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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 May 31, 2004
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 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X
--- ---
At June 30, 2004 there were 35,491,658 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 six months ended
May 31, 2004 and May 31, 2003. 3
Unaudited Condensed Consolidated Balance Sheet
as of May 31, 2004, November 30, 2003 and
May 31, 2003. 4
Unaudited Condensed Consolidated Statement of
Cash Flows for the six months ended May 31, 2004
and May 31, 2003. 6
Notes to Unaudited Condensed 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 24
ITEM 4. Controls and Procedures 24
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 26
ITEM 4. Submission of Matters to a Vote of Security Holders 26
ITEM 5. Other Information 26
ITEM 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTMARX CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS
(000'S OMITTED)
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
------------------------------ -------------------------------
2004 2003 2004 2003
------------ ------------- ------------- -------------
Net sale $ 142,383 $ 126,977 $ 278,996 $ 258,814
Licensing and other income 334 524 903 972
--------- --------- --------- ---------
142,717 127,501 279,899 259,786
--------- --------- --------- ---------
Cost of goods sold 97,846 87,732 193,709 180,713
Selling, general and administrative expenses 38,402 36,252 74,608 71,086
--------- --------- --------- ---------
136,248 123,984 268,317 251,799
--------- --------- --------- ---------
Operating earnings 6,469 3,517 11,582 7,987
Interest expense 1,579 1,857 3,122 3,767
Refinancing expense -- -- -- 795
--------- --------- --------- ---------
Earnings before taxes 4,890 1,660 8,460 3,425
Tax provision (1,930) (655) (3,340) (1,350)
--------- --------- --------- ---------
Net earnings $ 2,960 $ 1,005 $ 5,120 $ 2,075
========= ========= ========= =========
Earnings per share:
Basic $ .08 $ .03 $ .15 $ .06
========= ========= ========= =========
Diluted $ .08 $ .03 $ .14 $ .06
========= ========= ========= =========
Dividends per common share $ -- $ -- $ -- $ --
========= ========= ========= =========
Average shares outstanding:
Basic 34,950 33,209 34,417 33,117
========= ========= ========= =========
Diluted 36,215 34,202 35,951 34,087
========= ========= ========= =========
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000'S OMITTED)
MAY 31, NOV. 30, MAY 31, 2003
2004 2003
------------- -------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 7,735 $ 2,964 $ 855
Accounts receivable, less allowance
for doubtful accounts of $8,402,
$10,604 and $9,475 116,258 117,778 110,950
Inventories 127,923 124,010 144,974
Prepaid expenses 5,892 5,249 7,076
Deferred income taxes 14,521 14,521 11,372
------------- -------------- -------------
Total current assets 272,329 264,522 275,227
------------- -------------- -------------
GOODWILL 23,045 23,165 22,056
------------- -------------- -------------
DEFERRED INCOME TAXES 52,280 53,636 60,639
------------- -------------- -------------
OTHER ASSETS 7,275 7,858 7,710
------------- -------------- -------------
PREPAID AND INTANGIBLE PENSION ASSET 63,116 60,871 60,545
------------- -------------- -------------
PROPERTIES
Land 1,980 1,980 1,980
Buildings and building improvements 36,395 36,350 36,253
Furniture, fixtures and equipment 104,946 104,321 103,179
Leasehold improvements 25,645 25,273 24,743
------------- -------------- -------------
168,966 167,924 166,155
Accumulated depreciation and amortization (141,039) (138,601) (135,514)
------------- -------------- -------------
Net properties 27,927 29,323 30,641
------------- -------------- -------------
TOTAL ASSETS $ 445,972 $ 439,375 $ 456,818
============= ============== =============
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000'S OMITTED)
MAY 31, NOV. 30, MAY 31, 2003
2004 2003
------------- ------------- -------------
CURRENT LIABILITIES
Current portion of long-term debt $ 15,648 $ 15,628 $ 20,601
Accounts payable and accrued expense 69,275 65,200 67,908
--------- --------- ---------
84,923 80,828 88,509
Total current liabilities
--------- --------- ---------
NON-CURRENT LIABILITIES 12,037 13,142 12,530
--------- --------- ---------
LONG-TERM DEBT 84,834 88,776 103,772
--------- --------- ---------
MINIMUM PENSION LIABILITY 64,178 64,178 69,473
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued -- -- --
Common shares, $2.50 par value; 75,000,000 shares authorized;
35,889,314 shares issued at May 31, 2004, 36,996,314 shares
issued at November 30, 2003 and 36,795,314 shares issued at
May 31, 2003 89,723 92,491 91,988
Capital surplus 63,997 65,642 66,507
Retained earnings 60,395 55,275 48,645
Unearned employee benefits -- (1,303) (1,615)
Common shares in treasury, at cost,
413,660 at May 31, 2004,
1,916,681 at November 30, 2003 and
2,187,414 at May 31, 2003 (2,460) (8,454) (9,649)
Accumulated other comprehensive income (loss) (11,655) (11,200) (13,342)
--------- --------- ---------
Total shareholders' equity 200,000 192,451 182,534
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 445,972 $ 439,375 $ 456,818
========= ========= =========
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000'S OMITTED)
SIX MONTHS ENDED MAY 31,
------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2004 2003
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,120 $ 2,075
Reconciling items to adjust net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 2,859 3,231
Amortization of long lived assets, debt discount and
unearned employee benefits 2,359 1,605
