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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 February 28, 2005
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 March 31, 2005 there were 36,433,569 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 ended February 28, 2005
and February 29, 2004. 3
Unaudited Condensed Consolidated Balance Sheet
as of February 28, 2005, November 30, 2004 and
February 29, 2004. 4
Unaudited Condensed Consolidated Statement
of Cash Flows for the three months ended
February 28, 2005 and February 29, 2004. 6
Notes to Unaudited Condensed Consolidated
Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4. Controls and Procedures 22
Part II - OTHER INFORMATION
Item 6. Exhibits 24
Signatures
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
HARTMARX CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS
(000's Omitted, except per share amounts)
Three Months Ended
----------------------------------
Feb. 28, Feb. 29,
2005 2004
-------------- ------------
Net sales $ 143,822 $ 136,613
Licensing and other income 765 569
------------- -----------
144,587 137,182
------------- -----------
Cost of goods sold 95,658 95,863
Selling, general and administrative expenses 40,404 36,206
------------- -----------
136,062 132,069
------------- -----------
Operating earnings 8,525 5,113
Interest expense 1,575 1,543
------------- -----------
Earnings before taxes 6,950 3,570
Tax provision (2,745) (1,410)
------------- -----------
Net earnings $ 4,205 $ 2,160
============= ===========
Earnings per share:
Basic $ .12 $ .06
Diluted $ .11 $ .06
============= ===========
Dividends per common share $ - $ -
============= ===========
Average shares outstanding:
Basic 35,920 33,878
============= ===========
Diluted 36,789 35,205
============= ===========
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000's Omitted)
Feb. 28, Nov. 30, Feb. 29,
2005 2004 2004
-------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 4,527 $ 2,356 $ 1,447
Accounts receivable, less allowance
for doubtful accounts of $7,049,
$6,735 and $9,881 137,586 119,033 135,006
Inventories 141,643 130,139 128,281
Prepaid expenses 8,109 6,843 5,963
Deferred income taxes 23,711 21,783 14,521
-------------- ------------- --------------
Total current assets 315,576 280,154 285,218
-------------- ------------- --------------
GOODWILL 24,074 24,131 23,145
-------------- ------------- --------------
INTANGIBLE ASSETS 35,165 35,594 533
-------------- ------------- --------------
DEFERRED INCOME TAXES 30,335 34,167 54,095
-------------- ------------- --------------
OTHER ASSETS 6,939 7,441 6,925
-------------- ------------- --------------
INTANGIBLE PENSION ASSET 39,411 39,411 42,860
-------------- ------------- --------------
PROPERTIES
Land 1,908 1,908 1,980
Buildings and building improvements 37,851 35,749 36,361
Furniture, fixtures and equipment 102,719 102,733 104,536
Leasehold improvements 24,776 24,664 25,306
-------------- ------------- --------------
167,254 165,054 168,183
Accumulated depreciation and amortization (138,263) (137,411) (139,740)
-------------- ------------- --------------
Net properties 28,991 27,643 28,443
-------------- ------------- --------------
TOTAL ASSETS $ 480,491 $ 448,541 $ 441,219
============== ============= ==============
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's Omitted, except share data)
Feb. 28, Nov. 30, Feb. 29,
2005 2004 2004
-------------- ------------- ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 25,689 $ 25,679 $ 15,638
Accounts payable and accrued expenses 69,776 72,905 59,113
-------------- ------------- --------------
Total current liabilities 95,465 98,584 74,751
-------------- ------------- --------------
NON-CURRENT LIABILITIES 24,715 25,402 12,621
-------------- ------------- --------------
LONG-TERM DEBT 105,106 76,353 109,478
-------------- ------------- --------------
ACCRUED PENSION LIABILITY 27,219 26,416 47,934
-------------- ------------- --------------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued - - -
Common shares, $2.50 par value; 75,000,000
shares authorized; 36,372,446 shares
issued at February 28, 2005, 36,023,846
shares issued at November 30, 2004 and
36,194,814 shares issued at February 29, 2004. 90,931 90,060 90,487
Capital surplus 64,938 63,784 64,478
Retained earnings 75,345 71,140 57,435
Unearned employee benefits (1,249) (1,332) (482)
Common shares in treasury, at cost,
0 at February 28, 2005,
41,204 at November 30, 2004 and
808,716 at February 29, 2004. - (344) (4,038)
Accumulated other comprehensive income (loss) (1,979) (1,522) (11,445)
-------------- ------------- --------------
Total shareholders' equity 227,986 221,786 196,435
-------------- ------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 480,491 $ 448,541 $ 441,219
============== ============= ==============
(See accompanying notes to unaudited condensed consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000's Omitted)
Three Months Ended
