UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended August 31, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
Yes [ ] No [x]
At September 30, 2006 there were 36,433,255 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 and nine months ended August 31, 2006
and August 31, 2005. 3
Unaudited Condensed Consolidated Balance Sheet
as of August 31, 2006, November 30, 2005 and
August 31, 2005. 4
Unaudited Condensed Consolidated Statement of Cash Flows
for the nine months ended August 31, 2006
and August 31, 2005. 6
Notes to Unaudited Condensed Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 33
Part II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity and Use of Proceeds 35
Item 5. Other Information 35
Item 6. Exhibits 36
Signatures 37
-2-
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 Nine Months Ended
August 31, August 31,
------------------------------ -------------------------------
2006 2005 2006 2005
------------ ------------- ------------- -------------
Net sales $137,691 $152,134 $434,461 $441,698
Licensing and other income 875 690 2,056 1,738
-------- -------- -------- --------
138,566 152,824 436,517 443,436
-------- -------- -------- --------
Cost of goods sold 90,146 101,758 288,977 292,581
Selling, general and administrative expenses 45,427 38,664 129,704 119,247
-------- -------- -------- --------
135,573 140,422 418,681 411,828
-------- -------- -------- --------
Operating earnings 2,993 12,402 17,836 31,608
Interest expense 2,053 1,757 6,601 5,138
-------- -------- -------- --------
Earnings before taxes 940 10,645 11,235 26,470
Tax provision 450 4,060 4,280 10,255
-------- -------- -------- --------
Net earnings $ 490 $ 6,585 $ 6,955 $ 16,215
======== ======== ======== ========
Earnings per share:
Basic $ .01 $ .18 $ .19 $ .45
======== ======== ======== ========
Diluted$ $ .01 $ .18 $ .19 $ .44
======== ======== ======== ========
Dividends per common share $ -- $ -- $ -- $ --
======== ======== ======== ========
Average shares outstanding:
Basic 36,130 36,652 36,580 36,331
======== ======== ======== ========
Diluted 36,712 37,466 37,231 37,174
======== ======== ======== ========
(See accompanying notes to unaudited condensed consolidated financial statements)
-3-
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000's Omitted)
Aug. 31, Nov. 30, Aug. 31,
2006 2005 2005
-------------- ------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 2,527 $ 1,257 $ 2,158
Accounts receivable, less allowance
for doubtful accounts of $5,475,
$5,237 and $5,889 113,681 123,058 131,879
Inventories 172,410 153,263 150,284
Prepaid expenses 9,063 12,707 13,148
Deferred income taxes 28,832 25,068 29,747
--------- --------- ---------
Total current assets 326,513 315,353 327,216
--------- --------- ---------
GOODWILL 27,113 26,233 24,130
--------- --------- ---------
INTANGIBLE ASSETS 56,342 49,598 34,171
--------- --------- ---------
DEFERRED INCOME TAXES 16,729 23,797 19,250
--------- --------- ---------
OTHER ASSETS 6,672 6,451 6,488
--------- --------- ---------
INTANGIBLE PENSION ASSET 35,963 35,963 39,411
--------- --------- ---------
PROPERTIES
Land 1,883 1,883 1,886
Buildings and building improvements 44,171 43,825 43,778
Furniture, fixtures and equipment 105,497 103,422 102,498
Leasehold improvements 28,224 28,124 27,833
--------- --------- ---------
179,775 177,254 175,995
Accumulated depreciation and amortization (144,075) (140,004) (138,951)
--------- --------- ---------
Net properties 35,700 37,250 37,044
--------- --------- ---------
TOTAL ASSETS $ 505,032 $ 494,645 $ 487,710
========= ========= =========
(See accompanying notes to unaudited condensed consolidated financial statements)
-4-
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's Omitted, except share data)
Aug. 31, Nov. 30, Aug. 31,
2006 2005 2005
-------------- ------------- --------------
CURRENT LIABILITIES
Current portion of long-term debt $ 24,762 $ 24,732 $ 25,709
Accounts payable and accrued expenses 76,896 74,111 74,446
--------- --------- ---------