Non-cash charge re: refinancing expense -- 795
Changes in:
Receivables, inventories, prepaids and other assets (5,488) (10,876)
Accounts payable, accrued expenses and
non-current liabilities 2,522 (1,335)
Taxes and deferred taxes on earnings 2,950 580
-------- --------
Net cash provided by (used in) operating activities 10,322 (3,925)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,729) (1,341)
Contingent payments re: acquisition (1,392) (1,664)
-------- --------
Net cash used in investing activities (3,121) (3,005)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under Credit Facility (3,612) 10,868
Payment of 12.5% Senior Unsecured Notes -- (10,341)
Payment of other debt (310) (289)
Change in checks drawn in excess of bank balances (668) --
Other equity transactions 2,160 693
-------- --------
Net cash provided by (used in) financing activities (2,430) 931
-------- --------
Net increase (decrease) in cash and cash equivalents 4,771 (5,999)
Cash and cash equivalents at beginning of period 2,964 6,854
-------- --------
Cash and cash equivalents at end of period $ 7,735 $ 855
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest $ 2,844 $ 3,606
Income taxes 196 770
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
NOTES TO UNAUDITED CONDENSED
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, 2003. 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. The number of shares used in
computing basic and diluted shares were as follows (000's omitted):
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
----------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
Basic 34,950 33,209 34,417 33,117
Dilutive effect of:
Stock options and awards 790 77 781 78
Restricted stock awards 475 916 753 892
----------- ----------- ----------- ------------
Diluted 36,215 34,202 35,951 34,087
=========== =========== =========== ============
At May 31, 2004 and 2003, all outstanding restricted stock awards were included
in the calculation of diluted shares using the treasury stock method.
For the three months and six months ended May 31, 2004 and 2003, the following
number of options were not included in the computation of diluted earnings per
share, as the average price per share of the Company's common stock was below
the grant price for the respective period:
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
-------------------------------- ----------------------------------
2004 2003 2004 2003
----------- --------------- ------------- ---------------
Anti-dilutive options 66,685 2,865,895 129,238 2,906,362
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 and earnings 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 amounts).
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
----------------------------- ---------------------------
2004 2003 2004 2003
----------- ------------ ----------- ------------
Net earnings, as reported $ 3.0 $ 1.0 $ 5.1 $ 2.1
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
options, net of related tax effects (0.2) (0.1) (0.3) (0.3)
----- ----- ----- -----
Pro forma net earnings $ 2.8 $ 0.9 $ 4.8 $ 1.8
===== ===== ===== =====
Earnings per share:
Basic - as reported $ .08 $ .03 $ .15 $ .06
===== ===== ===== =====
- pro forma $ .08 $ .03 $ .14 $ .05
===== ===== ===== =====
Diluted - as reported $ .08 $ .03 $ .14 $ .06
===== ===== ===== =====
- pro forma $ .08 $ .03 $ .13 $ .05
===== ===== ===== =====
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
Black-Sholes model does not necessarily provide a reliable single measure of the
fair value of its stock options. Second quarter results included $.4 million of
incremental expense associated with the performance based vesting on March 25,
2004 of 201,000 restricted stock awards resulting from the closing price of
common shares equaling or exceeding $5.25 for thirty consecutive days. As
reported in the Company's first quarter 10-Q filing, first quarter results also
included $.6 million of incremental expense associated with the performance
based vesting on February 10, 2004 of 606,500 restricted stock awards resulting
from the closing price of common shares equaling or exceeding $4.25 for thirty
consecutive days.
NOTE 3
Long-term debt comprised the following (000's omitted):
MAY 31, NOV. 30, MAY 31,
2004 2003 2003
------------ ------------ ------------
Borrowings under Credit Facility $ 65,062 $ 68,674 $ 88,348
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 18,170 18,480 18,775
------------ ------------ ------------
100,482 104,404 124,373
Less - current 15,648 15,628 20,601
------------ ------------ ------------
Long-term debt $ 84,834 $ 88,776 $ 103,772
============ ============ ============
Effective August 31, 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. The 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 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 May
31, 2004, based on LIBOR and prime rate loans. The facility provides for an
unused commitment fee of .375% 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.
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 2004 and as
of May 31, 2004, the Company was in compliance with all covenants under the
Credit Facility and its other borrowing agreements. At May 31, 2004, the Company
had approximately $29 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 availability. At May 31, 2004, additional
borrowing availability under the Credit Facility was approximately $77 million.
Mortgages and other debt includes the Company's ongoing guarantee of a $2.5
million industrial development bond retained by a former subsidiary, due
September 1, 2007, on which the annual interest rate of 8.5% is paid
semi-annually and there is no collateral.
