notes. The prior period included refinancing expense of $2.8 million
related to refinancing the Company's Credit Facility in August 2002. Pre-tax
earnings were $9.5 million this year compared to a loss of $3.5 million last
year. After reflecting the applicable tax provision or benefit, consolidated
net earnings were $5.6 million or $.16 per basic and diluted share this year
compared to a loss of $2.1 million or $.06 per basic and diluted share last
year.
While the recent retail environment has shown some indication of improvement,
aggressive inventory management by some retail customers contributed to lower
in-stock business and higher inventory and debt levels. Although in-stock
activity for the Fall 2003 season will be a factor in fourth quarter revenues
and earnings, the Company expects to report a profitable fourth quarter which
would result in full year net earnings and earnings per share improving
significantly compared to 2002. The Company remains focused on those areas
which are controllable with the objective of achieving improved operating
margins and reduced interest expense. Restructuring actions initiated in 2001
were completed in 2002, which lowered both manufacturing and administrative
costs through reduced production overheads, fewer warehousing and
administrative facilities and headcount reductions. Additional administrative
combinations initiated during 2002 have been completed in 2003 and have reduced
operating costs. During 2002, the Company put in place a financing structure
complementing its operational strategies with increased borrowing capacity
under a new credit facility compared to the facility it replaced. Based on the
Company's current capital structure and anticipated borrowing levels and rates,
interest expense in 2003 is significantly below the prior year level. The
higher inventory levels experienced at August 31 compared to the year earlier
period are anticipated to moderate by year end, which should result in total
debt, $156.1 million at August 31, being closer to the year end 2002 amount of
$123 million.
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 2002 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 are recognized in earnings in the period in
which the purchase obligations are satisfied or funds are received. As of
August 31, 2003, the Company had entered into foreign exchange contracts,
aggregating approximately $4.2 million corresponding to approximately $3.5
million Euros primarily related to inventory purchases in the next twelve
months and 56 million Japanese yen primarily related to anticipated licensing
revenues to be received in the next nine months.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of the variable rate borrowings under
its Credit Facility. 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 at August 31, 2003 under its Credit Facility would
impact interest expense by approximately $1.2 million. In the last three years,
the Company has not used derivative financial instruments to manage interest
rate risk.
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 2002. The ten largest customers represented approximately 54% of
consolidated sales during fiscal 2002 with the largest customer representing
approximately 21% of sales. 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.
ITEM 4 - CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's
management, under the supervision of and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of the end of the period
covered by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act.
(B) INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
changes in the Company's internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during
the fiscal quarter to which this report relates that have materially affected,
or are reasonable likely to materially affect, the Company's internal control
over financial reporting.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
3-B By-laws of the Company, as amended to the date hereof.
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K:
On June 25, 2003, the Company filed Form 8-K announcing results
of operations for the second quarter ended May 31, 2003.
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 14, 2003 By /s/ GLENN R. MORGAN
-------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
October 14, 2003 By /s/ ANDREW A. ZAHR
------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)