Total current liabilities 101,658 98,843 100,155
--------- --------- ---------
NON-CURRENT LIABILITIES 21,142 25,730 25,526
--------- --------- ---------
LONG-TERM DEBT 107,390 94,781 91,537
--------- --------- ---------
ACCRUED PENSION LIABILITY 25,843 29,445 26,617
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued -- -- --
Common shares, $2.50 par value; 75,000,000
shares authorized; 37,579,190 shares issued at
August 31, 2006, 37,157,586 shares
issued at November 30, 2005 and 37,075,936 shares
issued at August 31, 2005 93,948 92,894 92,690
Capital surplus (revised) 85,836 86,348 85,989
Retained earnings (revised) 84,085 77,130 69,790
Unearned employee benefits -- (2,798) (2,963)
Common shares in treasury, at cost, 1,167,800
shares at August 31, 2006 and 0 shares at
November 30, 2005 and August 31, 2005 (7,876) -- --
Accumulated other comprehensive income (loss) (6,994) (7,728) (1,631)
--------- --------- ---------
Total shareholders' equity 248,999 245,846 243,875
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 505,032 $ 494,645 $ 487,710
========= ========= =========
(See accompanying notes to unaudited condensed consolidated financial statements)
-5-
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000's Omitted)
Nine Months Ended
August 31,
-----------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2006 2005
-------------- ---------------
Cash Flows from operating activities:
Net earnings $ 6,955 $ 16,215
Reconciling items to adjust net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 4,192 3,618
Amortization of intangible assets and long lived assets 2,823 2,333
Stock compensation expense 1,590 260
Tax effect of option exercises -- 1,455
Deferred taxes on earnings 3,294 7,031
Changes in assets and liabilities:
Accounts receivable, inventories, prepaid expenses
and other assets (2,185) (39,125)
Accounts payable, accrued expenses and
non-current liabilities (4,678) (891)
-------- --------
Net cash provided by (used in) operating activities 11,991 (9,104)
-------- --------
Cash Flows from investing activities:
Capital expenditures (2,648) (13,023)
Payments made re: acquisitions (16,143) (2,203)
Cash proceeds from asset held for sale -- 300
-------- --------
Net cash used in investing activities (18,791) (14,926)
-------- --------
Cash Flows from financing activities:
Borrowings under Credit Facility 13,184 15,719
Payment of other debt (545) (505)
Grant proceeds related to facility modernization 759 3,437
Financing fees and expenses -- (400)
Change in checks drawn in excess of bank balances 798 1,287
Proceeds from exercise of stock options 417 3,269
Purchase of treasury shares (7,876) --
Tax effect of option exercises 163 --
Other equity transactions 1,170 1,025
-------- --------
Net cash provided by financing activities 8,070 23,832
-------- --------
Net increase (decrease) in cash and cash equivalents 1,270 (198)
Cash and cash equivalents at beginning of period 1,257 2,356
-------- --------
Cash and cash equivalents at end of period $ 2,527 $ 2,158
======== ========
Supplemental cash flow information:
Net cash paid during the period for:
Interest $ 6,719 $ 5,118
Income taxes 853 1,672
(See accompanying notes to unaudited condensed consolidated financial statements)
-6-
HARTMARX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Principles of Consolidation
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, 2005.
Note 2 - Stock Based Compensation
The Company has in effect the 1998 Incentive Stock Plan ("1998 Plan"), the 2003
Incentive Stock Plan ("2003 Plan"), the 2006 Incentive Stock Plan ("2006 Plan")
(collectively, the "Employee Plans") and the 2006 Stock Compensation Plan for
Non-Employee Directors ("2006 Director Plan") under which officers, key
employees and directors (with respect to the 2006 Director Plan) may be granted
options to purchase the Company's common stock at prices equal to or exceeding
the fair market value at the date of grant. The 2006 Director Plan also allows
for the awarding of Deferred Director Stock Awards to non-employee directors.