On January 21, 2003, the Company retired the remaining $10.3 million face value
of the then outstanding 12.5% senior unsecured notes. This early retirement
resulted in a fiscal first quarter 2003 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 for the six months ended May 31, 2003.
Checks drawn in excess of bank balances are included as a component of accounts
payable.
NOTE 4
Components of net periodic pension expense for the Company's defined benefit and
non-qualified supplemental pension plans for the three months and six months
ended May 31, 2004 and 2003 were as follows (000's omitted):
THREE MONTHS ENDED MAY 31, SIX MONTHS ENDED MAY 31,
----------------------------- -----------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
Service cost $ 1,074 $ 1,222 $ 2,509 $ 2,443
Interest cost 3,203 3,956 7,415 7,920
Expected return on plan assets (3,795) (3,786) (8,167) (7,579)
Recognized net actuarial gain (228) 146 (46) 293
Net amortization 847 847 1,693 1,693
----------- ----------- ----------- ------------
Net periodic pension expense $ 1,101 $ 2,385 $ 3,404 $ 4,770
=========== =========== =========== ============
As the Company has not completed its actuarial valuation as of the respective
interim dates, the above amounts for the three and six months ended May 31, 2004
and 2003 have been calculated based upon the Company's best estimate of pension
expense for the respective period.
During fiscal 2004 to date, $5.6 million of contributions have been made,
including $1.5 million during the second fiscal quarter. Based on the current
level of plan assets and available actuarial data, the Company currently
anticipates contributing a minimum additional amount of $1 million during fiscal
2004, which would aggregate $6.6 million for the full year; optional additional
contributions in fiscal 2004 in the range of $2 to $3 million are being
considered.
NOTE 5
Inventories at each date consisted of (000's omitted):
MAY 31, NOV. 30, MAY 31,
2004 2003 2003
------------- -------------- --------------
Raw materials $ 36,862 $ 38,455 $ 46,254
Work-in-process 7,975 7,168 10,074
Finished goods 83,086 78,387 88,646
------------- -------------- --------------
$ 127,923 $ 124,010 $ 144,974
============= ============== ==============
Inventories are stated at the lower of cost or market. At May 31, 2004, November
30, 2003 and May 31, 2003, approximately 49%, 48% and 50% 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 additional contingent payments to the former owners of Consolidated Apparel
Group are based on earnings achievement for the periods involved. Based on the
aggregate amount of contingent payments made to date, additional contingent
payments are expected to aggregate within a range of $3 million to $4 million
over the remaining earnout periods through 2006, as defined in the Agreement.
The amount accrued for additional contingent payments for the year ended
November 30, 2003 was paid in January 2004.
NOTE 7
Amounts billed to customers for shipping and handling are included in sales. The
cost of goods sold caption includes, where applicable, the following components:
product cost, including inbound freight, duties, internal inspection costs,
internal transfer costs and certain other costs of the distribution network. The
warehousing, picking and packing of finished products totaled $9.6 million in
the first six months of fiscal 2004 and $9.7 million in the first six months of
fiscal 2003 and $4.9 million for the second quarter of 2004 and $4.6 million for
the second quarter of 2003 and are included as a component of Selling, General
and Administrative Expenses.
NOTE 8
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 to consumer catalog and using the internet.
Information on the Company's operations and total assets for the three and six
months ended and as of May 31, 2004 and May 31, 2003 is summarized as follows
(in millions):
MEN'S WOMEN'S
APPAREL APPAREL
GROUP GROUP ADJ. CONSOL.
---------------- --------------- ------------ -----------------
THREE MONTHS ENDED MAY 31,
2004
Sales $ 121.7 $ 20.7 $ -- $ 142.4
Earnings (loss) before taxes 7.9 2.4 (5.4) 4.9
2003
Sales $ 115.3 $ 11.7 $ -- $ 127.0
Earnings (loss) before taxes 7.3 (0.3) (5.3) 1.7
SIX MONTHS ENDED MAY 31,
2004
Sales $ 240.9 $ 38.1 $ -- $ 279.0
Earnings (loss) before taxes 15.4 3.8 (10.7) 8.5
Total assets 268.8 31.2 146.0 446.0
2003
Sales $ 235.9 $ 22.9 $ -- $ 258.8
Earnings (loss) before taxes 15.3 (0.5) (11.4) 3.4
Total assets 286.9 23.5 146.4 456.8
During the three and six months ended May 31, 2004 and 2003, 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 in 2003, and
general corporate expenses. 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.
Revenues and long-lived assets by geographic region are as follows (in millions):
REVENUES LONG-LIVED ASSETS
---------------------------------------------------------------- ------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31, MAY 31,
----------------------------- ----------------------------- ------------------------
2004 2003 2004 2003 2004 2003
------------ ----------- ------------ ----------- ---------- ----------
USA $136.5 $121.3 $269.6 $248.2 $118.1 $117.6
Canada 5.4 5.5 9.0 9.7 2.4 2.5
All Other 0.5 0.2 0.4 0.9 0.9 0.9
------ ------ ------ ------ ------ ------
$142.4 $127.0 $279.0 $258.8 $121.4 $121.0
====== ====== ====== ====== ====== ======
Sales by Canadian subsidiaries to customers in the United States are included in
USA sales. Sales to customers in countries other than USA or Canada are included
in All Other.