------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents Feb. 28, Feb. 29,
2005 2004
-------------- ---------------
Cash Flows from operating activities:
Net earnings $ 4,205 $ 2,160
Reconciling items to adjust net earnings to
net cash used in operating activities:
Depreciation and amortization of fixed assets 1,243 1,414
Amortization of long lived assets, intangible assets, and
unearned employee benefits 904 1,349
Tax effect of option exercises 600 1,300
Changes in assets and liabilities:
Accounts receivable, inventories, prepaid expenses
and other assets (31,126) (20,532)
Accounts payable, accrued expenses and
non-current liabilities (3,253) (5,238)
Taxes and deferred taxes on earnings 1,926 (402)
-------------- ---------------
Net cash used in operating activities (25,501) (19,949)
-------------- ---------------
Cash Flows from investing activities:
Capital expenditures (2,636) (577)
Payments made re: acquisitions (2,203) (1,392)
-------------- ---------------
Net cash used in investing activities (4,839) (1,969)
-------------- ---------------
Cash Flows from financing activities:
Borrowings under Credit Facility 28,926 20,864
Payment of other debt (163) (152)
Grant proceeds related to facility renovation 500 -
Financing fees and expenses (400) -
Change in checks drawn in excess of bank balances 1,852 (1,818)
Proceeds from exercise of stock options 1,429 1,346
Other equity transactions 367 161
-------------- ---------------
Net cash provided by financing activities 32,511 20,401
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 2,171 (1,517)
Cash and cash equivalents at beginning of period 2,356 2,964
-------------- ---------------
Cash and cash equivalents at end of period $ 4,527 $ 1,447
============== ===============
Supplemental cash flow information:
Net cash paid during the period for:
Interest $ 1,813 $ 1,561
Income taxes 135 399
(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, 2004. 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 in computing basic and diluted shares were as follows (000's omitted):
Three Months Ended
---------------------------------------
Feb. 28, Feb. 29,
2005 2004
----------------- ----------------
Basic 35,920 33,878
Dilutive effect of:
Stock options and awards 838 750
Restricted stock awards 31 577
----------------- ----------------
Diluted 36,789 35,205
================= ================
For the three months ended February 28, 2005 and February 29, 2004, the
following number of options and restricted stock awards 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 or award price for the
respective period:
Three Months Ended
--------------------------------
Feb. 28, Feb. 29,
2005 2004
------------- -----------
Anti-dilutive:
Stock options - 361,142
Restricted stock awards - -
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
------------------------------------
Feb. 28, Feb. 29,
2005 2004
------------- -------------
Net earnings, as reported $ 4.2 $ 2.2
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects (0.1) (0.2)
------------- -------------
Pro forma net earnings $ 4.1 $ 2.0
============= =============
Earnings per share:
Basic - as reported $ .12 $ .06
============= =============
Basic - pro forma $ .11 $ .06
============= =============
Diluted - as reported $ .11 $ .06
============= =============
Diluted - pro forma $ .11 $ .06
============= =============
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 3
Long-term debt comprised the following (000's omitted):
Feb. 28, Nov. 30, Feb. 29,
2005 2004 2004
------------ ------------ ------------
Borrowings under Credit Facility $ 95,856 $ 66,930 $ 89,538
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 17,689 17,852 18,328
------------ ------------ ------------
130,795 102,032 125,116
Less - current 25,689 25,679 15,638
------------ ------------ ------------
Long-term debt $ 105,106 $ 76,353 $ 109,478
============ ============ ============
Pursuant to an amendment dated on January 3, 2005, and effective January 1,
2005, the Credit Facility was amended, extending its term by three years to
February 28, 2009; the Company retains its option to extend the term for an
additional year, to February 28, 2010. The Credit Facility provides for a $50
million letter of credit sub-facility. Interest rates under the Credit
Facility continue to be 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 4.4% at February 28, 2005, 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 2005 and
as of February 28, 2005, the Company was in compliance with all covenants
under the Credit Facility and its other borrowing agreements. At February 28,
2005, the Company had approximately $22 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. During the twelve months
ended February 28, 2005, borrowing availability ranged from $35 million to
$102 million. At February 28, 2005, additional borrowing availability under
the Credit Facility was approximately $61 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.