Options granted to employees in 2006 and 2005 have five year terms. Options
granted to employees in 2004 and prior years and outstanding at August 31, 2006
have ten year terms. Options granted to employees are priced at the average of
the high and low of the Company's stock price on the day the Compensation and
Stock Option Committee of the Board of Directors approves the grants. Fair
market value option awards to outside directors are priced at the average of the
high and the low of the Company's stock price on the date of the award, usually
the day of the annual meeting. Options granted to employees under the Employee
Plans generally become exercisable in cumulative one-third installments on each
of the first three anniversaries of the grant date; however, for participants
employed by the Company for at least three years on the first anniversary of the
grant date, all or any portion of the options granted are exercisable beginning
one year after the date of grant. For participants employed by the Company for
at least two years but less than three years on the first anniversary of the
grant date, two-thirds of the options granted are exercisable beginning one year
after the date of grant. No additional grants will be made under the 1998 and
2003 Plans. Following the stockholder adoption of the 2006 Incentive Stock Plan
in April 2006, shares covered by grants or awards under the terms of the 1998 or
2003 Plans which terminate, lapse or are forfeited will be added to the
aggregate number of shares authorized under the 2006 Plan and will become
available for grants under the 2006 Plan. Options granted under the 2006 Plan
are evidenced by agreements that set forth the terms, conditions and limitations
for such grants, including the term of the award, limitations on exercisability,
and other provisions as determined by the Compensation and Stock Option
Committee of the Board of Directors.
The Employee Plans also provide for the discretionary grant of stock
appreciation rights in conjunction with the stock option, which allows the
holder to receive cash, stock or a combination of stock and cash equal to the
gain in market price from the date of grant until its exercise. Under certain
circumstances, the entire gain attributable to rights granted under the 1998,
2003 and 2006 Plans may be paid in cash; in the case of stock appreciation
rights granted in tandem with a stock option, the cash payment under the 1998
Plan and the 2003 Plan is limited to one-half the gain. When options and stock
appreciation rights are granted in tandem, the exercise of one cancels the
other. There were no stock appreciation rights outstanding at August 31, 2006,
November 30, 2005 or August 31, 2005. The Employee Plans also allow for granting
of restricted stock
-7-
awards enabling the holder to obtain full ownership rights subject to terms and
conditions specified at the time each award is granted. The 2006 Plan also
allows for the granting of restricted stock units enabling the holder to receive
awards of common stock subject to terms and conditions specified at the time
such an award is granted.
As of August 31, 2006, there are 897,700 options outstanding under the 1998 Plan
and 1,018,000 options outstanding under the 2003 Plan. No options were
outstanding under the 2006 Plan. Under the 2006 Plan, 1,832,683 shares remain
available for future grants.
Effective December 1, 2005, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), "Share-Based
Payment ("SFAS 123R")," which requires the Company to recognize expense related
to the grant date fair value of its employee stock option awards. The Company
recognizes the expense of all share-based awards on a straight-line basis over
the employee's requisite service period (generally the vesting period of the
award). Stock compensation expense recognized by the Company related to employee
stock option awards and principally included in Selling, General and
Administrative Expense in the unaudited Consolidated Statement of Earnings for
the periods ended August 31, 2006 was as follows (in millions):
Pre-Tax After-Tax
-------------- --------------
Three months ended August 31, 2006 $ .28 $ .15
Nine months ended August 31, 2006 $ .87 $ .54
Prior to December 1, 2005, the Company accounted for its stock option plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations ("APB 25"), as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company elected to adopt the modified-prospective
transition method as provided by SFAS No. 123(R). Under that transition method,
share-based compensation cost recognized in fiscal 2006 includes: (a)
compensation expense for all share-based awards granted prior to, but not yet
vested, as of December 1, 2005, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
expense for all share-based awards granted subsequent to December 1, 2005, based
on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). Financial statement amounts for the prior periods presented in this
Form 10-Q have not been restated to reflect the fair value method of expensing
share based compensation. The Company intends to use the short cut method to
calculate the pool of windfall tax benefits.