Long-lived assets includes prepaid and intangible pension asset, net properties,
goodwill and other assets.
NOTE 9
On September 25, 2003, the Board of Directors adopted an amendment to the Rights
Agreement which provides that the Rights expire at the earliest of (i) the close
of business on January 31, 2006, (ii) the time at which the Rights are redeemed
in accordance with the terms of the Rights Agreement or (iii) the close of
business on the first Trading Day (as defined in the Rights Agreement) after the
closing price of the Company's common stock as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange ("NYSE") or comparable
national securities exchange, if not listed on the NYSE, exceeded the Book Value
per Share (as defined below) for 60 consecutive calendar days. The term "Book
Value per Share" means on any date the total shareholders' equity of the Company
as reported in the Company's most recent periodic report filed with the SEC
divided by the total number of shares of the Company's common stock issued and
outstanding stated in such report. At May 31, 2004, book value per share was
$5.64. Effective as of the close of business on June 15, 2004, all Rights issued
to Company stockholders expired as a result of the reported closing price of the
Company's common stock exceeding the Book Value per Share, as defined, for 60
consecutive days.
NOTE 10
Comprehensive income, which includes all changes in the Company's equity during
the period, except transactions with stockholders, was as follows (000's
omitted):
SIX MONTHS ENDED
----------------------------------
MAY 31, 2004 MAY 31,
2003
--------------- --------------
Net earnings $ 5,120 $ 2,075
Other comprehensive income (loss):
Change in fair value of foreign exchange
contracts, net of tax (172) 265
Currency translation adjustment, net of tax (283) 507
------- -------
Comprehensive earnings $ 4,665 $ 2,847
======= =======
The change in Accumulated Other Comprehensive Income (Loss) was as follows (000's omitted):
FAIR VALUE OF FOREIGN ACCUMULATED
MINIMUM FOREIGN CURRENCY OTHER
PENSION EXCHANGE TRANSLATION COMPREHENSIVE
LIABILITY CONTRACTS ADJUSTMENT INCOME (LOSS)
--------------- ---------------- ---------------- ----------------
FISCAL 2004
- ---------------------------
Balance Nov. 30, 2003 $(11,735) $ 249 $ 286 $(11,200)
Change in Fiscal 2004 -- (172) (283) (455)
-------- -------- -------- --------
Balance May 31, 2004 $(11,735) $ 77 $ 3 $(11,655)
======== ======== ======== ========
FISCAL 2003
- ---------------------------
Balance Nov. 30, 2002 $(14,015) $ (22) $ (77) $(14,114)
Change in fiscal 2003 -- 265 507 772
-------- -------- -------- --------
Balance May 31, 2003 $(14,015) $ 243 $ 430 $(13,342)
======== ======== ======== ========
The pre-tax amounts, the related income tax (provision) benefit and after-tax
amounts allocated to each component of the change in other comprehensive income
(loss) was as follows (000's omitted):
SIX MONTHS ENDED MAY 31, 2004 PRE-TAX TAX AFTER-TAX
- --------------------------------------------------- --------------- --------------- ----------------
Minimum pension liability $ -- $ -- $ --
Fair value of foreign exchange contracts (284) 112 (172)
Foreign currency translation adjustment (468) 185 (283)
------- ------- -------
$ (752) $ 297 $ (455)
======= ======= =======
SIX MONTHS ENDED MAY 31, 2003
- --------------------------------------------------
Minimum pension liability $ -- $ -- $ --
Fair value of foreign exchange contracts 438 (173) 265
Foreign currency translation adjustment 838 (331) 507
------- ------- -------
$ 1,276 $ (504) $ 772
======= ======= =======
NOTE 11
As of December 1, 2003, the Company adopted Financial Accounting Standards Board
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. In October 2003, the
Board deferred the effective date of FIN 46 to the first reporting period ending
after December 15, 2003 for VIEs created before February 1, 2003. As the Company
does not have an interest in 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 March 1, 2004, the Company adopted the disclosure requirements of
Financial Accounting Standards Board issued SFAS No. 132 (Revised 2003) -
"Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS
132 (Revised) retains the disclosures required by SFAS 132 and requires
additional disclosures relating to types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows and components of net periodic
benefit cost recognized in interim periods of defined benefit pension plans and
other defined benefit postretirement plans. The provisions of SFAS 132 (Revised)
are effective for financial statements issued for years ending after December
15, 2003 (the Company's fiscal year beginning December 1, 2003) and for interim
periods beginning after December 15, 2003 (the Company's second quarter
beginning March 1, 2004).