Note 4
Components of net periodic pension expense for the Company's defined benefit
and non-qualified supplemental pension plans for the three months ended
February 28, 2005 and February 29, 2004 were as follows (000's omitted):
Three Months Ended
-----------------------------
Feb. 28, Feb. 29,
2005 2004
-------------- -------------
Service cost $ 1,368 $ 1,245
Interest cost 3,493 3,787
Expected return on plan assets (4,643) (3,974)
Recognized net actuarial (gain) loss (8) 396
Net amortization 847 847
-------------- -------------
Net periodic pension expense $ 1,057 $ 2,301
============== =============
As the Company had not completed its actuarial valuation as of the respective
interim dates, the above amounts for the three months ended February 28, 2005
and February 29, 2004 have been calculated based upon the Company's estimate
of pension expense for the respective period.
During fiscal 2005 to date, no contributions have been made to the Company's
pension plans. The Company anticipates contributions in the $6 million to $8
million range will be made in fiscal 2005.
Note 5
Inventories at each date consisted of (000's omitted):
Feb. 28, Nov. 30, Feb. 29,
2005 2004 2004
----------- ------------- -------------
Raw materials $ 39,748 $ 37,560 $ 37,641
Work-in-process 7,304 7,674 7,263
Finished goods 94,591 84,905 83,377
------------ ------------- -------------
$ 141,643 $ 130,139 $ 128,281
============ ============= =============
Inventories are stated at the lower of cost or market. At February 28, 2005,
November 30, 2004 and February 29, 2004, approximately 48%, 45% and 47%,
respectively, of the Company's total inventories 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
On July 20, 2004, the Company acquired certain assets, properties and
operations of Exclusively Misook, Inc. ("Misook"), a designer and marketer of
upscale women's knit products sold through leading specialty and department
stores. The acquisition of Misook is expected to provide for strategic growth
opportunities in women's wear and further diversification of product
categories.
The purchase price for Misook as of the acquisition date was $32.6 million.
Additional cash purchase consideration will be due if Misook achieves certain
specified financial performance targets over a five-year period commencing
August 1, 2004. This additional contingent cash purchase consideration is
calculated based on a formula applied to operating results. A minimum level of
performance, as defined in the purchase agreement, must be achieved during any
of the periods in order for additional consideration to be paid. The
additional consideration anticipated applicable to the three months ending
February 28, 2005 was approximately $.7 million. At the minimum level of
performance (annualized operating earnings, as defined, of at least $12
million), additional annual consideration of $3.6 million would be paid
applicable to the five year period following the acquisition. The amount of
consideration increases with increased levels of earnings and there is no
maximum amount of incremental purchase price.
If the Misook business is sold within five years of the acquisition date
("Sale Transaction"), the purchase agreement provides, at the option of the
seller, for a lump sum payment covering the remaining earnout period based on
the average annual contingent consideration earned prior to the date of the
Sale Transaction.
The Misook acquisition is being accounted for under the purchase method of
accounting. Accordingly, the results of Misook are included in the
consolidated financial statements from the acquisition date. Misook's results
of operations and assets are included in the Women's Apparel Group segment.
The Company has allocated the purchase price to the Misook assets acquired and
liabilities assumed at estimated fair values, considering a number of factors,
including the use of an independent appraisal. The excess of fair value of the
net assets acquired compared to the amount paid as of the acquisition date has
been reflected as "estimated amount due seller", in accordance with SFAS No.
141 ("Business Combinations"). Any contingent consideration payable in the
future will be first applied to reduce the amount recorded as "estimated
amount due seller", and thereafter to goodwill. This allocation is subject to
revision; subsequent revisions, if any, are not expected to be material. The
following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (000's omitted):
Cash consideration $ 32,616
Direct acquisition costs 235
-------------
Total purchase price $ 32,851
=============
Allocation of purchase price:
Accounts receivable $ 6,715
Inventories 1,155
Other current assets 392
Intangible assets 36,150
Deferred taxes (related to minimum pension liability) 568
Property, plant and equipment 58
Other assets 48
Current liabilities (428)
Estimated amount due seller (10,455)
Minimum pension liability (1,352)
-------------
Total purchase price $ 32,851
=============
The components of the Intangible Assets listed in the above table as of the
acquisition date were determined utilizing an independent third party
appraisal and are as follows (000's omitted):
Amount Life
------------ ---------------
Tradename $ 28,400 Indefinite
Customer relationships 3,000 10 years
Supply agreement 4,400 5 years
Covenant not to compete 350 4 years
------------
$ 36,150
============
The tradename was deemed to have an indefinite life and, accordingly, is not
being amortized, but will be subject to periodic impairment testing at future
periods in accordance with SFAS No. 142 ("Goodwill and Other Intangible
Assets"). The customer relationships and covenant not to compete are being
amortized based on estimated weighted cash flows over their life. The supply
agreement is being amortized on a straight line basis over the life of the
agreement.