As a result of adopting SFAS 123(R) on December 1, 2005, the Company's income
before income taxes and net income for the periods ended August 31, 2006 are
lower by the amounts shown above, than if the Company had continued to account
for share-based compensation under APB 25. Prior to the adoption of SFAS No.
123(R), the Company presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the Statement of Cash
Flows. Effective December 1, 2005 and in accordance with SFAS No. 123(R), the
Company changed its cash flow presentation whereby the cash flows resulting from
the tax benefits arising from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) are now classified as
financing cash flows.
The Company estimates the fair value of its option awards using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table. The stock volatility for each grant is measured using the
weighted average of historical daily price changes of the Company's common
stock over the most recent
-8-
period equal to the expected life of the grant. The expected term of options
granted is derived from historical data to estimate option exercises and
employee terminations, and represents the period of time that options granted
are expected to be outstanding. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The fair value of options granted in 2006 was
calculated to be $2.98 using the following assumptions for the periods ended
August 31, 2006:
Risk-free interest rate 4.3%
Expected life (in years) 3.6
Expected volatility 44%
Expected dividend yield 0%
The Company did not recognize compensation expense for employee stock based
awards for the periods ended August 31, 2005 when the exercise price of the
awards equaled the market price of the underlying stock on the date of grant.
The Company did recognize compensation expense under APB 25 relating to certain
restricted stock awards.
The following table illustrates the effects on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
"Accounting for Stock-Based Compensation", to employee stock based awards under
the Company's stock option plans during the periods ended August 31, 2005. For
purposes of this pro forma disclosure, the value of the options is amortized to
expense on a straight-line basis over the vesting period and forfeitures are
recognized as they occur (amounts in millions, except per share amounts):
Periods Ended August 31, 2005
----------------------------------------
Three Nine
Months Months
----------- ------------
Net earnings, as reported $ 6.6 $ 16.2
Add: Total stock-based employee compensation
expense determined under intrinsic value based
method for all awards, net of related tax effects -- 0.2
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (0.3) (0.8)
----------- ------------
Pro forma net earnings $ 6.3 $15.6
=========== ============
Earnings per share:
Basic - as reported $ .18 $ .45
=========== ============
Basic - pro forma $ .17 $ .43
=========== ============
Diluted - as reported $ .18 $ .44
=========== ============
Diluted - pro forma $ .17 $ .42
=========== ============
-9-
The fair value of each option grant of $3.46 was estimated on the grant date
using the Black-Scholes option pricing model using the following assumptions for
the periods ended August 31, 2005:
Risk-free interest rate 3.6%
Expected life (in years) 4
Expected volatility 50%
Expected dividend yield 0%
The following table summarizes the stock option transactions for the nine months
ended August 31, 2006:
Weighted
Average Aggregate
Exercise Intrinsic
Shares Price Value
------------ ----------- --------------
Outstanding at November 30, 2005 1,659,840 $ 4.57 $ 3,501,825
Granted 360,500 $ 7.93 1,074,290
Exercised (83,890) $ 3.74 (172,254)
Expired or forfeited (20,750) $ 6.52 (64,905)
----------- -------------
Outstanding at August 31, 2006 1,915,700 $ 5.18 $ 4,338,956
=========== =============
Exercisable at August 31, 2006 1,516,839 $ 4.08 $ 3,134,084
=========== =============
Shares issued upon the exercise of stock options are normally from authorized
but unissued common shares of the Company. However, to the extent that the
Company has treasury shares outstanding, such shares may be reissued upon the
exercise of stock options.