NOTE 12
On June 28, 2004, the Company announced that it had entered into a definitive
agreement to acquire the business of Exclusively Misook, Inc., a designer and
marketer of upscale women's knit products sold through leading specialty stores.
The terms of the transaction call for a cash payment at closing of $30 million
subject to certain post-closing adjustments. Additional contingent amounts would
be payable over a five-year period if specified earnings levels are achieved.
The acquisition, which is subject to customary closing conditions, including
expiration or early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, is expected to close
during July.
HARTMARX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company operates exclusively in the apparel business. Its operations are
comprised of the Men's Apparel Group ("MAG") and Women's Apparel Group. MAG
designs, manufactures and markets men's tailored clothing, slacks, sportswear
(including golfwear) and dress furnishings (shirts and ties). Products are sold
at luxury, premium and moderate price points under a broad variety of apparel
brands, both owned and under license, to an extensive range of retail channels.
The Women's Apparel Group markets women's career apparel, sportswear and
accessories to department and specialty stores under owned and licensed brand
names and through a direct to consumer operation offering a wide range of
apparel and accessories to business and professional women through catalogs and
its e-commerce website.
The Company's principal operational challenges have been to address the
following:
> The widespread casual dressing in the workplace, which was a major
contributor to the overall market decline for tailored clothing products,
especially for tailored suits, the Company's core product offering.
> The need to diversify the Company's product offerings in non-tailored
product categories in light of the declining demand for tailored clothing.
> The market share declines experienced by certain department store
retailers, an important distribution channel for the Company.
The Company has gradually expanded its non-tailored clothing product offerings
through internally developed programs, new licensing arrangements and
acquisitions, including the acquisition of the Consolidated Apparel Group during
2001. This product diversification has also opened up or expanded distribution
channels for the Company's products, such as through resort and "green grass"
golf shops for the Company's golf lines, warehouse clubs for moderate-priced
sportswear and, most recently, internet-based marketing for certain womenswear
products. Sales of non-tailored apparel (men's sportswear, golfwear, slacks and
womenswear) increased to 46% of total sales during the first half of 2004
compared to 42% for the first half of 2003. Non-tailored apparel sales
represented 44% of total sales for the fiscal year ended November 30, 2003
compared to 42% in fiscal 2002.
The increase in first half pre-tax earnings to $8.5 million in 2004 from $3.4
million in 2003 reflected an 8% revenue increase to $279.0 million from $258.8
million, improved operating margins and lower financing related costs.
LIQUIDITY AND CAPITAL RESOURCES
NOVEMBER 30, 2003 TO MAY 31, 2004
For the six months ended May 31, 2004, net cash provided by operating
activities as reflected in the accompanying Unaudited Condensed Consolidated
Statement of Cash Flows was $10.3 million compared to a net use of cash of
$3.9 million for the six months ended May 31, 2003. The improvement compared
to the prior year net use of cash of $3.9 million reflected the increased
earnings this year and higher working capital requirements during the prior
year period, principally related to the increase in inventory levels. Since
November 30, 2003, net accounts receivable decreased $1.5 million or 1.3% to
$116.3 million. Inventories of $127.9 million increased $3.9 million or 3.2%
and were about offset by accounts payable and accrued expenses increasing $2.5
million. Net properties decreased $1.4 million to $27.9 million as
depreciation expense exceeded capital additions. Total debt, including current
maturities, decreased $3.9 million to $100.5 million and represented the
principal component of net cash used in financing activities, partially offset
by $1.7 million of stock option proceeds, in the accompanying Unaudited
Condensed Consolidated Statement of Cash Flows. Total debt represented 33% of
total capitalization at May 31, 2004 compared to 35% at November 30, 2003.
Shareholders' equity increased $7.5 million, principally from the earnings and
from the impact of stock option exercises.
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, 2003.
The Company's borrowing arrangements consist of a senior revolving credit
facility, mortgages and industrial development bonds. The current $200 million
Credit Facility has an initial 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 Credit 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 May 31, 2004, based on LIBOR and prime rate loans. The
facility provides for an unused commitment fee of .375% 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. The weighted average interest rate at May 31, 2004 and May 31, 2003
on all borrowings was approximately 5.0% in 2004 compared to 4.9% in 2003.
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 2004 and as
of May 31, 2004, 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), who have reported modest sales increases so
far in 2004 following declines in sales during various monthly periods of 2003
and 2002. The ten largest customers represented approximately 56% of
consolidated sales during fiscal 2003 with the largest customer representing
approximately 26% 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
condition and results of operations.
At May 31, 2004, the Company had approximately $29 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 Credit Facility and are considered as usage for purposes
of determining borrowing availability. At May 31, 2004, additional borrowing
availability under the Credit Facility was approximately $77 million.