The Misook acquisition was financed utilizing borrowing availability under the
Company's Credit Facility.
Regarding the 2001 acquisition of the Consolidated Apparel Group, no
additional contingent consideration can be earned by the former owners
subsequent to November 30, 2004, pursuant to a November 2004 amendment to the
purchase agreement.
The amounts of contingent consideration related to fiscal 2004 accrued as of
November 30, 2004 for Misook, approximately $1.2 million, and CAG,
approximately $1.0 million, were each paid in the first quarter of fiscal
2005.
The pro forma financial information presented below gives effect to the Misook
acquisition as if it had occurred as of the beginning of the Company's fiscal
year 2004. The pro forma amounts below reflect interest on the purchase price
assuming the acquisition occurred as of December 1, 2003, with interest
calculated at the Company's borrowing rate under its Credit Facility for the
period. The pro forma earnings below assumes an income tax provision at the
Company's consolidated tax rate for the period. The information presented
below is for illustrative purposes only and is not indicative of results that
would have been achieved if the acquisition had occurred as of the beginning
of the Company's 2004 fiscal year or of future operating performance. Amounts
in millions, except per share amounts:
Three Months Ended
February 29, 2004
-----------------
Net sales $146.5
Net earnings 3.8
Net earnings per share:
Basic .11
Diluted .11
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 $4.8 million for the first quarter of 2005 and $4.6 million
for the first quarter of 2004 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, designer knitwear, 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 months
ended and as of February 28, 2005 and February 29, 2004 is summarized as
follows (in millions):
Men's Women's
Apparel Apparel
Group Group Adj. Consol.
------------- ------------ -------------- -------------
2005
Net sales $ 123.9 $ 19.9 $ - $ 143.8
Earnings (loss) before taxes 11.2 2.3 (6.5) 7.0
Total assets 304.2 67.9 108.4 480.5
2004
Net sales $ 119.2 $ 17.4 $ - $ 136.6
Earnings (loss) before taxes 7.5 1.4 (5.3) 3.6
Total assets 286.8 30.1 124.3 441.2
During the three months ended February 28, 2005 and February 29, 2004, 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 and general corporate expenses.
Adjustments of total assets are for cash, deferred income taxes, investments,
other assets, corporate properties and the intangible pension asset.
At February 28, 2005 and February 29, 2004, the Men's Apparel Group total
assets includes $24.1 million and $23.1 million, respectively, of goodwill
related to acquisitions. At February 28, 2005, Women's Apparel Group total
assets include intangible assets of $34.9 million related to acquisitions.
Sales and long-lived assets by geographic region are as follows (in millions):
Sales Long-Lived Assets
--------------------------------- -------------------------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2005 2004 2005 2004
------------- ------------- ------------- --------------
USA $ 139.0 $ 133.0 $ 131.1 $ 98.3
Canada 4.7 3.6 2.8 2.7
All Other 0.1 - 0.7 0.9
------------ ------------- ------------- --------------
$ 143.8 $ 136.6 $ 134.6 $ 101.9
============ ============= ============= ==============
Sales by Canadian subsidiaries to customers in the United States are included
in USA sales. Sales to customers in countries other than the USA or Canada are
included in All Other.
Long-lived assets includes intangible pension asset, net properties, goodwill,
intangible assets and other assets.