Information on employee stock options outstanding and exercisable at August 31,
2006 is as follows:
Weighted Average
-----------------------------
Weighted
Number Remaining Number Average
Range of Price Outstanding Life in Years Price Exercisable Price
------------------ -------------- ---------------- ---------- --------------- -------------
$2.50 to $2.64 724,250 5.0 $ 2.54 724,250 $2.54
$3.28 to $4.30 348,200 4.8 $ 4.01 347,459 $4.01
$7.26 to $9.54 843,250 3.8 $ 8.01 445,130 $8.06
-------------- ---------------
1,915,700 4.5 $ 5.21 1,516,839 $4.50
============== ===============
-10-
A summary of the status of the Company's nonvested stock options as of August
31, 2006 and changes during the nine month period ended August 31, 2006 is as
follows:
Weighted
Average Aggregate
Exercise Intrinsic
Shares Price Value
------------- ------------ ----------------
November 30, 2005 487,845 $ 8.03 $ 1,678,462
Granted 360,500 $ 7.93 1,074,290
Vested (444,487) $ 8.03 (1,531,231)
Expired or forfeited (4,997) $ 7.86 (16,649)
------------- -----------
August 31, 2006 398,861 $ 7.94 $ 1,204,872
============= ===========
As of August 31, 2006 there was approximately $.6 million of unrecognized
compensation cost related to nonvested stock options, of which $.3 million is
expected to be recognized in the remainder of fiscal 2006 and $.3 million in
fiscal 2007.
With respect to the Company's long term incentive restricted stock plan awards
pursuant to the 1998, 2003 and 2006 plans, compensation expense is measured at
fair value on the date of grant based on the number of awards granted and the
quoted market price of the Company's stock. The Company has assumed no
forfeitures. In accordance with SFAS No. 123(R), Unearned Employee Benefits,
which had previously been reported as a separate component of Shareholders'
Equity, is now included in Capital Surplus. Restricted stock awards vest at the
earlier of five years from the date of grant, retirement at age 65 or the
Company's share price exceeding performance measures established at the date of
grant. Compensation expense is recognized on a straight-line basis over the
vesting period, or on an accelerated basis if the share price exceeds the
vesting threshold price for thirty consecutive days. The restricted stock awards
resulted in compensation expense included in Selling, General and Administrative
Expense in the unaudited Consolidated Statement of Earnings for the periods
ended August 31 as follows (in millions):
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------- -------------------------------
2006 2005 2006 2005
------------- ------------- ------------- -------------
Pre-tax $ .18 $ .10 $ .50 $ .26
After-tax .09 .06 .31 .16
As of August 31, 2006, unrecognized compensation cost associated with restricted
stock was approximately $3.2 million, which will be recognized as follows: $.2
million in the remainder of 2006, $.9 million in 2007, $.8 million in 2008, $.8
million in 2009, $.4 million in 2010 and $.1 million in 2011. However, if the
vesting thresholds are achieved prior to the end of the five year term, the
related compensation expense will be accelerated.
-11-
Information regarding long term incentive restricted stock plan awards for the
period ended August 31, 2006 is as follows:
Number Weighted Average
of Grant Date Fair Value
Shares Per Share
----------------- ---------------------
November 30, 2005 387,500 $ 8.60
Granted 155,500 $ 6.44
Forfeited (6,500) $ 9.33
-----------------
August 31, 2006 536,500 $ 7.96
=================
The vesting threshold for restricted stock awards outstanding is as
follows:
Number of Vesting Latest
Shares Threshold Vesting Date
------------------------ -------------------- ----------------------
194,500 $11.00 August 4, 2009
186,500 $14.00 August 3, 2010
155,500 $10.00 August 8, 2011
The 2006 Director Plan and the 1995 Stock Plan for Non-Employee Directors ("1995
Director Plan") provide for possible annual grants of Director Stock Options
("DSO") to non-employee members of the Board of Directors at market value on the
date of grant. In addition, under the 1995 Director Plan, each non-employee
director had the right to make an irrevocable election to receive a DSO in lieu
of all or part of his or her retainer. The number of whole shares which could be
granted is based on the unpaid annual retainer divided by the market value of a
share on such date minus $1.00, and the exercise price is $1.00. DSOs are
exercisable in full six months after the date of grant or earlier in the event
of death, disability or termination of service. Under the 2006 Director Plan,
upon election to the Board by stockholders at an annual meeting (or re-election,
as the case may be) each non-employee director is entitled to receive a stock
option grant of 5,000 options at the fair market value on the date of grant.