Availability levels on any date are impacted by the level of outstanding
borrowings under the Credit Facility, the level of eligible receivables and
inventory and outstanding letters of credit. For the trailing twelve months,
additional availability levels have ranged from $26 million to $101 million. The
Company has also entered into surety bond arrangements aggregating approximately
$11 million with unrelated parties, primarily for the purposes of satisfying
workers' compensation deposit requirements of various states where the Company
has operations. At May 31, 2004, there were an aggregate of $2.8 million of
outstanding foreign exchange contracts primarily related to anticipated
inventory purchases to be made in the next six months. Other than the Company's
ongoing guarantee of a $2.5 million industrial development bond included as a
component of consolidated debt, 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'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.
On June 28, 2004, the Company announced that it had entered into a definitive
agreement to acquire the business of Exclusively Misook, Inc., a designer and
marketer of upscale women's knit products sold through leading specialty stores.
The terms of the transaction call for a cash payment at closing of $30 million
subject to certain post-closing adjustments. Additional contingent amounts would
be payable over a five-year period if specified earnings levels are achieved.
The acquisition, which is subject to customary closing conditions, including
Hart-Scott-Rodino approval under the United States antitrust laws, is expected
to close during July.
The Company believes its liquidity and expected cash flows are sufficient to
finance its operations after due consideration of its various borrowing
arrangements, other contractual obligations and earnings prospects.
MAY 31, 2003 TO MAY 31, 2004
Net accounts receivable of $116.3 million increased $5.3 million or 4.8%
principally reflecting the higher sales. Inventories of $127.9 million decreased
$17.1 million or 11.8%, attributable to the Men's Apparel Group, as the prior
year included earlier production and receipts of finished products and higher
in-stock inventory levels. Net properties of $27.9 million decreased $2.7
million, as capital additions were more than offset by higher depreciation
expense. At May 31, 2004, total debt of $100.5 million declined $23.9 million
compared to the year earlier level. Cash and equivalents aggregated $7.7 million
at May 31, 2004 compared to $.9 million at the year earlier period, reflecting
temporary cash balances which were utilized to further reduce debt levels
subsequent to May 31, 2004. Debt levels have been favorably impacted principally
by the higher cash earnings and lower working capital requirements, principally
inventories. Total debt represented 33% of total capitalization at May 31, 2004
compared to 41% at May 31, 2003.
RESULTS OF OPERATIONS
SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2003
Second quarter consolidated sales were $142.4 million compared to $127.0
million in 2003. Men's Apparel Group revenues increased 5.6% to $121.7
million. Within the Men's Apparel Group, wholesale selling prices for
comparable products were approximately even in 2004 compared to 2003. Overall,
tailored clothing average wholesale selling prices decreased slightly from
2003, reflecting a shift in product mix in 2004 from the prior year. Unit
sales of tailored clothing product categories changed from the prior year's
second quarter as follows: suits increased approximately 14% and sport coats
increased approximately 15%. Slack product categories increased approximately
35%. The unit increases reflected both a stronger demand for products from
customers as well as disposing of surplus inventories. While unit sales of
sportswear products decreased approximately 20%, average wholesale selling
prices were 13% higher than 2003, reflecting product mix changes to higher
priced products. Women's Apparel Group revenues, which represented
approximately 14% of consolidated sales in 2004 and 9% in 2003, increased $9.0
million, principally from the effect of a one year private label program which
commenced last fall and was substantially completed during the second fiscal
quarter. The program aggregated $6.4 million in 2004. Excluding this program
and considering the introductions of other new programs, unit sales of women's
apparel increased 28% and average selling prices decreased 5%, primarily
attributable to a change in product mix. Aggregate sportswear and other
non-tailored clothing product categories, including women's, represented
approximately 49% of total second quarter revenues compared to 46% a year ago.
The consolidated gross margin percentage to sales was 31.3% compared to 30.9%
last year. The higher gross margin rate compared to last year reflected
changes in product mix, as the women's segment generated a higher gross margin
rate compared to the Men's Apparel Group. Approximately $4.9 million in 2004
and $4.6 million in 2003 of costs related to warehousing, picking and packing
of finished products are included as a component in Selling, General and
Administrative Expenses; accordingly, gross margin may not be comparable to
those other entities that include all of the costs related to their
distribution network in arriving at gross margin. Consolidated selling,
general and administrative expenses increased to $38.4 million in the current
period compared to $36.3 million in 2003 on the higher 2004 sales; the ratio
to sales declined to 27.0% in 2004 compared to 28.6% in 2003, reflecting
favorable operating leverage from the increased sales, principally in the
women's segment. The current period included $.4 million of incremental
expense associated with the performance based vesting on March 25, 2004 of
restricted stock awards resulting from the closing price of common shares
equaling or exceeding $5.25 for thirty consecutive calendar days.
Operating earnings increased to $6.5 million in 2004 compared to $3.5 million
last year, principally attributable to the women's segment, and represented 4.5%
of net sales in 2004 and 2.8% of net sales in 2003, with the improvement
attributable to both the lower operating expense ratio and the higher gross
margin ratio compared to the prior year. Men's Apparel Group operating earnings
were $7.9 million in 2004 compared to $7.3 million in 2003, attributable to the
higher sales with tailored clothing products representing the most significant
contributor to earnings and cash flow in each year. Women's Apparel Group
operating earnings increased to $2.4 million in 2004 compared to a loss of $.3
million in 2003, attributable to its higher sales and related favorable
operating expense leverage.