Note 9
Comprehensive income, which includes all changes in the Company's equity
during the period, except transactions with stockholders, was as follows
(000's omitted):
Three Months Ended
--------------------------------
Feb. 28, Feb. 29,
2005 2004
------------- --------------
Net earnings $ 4,205 $ 2,160
Other comprehensive income (loss):
Change in fair value of foreign exchange
contracts, net of tax (43) (86)
Currency translation adjustment, net of tax (414) (159)
------------- --------------
Comprehensive earnings $ 3,748 1,915
============= ==============
The change in Accumulated Other Comprehensive Income (Loss) was as follows
(000's omitted):
Fair Value Foreign Accumulated
Minimum of Foreign Currency Other
Pension Exchange Translation Comprehensive
Liability Contracts Adjustment Income (Loss)
------------- ---------------- ---------------- --------------
Fiscal 2005
- ----------------------
Balance Nov. 30, 2004 $ (3,425) $ 123 $ 1,780 $ (1,522)
Change in fiscal 2005 - (43) (414) (457)
------------- ---------------- ---------------- ---------------
Balance February 28, 2005 $ (3,425) $ 80 $ 1,366 $ (1,979)
============= ================ ================ ===============
Fair Value Foreign Accumulated
Minimum of 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 - (86) (159) (245)
------------- ---------------- ---------------- ---------------
Balance February 29, 2004 $ (11,735) $ 163 $ 127 $ (11,445)
============= ================ ================ ===============
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):
Three months ended February 28, 2005 Pre-tax Tax After-Tax
- ---------------------------------------- --------------- --------------- ----------------
Minimum pension liability $ - $ - $ -
Fair value of foreign exchange contracts (65) 22 (43)
Foreign currency translation adjustment (414) - (414)
--------------- --------------- ----------------
$ (479) $ 22 $ (457)
=============== =============== ================
Three months ended February 29, 2004
- ---------------------------------------
Minimum pension liability $ - $ - $ -
Fair value of foreign exchange contracts (142) 56 (86)
Foreign currency translation adjustment (272) 113 (159)
--------------- --------------- ----------------
$ (414) $ 169 $ (245)
=============== =============== ================
Note 10
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004) "Share-Based Payment", which requires companies to
recognize in the income statement the grant date fair value of stock options
and other equity-based compensation issued to employees and disallows the use
of the intrinsic value method of accounting for stock options, but expresses
no preference for a type of valuation model. This statement supersedes
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees", but does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
SFAS No. 123 as originally issued. SFAS No. 123 (revised 2004) is effective as
of the beginning of the Company's fourth quarter of fiscal 2005. While the
Company has not yet determined the precise impact that this statement will
have on its financial condition and results of operations for fiscal 2005,
assuming future annual stock option awards are comparable to prior years
annual awards and the Black-Scholes method is used to compute the value of the
awards, the annualized impact on diluted earnings per share is expected to be
in the range of $.03 to $.04.
In December 2004, FASB issued SFAS No. 151 "Inventory Costs, an Amendment of
ARB No. 43, Chapter 4". FAS 151 clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material and
requires that these items be recognized as current period charges. FAS 151
applies only to inventory costs incurred during periods beginning after the
effective date and also requires that the allocation of fixed production
overhead to conversion costs be based on the normal capacity of the production
facilities. FAS 151 is effective for the Company's fiscal year beginning
December 1, 2005. The Company does not anticipate that implementation of this
statement will have a material impact on its financial condition, results of
operations or cash flows.
In December 2004, FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets,
An Amendment of APB Opinion No. 29". FAS 153 eliminates the exception for
exchange of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance.
FAS 153 is effective for non-monetary assets and exchanges occurring in fiscal
periods beginning after June 15, 2005, the Company's third fiscal quarter. As
the Company does not engage in exchanges of non-monetary assets, the Company
does not anticipate that implementation of this statement will have a material
impact on its financial conditions, results of operations or cash flows.
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, designer
knitwear, 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 trend to casual dressing in the workplace has been a major
contributor to the overall market decline for tailored clothing
products over the past decade, 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 continued to expand its non-tailored clothing product
offerings through internally developed programs, new licensing arrangements
and acquisitions. On July 20, 2004, the Company acquired certain assets,
properties and operations of Exclusively Misook, Inc. ("Misook"), a designer
and marketer of upscale women's knit products sold through leading specialty
and department stores. The purchase price for Misook as of the acquisition
date was $32.6 million. As described in the Notes to Unaudited Condensed
Consolidated Financial Statements, additional contingent consideration will be
due as Misook achieves certain specified financial performance targets. The
acquisition of Misook, which provides for strategic growth opportunities in
women's wear and further diversification of non-tailored product categories,
contributed $6.8 million in revenues and approximately $.03 in earnings per
diluted share to first quarter results in 2005. The Company acquired the
Consolidated Apparel Group ("CAG"), a marketer of moderate priced men's
sportswear, in 2001. These product diversification actions, along with the
introductions of Bobby Jones and Nicklaus golfwear in earlier years, have
opened up or expanded distribution channels for the Company's products, such
as through "green grass" and resort shops for golfwear and warehouse clubs for
moderate-priced sportswear. Although representing only a small percentage of
consolidated revenues, direct-to-consumer marketing is increasing, including
internet-based marketing for certain womenswear and higher end sportswear
products and through a small number of stores marketing the Bobby Jones and
Hickey-Freeman brands.