Interest expense decreased to $1.6 million this period compared to $1.9 million
last year. The decline from last year's second quarter was primarily
attributable to the lower average outstanding borrowings. Consolidated pre-tax
earnings were $4.9 million compared to $1.7 million last year. After reflecting
the applicable tax provision, consolidated net earnings were $3.0 million this
period compared to $1.0 million last year. Diluted earnings per share was $.08
compared $.03 per share in 2003.
SIX MONTHS 2004 COMPARED TO SIX MONTHS 2003
Consolidated sales were $279.0 million compared to $258.8 million in 2003. In
the Men's Apparel Group, revenues increased $5.0 million to $240.9 million, as
tailored clothing product revenues represented the principal component of the
improvement. In general, wholesale selling prices for comparable products were
approximately even in 2004 compared to 2003. Overall, tailored clothing average
wholesale selling prices decreased slightly from 2003, reflecting a shift in
product mix in 2004 compared to the prior year. Year-to-date unit sales of
tailored clothing product categories changed from the prior year as follows:
suits increased approximately 3%; sport coats increased approximately 3%. Slack
product categories increased approximately 17%. The unit increases reflected
both a stronger demand for products from customers as well as dispositions of
surplus inventories. While unit sales of sportswear products decreased 11%,
average wholesale prices were approximately 8% higher than 2003 reflecting
product mix changes to higher priced products. Women's Apparel Group revenues,
which represented approximately 14% of consolidated sales in 2004 and 9% in
2003, increased approximately $15.2 million principally from the effect of a one
year private label program which commenced last fall and was substantially
completed during the second fiscal quarter. The program aggregated $10.7 million
in 2004. Excluding this program, and considering introductions of other new
products and programs, unit sales of women's apparel increased 33% and average
selling prices decreased 10%, primarily attributable to changes in product mix.
Aggregate sportswear and other non-tailored clothing product categories,
including women's, represented 46% of first half sales versus 42% a year ago.
The consolidated gross margin percentage to sales was 30.6% compared to 30.2%
last year, reflecting the greater proportion of women's segment sales which
realized a higher gross margin percentage compared to the Men's Apparel Group.
Approximately $9.6 million in 2004 and $9.7 million in 2003 of costs related to
warehousing, picking and packing of finished products are included as a
component in Selling, General and Administrative Expenses; accordingly, gross
margins may not be comparable to those other entities that include all of the
costs related to their distribution network in arriving at gross margin.
Consolidated selling, general and administrative expenses increased to $74.6
million in the current period compared to $71.1 million in 2003 on the higher
2004 sales; the ratio to sales declined to 26.7% of sales in 2004 compared to
27.5% of sales in 2003, reflecting favorable operating leverage from the
increased sales in the women's segment. The current period included $1.0 million
of incremental expense associated with the performance based vesting on February
10, 2004 and March 25, 2004 of restricted stock awards resulting from the
closing price of common shares equaling or exceeding the respective vesting
threshold for thirty consecutive calendar days.
Operating earnings increased to $11.6 million in 2004 compared to $8.0 million
in 2003, principally attributable to the women's segment, and represented 4.2%
of sales in 2004 compared to 3.1% of sales in 2003. Men's Apparel Group
operating earnings were $15.4 million in 2004 compared to $15.3 million in 2003
with tailored clothing products representing the most significant contributor to
earnings and cash flow in each year. Women's Apparel Group operating earnings
increased to $3.8 million in 2004 compared to a loss of $.5 million in 2003
attributable to its higher sales and related favorable operating expense
leverage.
Interest expense decreased to $3.1 million from $3.8 million last year; the
decline was principally attributable to the lower average borrowings. The prior
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 12.5% senior unsecured
notes. Consolidated pre-tax earnings were $8.5 million this year compared to
$3.4 million last year. After reflecting the applicable tax provision,
consolidated net earnings were $5.1 million or $.14 per diluted share this year
compared to $2.1 million or $.06 per share last year.
Based on current conditions, the Company anticipates a consolidated sales
percentage increase for the year ending November 30, 2004 in the mid single
digit range. In the Men's Apparel Group, full year revenue increases are
expected in the men's sportswear product categories, including the Ted Baker and
Bobby Jones product lines, as well as from new dedicated brand programs with
several additional retailers similar to the Austin Reed sportswear program
initiated previously with Dillards. Men's tailored clothing revenues in 2004 are
anticipated to increase slightly compared to the level attained during 2003.
While a full-year revenue increase is also anticipated in the Women's Apparel
Group and would include revenues from the Misook acquisition upon closing of the
transaction, a large portion of the higher first half revenues reflected the one
year private label program initiated in the Fall of 2003 that was substantially
completed during the second quarter of 2004.