Sales of non-tailored apparel (men's sportswear, golfwear, slacks and womens-
wear) increased to 45% of total sales during the first quarter of 2005
compared to 42% for the first quarter of 2004. For the full year, non-tailored
apparel sales represented 47% of total sales in 2004 compared to 44% in 2003.
The increase in first quarter pre-tax earnings to $6.9 million in 2005 from
$3.6 million in 2004 reflected a 5.3% revenue increase to $143.8 million from
$136.6 million and improved operating margins.
Liquidity and Capital Resources
November 30, 2004 to February 28, 2005
- --------------------------------------
For the three months ended February 28, 2005, net cash used in operating
activities as reflected in the accompanying Unaudited Condensed Consolidated
Statement of Cash Flows was $25.5 million compared to a net use of cash of
$19.9 million for the three months ended February 29, 2004. The additional use
of cash during the current period over the prior period was primarily
attributable to higher working capital requirements, principally inventories.
Since November 30, 2004, net accounts receivable increased $18.6 million or
16% to $137.6 million, principally attributable to the seasonal increase from
tailored clothing shipments in the Men's Apparel Group. Inventories of $141.6
million increased $11.5 million or 9%, reflecting the earlier production or
receipt of goods in advance of anticipated shipments. Net properties increased
$1.3 million to $29.0 million as capital additions in the current period
included amounts related to the renovation of the Hickey-Freeman manufacturing
and distribution facility. Accounts payable and accrued expenses declined $3.1
million reflecting regular seasonal payments. Total debt, including current
maturities, increased $28.8 million to $130.8 million and was the principal
component of net cash provided by financing activities in the accompanying
Unaudited Condensed Consolidated Statement of Cash Flows; this increase
reflected regular seasonal increases in working capital requirements. Total
debt represented 36% of total capitalization at February 28, 2005 compared to
32% at November 30, 2004. Shareholders' equity increased $6.2 million from the
earnings as well as from the favorable impact of stock option exercises and
equity sales to the Company's employee stock purchase plan, resulting in
392,804 additional shares issued during the first quarter.
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, 2004.
The Company's borrowing arrangements consist of a senior revolving credit
facility ("Credit Facility"), mortgages and industrial development bonds. The
current $200 million Credit Facility expires in February 2009 with an
additional one year renewal at the Company's option (i.e., until February
2010), 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 4.4% at February 28,
2005, 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 on all borrowings was approximately 5.4% at February 28,
2005 compared to 5.2% February 29, 2004.
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 2005 and
as of February 28, 2005, 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 stabilized in
recent periods after experiencing unit declines over the previous several
years. If the tailored clothing market declines further, 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 sportswear and casual 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 various monthly periods of 2004 and 2003. The ten largest
customers represented approximately 55% of consolidated sales during fiscal
2004 with the largest customer representing approximately 23% 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 February 28, 2005, the Company had approximately $22 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. 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. Availability levels generally decline towards the end of
the first and third quarters and increase during the second and fourth
quarters. For the trailing twelve months, additional availability levels have
ranged from $35 million to $102 million. At February 28, 2005, additional
borrowing availability under the Credit Facility was approximately $61
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 February 28, 2005, there
were an aggregate of $5.8 million of outstanding foreign exchange contracts
primarily attributable to approximately 1.1 million Canadian dollars related
to anticipated U.S. dollar collections by the Company's Canadian business in
the next three months, approximately 3.2 million Euros related to anticipated
inventory purchases to be made in the next nine months, and approximately 80
million Japanese yen, primarily related to anticipated licensing revenues 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.
Off-Balance Sheet Arrangements. 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.
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.