The anticipated revenue increase for 2004 as noted above, along with the
administrative expense structure currently in place, are expected to result in
net earnings increasing approximately 50% over 2003's full-year net earnings of
$8.7 million or $.25 per diluted share. Misook's annualized operating results
are expected to contribute approximately $35 million to consolidated sales and
$.12 to $.15 to Hartmarx earnings per share in fiscal 2005. The Misook
acquisition will be financed utilizing availability under the Company's senior
credit facility; as a result of trailing year cash earnings and reduced working
capital requirements, the Company does not anticipate any significant increase
in year over year debt levels after completing the acquisition. The Company
continues to pursue additional acquisitions which can contribute to business
growth, produce positive cash flows, are accretive to earnings in the near to
mid-term, and which do not create excess debt leverage.
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
2003 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 primarily associated
with purchase obligations denominated in foreign currencies. Foreign exchange
contracts are generally for amounts not to exceed forecasted purchase
obligations or receipts and require the Company to exchange U.S. dollars for
foreign currencies at rates agreed to at the inception of the contracts. These
contracts are typically settled by actual delivery of goods or receipt of funds.
The effects of movements in currency exchange rates on these instruments, which
have not been significant, are recognized in earnings in the period in which the
purchase obligations are satisfied or funds are received. As of May 31, 2004,
the Company had entered into foreign exchange contracts, aggregating
approximately $2.8 million corresponding to approximately 2.4 million Euros
primarily related to inventory purchases 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 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 anticipated borrowings under its Credit Facility would impact annual
interest expense by approximately $.65 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), who have reported modest sales increases so far
in 2004 following declines in sales during various monthly periods in 2003 and
2002. The ten largest customers represented approximately 56% of consolidated
sales during fiscal 2003 with the largest customer representing approximately
26% 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 Rule 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 and are reasonably
designed to ensure that all material information relating to the Company
required to be included in the Company's reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission.
(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.
The Company is currently in the process of evaluating and documenting its
internal controls over financial reporting as required by the Sarbanes-Oxley Act
of 2002. In the event that deficiencies are identified during this process, the
Company intends to implement corrective policies and procedures to remediate
such deficiencies.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management,
including the Chief Executive Officer and Chief Financial Officer, does not
expect that the Company's disclosure controls or the Company's internal controls
will prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
person, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective as of the close of business on June 15, 2004, all Rights issued to the
Company stockholders pursuant to the Amended and Restated Rights Agreement,
dated as of April 13, 2000 by and between the Company and Equiserve Trust
Company, N.A., as Rights agent, as amended, expired as a result of the reported
closing price of the Company's common stock exceeding the Book Value Per Share,
as defined, for 60 consecutive days.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Registrant was held on April 15,
2004. The directors listed in the Registrant's Proxy Statement for the Annual
Meeting of Stockholders dated February 24, 2004 were elected for one year terms
with voting for each as follows:
WITHHELD
DIRECTOR FOR AUTHORITY
- --------------------------------- ----------------- ----------------
Michael F. Anthony 29,545,018 3,107,726
Jeffrey A. Cole 29,272,904 3,379,840
James P. Dollive 29,500,858 3,151,886
Raymond F. Farley 29,392,762 3,259,982
Elbert O. Hand 29,341,658 3,311,086
Dipak C. Jain 29,539,531 3,113,213
Homi B. Patel 29,365,241 3,287,503
Michael B. Rohlfs 29,498,181 3,154,563
Stuart L. Scott 29,399,237 3,253,507
The 2004 Management Incentive Plan was ratified with 22,092,051 shares for,
3,584,862 shares opposed and 6,975,831 shares abstaining and broker non-votes.
The reappointment of PricewaterhouseCoopers LLP as independent auditors was
ratified with 32,258,139 shares for, 264,473 opposed and 130,132 shares
abstaining.
ITEM 5. OTHER INFORMATION
In accordance with the previously announced succession plan, Homi B. Patel
assumed the position of Chairman of Hartmarx Corporation as of July 1, 2004, in
addition to his ongoing responsibilities of President and Chief Executive
Officer upon the retirement of Elbert O. Hand. Mr. Hand will continue as a
director.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
10-D-3 Consulting Agreement dated April 15, 2004 between the Company and
Elbert O. Hand.
31.1 Certification of Chairman and 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 Executive Vice President and 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 Chairman and 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 Executive Vice President and 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:
Reports on Form 8-K filed during the second quarter ended
May 31, 2004. The Forms 8-K listed below that were furnished
to the SEC shall not be deemed filed for any purpose.
A current report on Form 8-K, dated March 29, 2004, was filed
with the SEC to report the Company's issuance of a press release
on the Company's financial results for the first quarter ended
February 29, 2004.
A current report on Form 8-K dated April 15, 2004 was filed with
the SEC to report the Company's issuance of a press release
summarizing matters covered at the Company's April 15th
shareholders' meeting, including updated earnings guidance for
fiscal 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTMARX CORPORATION
July 8, 2004 By /s/ GLENN R. MORGAN
-----------------------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
July 8, 2004 By /s/ ANDREW A. ZAHR
-----------------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)