February 29, 2004 to February 28, 2005
- --------------------------------------
Net accounts receivable of $137.6 million increased $2.6 million or 2%,
principally reflecting the higher sales, partially offset by improved
collections; the allowance for doubtful accounts declined $2.8 million to $7.0
million reflecting the write off of amounts previously reserved. The current
period included $4.8 million of net receivables related to Misook. Inventories
of $141.6 million increased $13.4 million or 10%, primarily attributable to
the Men's Apparel Group in anticipation of higher sales; inventories
attributable to Misook aggregated $.8 million. The increase in intangible
assets to $35.2 million from $.5 million in the year earlier period was
attributable to the fair value of intangible assets acquired in the Misook
transaction, including the Misook tradename. Net properties of $29.0 million
increased $.5 million, as capital additions, including amounts related to the
renovation of the Hickey-Freeman manufacturing and distribution facility,
exceeded depreciation expense. At February 28, 2005, cash and equivalents were
$4.5 million compared to $1.4 million in the year earlier period. Total debt
of $130.8 million increased $5.7 million compared to the year earlier level.
Debt levels have been favorably impacted by the higher cash earnings offset by
the cash paid related to the Misook acquisition. Total debt represented 36% of
total capitalization at February 28, 2005 compared to 39% at February 29,
2004.
Results of Operations
First Quarter 2005 Compared to First Quarter 2004
- -------------------------------------------------
First quarter consolidated sales were $143.8 million compared to $136.6
million in 2004. The current period reflected $6.8 million of revenues
attributable to Misook; also, improved sales at retail resulted in early
shipments of some second quarter orders. Men's Apparel Group revenues
increased to $123.9 million compared to $119.2 million in the year earlier
period. In general, wholesale selling prices for comparable products were
approximately even in 2005 compared to 2004, although product mix changes
impacted comparability of both unit sales and average wholesale selling
prices. Tailored clothing average wholesale selling prices decreased
approximately 8% from 2004, reflecting a shift in product mix in 2005 compared
to the prior year. Suit unit sales decreased approximately 12%; reflecting in
part the non-renewal of an expiring tailored clothing license, sport coat
units increased approximately 34% and slack product units increased
approximately 115%, each benefitting from the initial shipments of two new
separates programs. Slack average wholesale selling prices decreased
approximately 36%, reflecting a shift in product mix weighted towards casual
pants. While unit sales of sportswear products decreased approximately 22%,
attributable to declines in moderate priced sporstwear, average wholesale
selling prices were 19% higher than 2004, reflecting product mix changes to
higher priced products such as Bobby Jones. Women's Apparel Group revenues,
which represented approximately 14% of consolidated sales in 2005 and 13% in
2004, increased $2.5 million, attributable to Misook. The prior period
included $4.3 million related to a one year private label program which
commenced in the fall of 2003 and was substantially completed in the second
quarter of 2004. Excluding the effect of this program, unit sales of women's
apparel increased approximately 34%, attributable principally to Misook.
Average selling prices increased approximately 17%, attributable principally
to Misook. Aggregate sportswear and other non-tailored clothing product
categories, including women's, represented approximately 45% of total first
quarter revenues in fiscal 2005 compared to 42% in 2004.
The consolidated gross margin percentage to sales increased to 33.5% compared
to 29.8% last year. The higher gross margin rate compared to last year's first
quarter reflected improved manufacturing utilization in owned facilities,
fewer dispositions of off-price tailored clothing units, additional
utilization of off-shore contractors for moderate priced tailored clothing and
from changes in product mix; women's and men's sportswear product categories
generated a higher gross margin rate compared to tailored clothing. Gross
margins may not be comparable to those of other entities since some entities
include all of the costs related to their distribution network in arriving at
gross margin, whereas the Company included $4.8 million in 2005 and $4.6
million in 2004 of costs related to warehousing, picking and packing of
finished products as a component in Selling, General and Administrative
Expenses. Consolidated selling, general and administrative expenses were $40.4
million in 2005 compared to $36.2 million in 2004; the ratio to sales was
28.1% in 2005 compared to 26.5% in 2004. The increase relative to sales
reflected, in part, changes in revenue mix towards more women's and men's
sportswear products with higher gross margin and operating expense ratios to
sales. The dollar increase reflected $1.5 million of expenses related to
Misook and $1.4 million of incremental professional fees related to the
documentation and testing of internal controls as required by the
Sarbanes-Oxley Act. The prior period included $.6 million of incremental
expense associated with the performance based vesting on February 10, 2004 of
606,500 restricted stock awards.
Operating earnings were $8.5 million in 2005 compared to $5.1 million in 2004
and represented 5.9% of consolidated sales in 2005 and 3.7% of sales in 2004.
Men's Apparel Group operating earnings were $11.2 million in 2005 compared to
$7.5 million in 2004, attributable to both the higher sales and improved gross
margins; tailored clothing products represented the most significant
contributor to earnings and cash flow in each year. Women's Apparel Group
operating earnings were $2.3 million in 2005 compared to $1.4 million in 2004,
as the incremental earnings attributable to Misook were partially offset by
declines in other lines, including the impact of the private label program
which was substantially completed in the second quarter of 2004.
Interest expense was $1.6 million in 2005 compared to $1.5 million in 2004, as
the small increase was attributable to a rise in the weighted average interest
rate. Consolidated pre-tax earnings were $6.9 million in 2005 compared to $3.6
million in 2004. After reflecting the applicable tax provision, consolidated
net earnings were $4.2 million in 2005 compared to $2.2 million in 2004.
Diluted earnings per share were $.11 in 2005 compared to $.06 per share in
2004.
Based on current conditions, the Company continues to anticipate a
consolidated sales increase for the year ending November 30, 2005 in the low
to mid single digit range. In the Men's Apparel Group, tailored clothing
revenues should increase, benefitting from the introduction of new licensing
programs, but partially offset by the non-renewal of a license which generated
approximately $14 million of revenues during 2004. Sportswear product lines
are anticipated to increase at the higher price points from expected growth in
the Bobby Jones and Ted Baker lines, while moderate priced sportswear revenues
are expected to decline from reduced business with the warehouse club channel.
Women's Apparel Group revenues, which represented approximately 14% of total
sales in 2004, are anticipated to increase, principally from the incremental
impact of Misook for the full year, partially offset by the conclusion during
2004 of the one year private label program.
Operating margins are expected to improve on the higher sales due to improved
gross margins generally and from product mix. Debt reduction, excluding
acquisitions, is anticipated to commence in the second half of the year. The
January 2005 extension of the Company's $200 million senior credit facility to
February 2009, with an option to February 2010, provides additional
flexibility for the Company to implement its operating strategies. Net
earnings are anticipated to increase in the 30% - 40% range for the full year
over 2004's $15.9 million or $.44 per diluted share.
The Company's longer term objectives are to increase revenues and continue
pre-tax margin improvements, with growth realized from a combination of both
internal revenue growth and from acquisitions. The Company continues to pursue
prudent acquisitions which can produce positive cash flows, are accretive to
earnings in the near to mid-term, and which do not create excessive 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 2004 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 February 28, 2005, the Company had entered into foreign
exchange contracts, aggregating approximately $5.8 million principally
attributable to approximately 1.1 million Canadian dollars related to
anticipated U.S. dollar collections by the Company's Canadian business in the
next three months, approximately 3.2 million Euros primarily related to
inventory purchases in the next nine months, and approximately 80 million
Japanese yen primarily related to anticipated licensing revenues to be
received in the next six months.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of 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 $1.0 million based on borrowings
under the Credit Facility at February 28, 2005. 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 various monthly periods in 2003 and 2004. The ten largest
customers represented approximately 55% of consolidated sales during fiscal
2004 with the largest customer representing approximately 23% 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 were
effective and were 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) Changes In Internal Control Over Financial Reporting. As disclosed
in the Company's Form 10-K/A filed on March 30, 2005, in connection with the
material
weakness in internal control over financial reporting described in Management's
Report on Internal Control Over Financial Reporting, in the Company's fiscal
quarter ended February 28, 2005, the valuation of certain inventory and cost of
goods sold described therein have been remediated and new operating unit
personnel having enhanced expertise in the supervision over and determination
of inventory valuation methodologies have been employed. Other than these
changes, 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 Company's fiscal quarter ended February 28,
2005 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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 company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Further, the design of disclosure controls and procedures and internal control
over financial reporting 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.
Part II -- OTHER INFORMATION
Item 6. Exhibits
- -----------------
31.1 Certification of Chairman, President 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, President 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.
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
April 8, 2005 By /s/ GLENN R. MORGAN
-----------------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
April 8, 2005 By /s/ ANDREW A. ZAHR
-----------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)