Under the 2006 Director Plan, an option is forfeited if Board service terminates
before the option vests (six months after grant). Each non-employee director is
also eligible for a possible annual grant of a Director Deferred Stock Award
("DDSA") equal to the number of DDSA units computed by dividing the director's
annual retainer by the fair market value of a share on the date of the annual
meeting. Pursuant to the terms of the 2006 Director Plan, each non-employee
director receives a DDSA award upon election to the Board by stockholders at an
annual meeting (or re-election, as the case may be). Prior to 1998, each
non-employee director received a DDSA equal to 150 units. A DDSA unit equals one
share of the Company's common stock. DDSA units are payable in shares of common
stock upon death, disability or termination of service and any fractional units
are payable in cash. Dividend equivalents may be earned on qualifying DSO and
DDSA units and allocated to directors' respective accounts in accordance with
the terms of the Director Plan. DSO's are charged to expense at the time the
director elects to receive the DSO. DDSAs are charged to expense at the time the
grant is made to the director. Dividend equivalents, if any, would be charged to
expense at the time the dividend would be declared.
-12-
Stock compensation expense related to non-employee director stock options and
DDSAs and included in Selling, General and Administrative Expense in the
unaudited Consolidated Statement of Earnings for the three month and nine month
periods ended August 31, 2006 was $.06 million pre-tax; $.03 million after tax
and $.25 million pre-tax; $.16 million after-tax, respectively.
The fair value of options granted in 2006 was calculated to be $3.15 per share,
using the same option valuation model and assumptions similar to those for
employee stock option awards.
For the nine month period ended August 31, 2005, stock compensation expense
included in Selling, General and Administrative Expense related to DDSAs was the
same as through the six months ended May 31, 2005; $.16 million pre-tax and $.10
million after-tax. No fair value options were granted to non-employee directors
in fiscal 2005.
The following table summarizes director stock option transactions for the nine
months ended August 31, 2006:
Weighted
Average
Shares Price
-------------- ----------------
Outstanding at November 30, 2005 130,748 $ 2.89
Grants:
Fair market value options 40,000 $ 8.38
DDSAs 19,096 --
Exercises:
Fair market value options (10,889) $ 5.63
$1.00 options (7,568) $ 1.00
--------------
Outstanding August 31, 2006 171,387 $ 3.76
==============
The balance at August 31, 2006
consists of:
$1.00 options 21,335 $ 1.00
DDSA 65,537 --
Fair market value 84,515 $ 7.37
--------------
Outstanding August 31, 2006 171,387 $ 3.76
==============
At August 31, 2006 and November 30, 2005, 216,526 shares and 25,622 shares,
respectively, were available for future DSOs and DDSAs.
Note 3 - Per Share Information
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
-13-
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 Nine Months Ended
August 31, August 31,
--------------------------------- --------------------------------
2006 2005 2006 2005
------------ ------------ ----------- -----------
Basic 36,130 36,652 36,580 36,331
Dilutive effect of:
Stock options and awards 516 753 578 795
Restricted stock awards 66 61 73 48
------------ ------------ ----------- -----------
Diluted 36,712 37,466 37,231 37,174
============ ============ =========== ===========
For the three months and nine months ended August 31, 2006 and August 31, 2005,
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 (000's omitted):
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- --------- -----------
Stock options 911 1 801 -
Restricted stock awards 342 192 342 192
Note 4 - Financing
Long-term debt comprised the following (000's omitted):
Aug. 31, Nov. 30, Aug. 31,
2006 2005 2005
------------ ------------ ------------
Borrowings under Credit Facility $ 98,273 $ 85,089 $ 82,649
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 16,629 17,174 17,347
------------ ------------ ------------
Total debt 132,152 119,513 117,246
Less - current 24,762 24,732 25,709
------------ ------------ ------------
Long-term debt $ 107,390 $ 94,781 $ 91,537
============ ============ ============
Pursuant to an amendment dated 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
-14-
either LIBOR or prime as the benchmark rate and on the level of excess
availability. The weighted average interest rate was approximately 7.1% at
August 31, 2006, 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. As of and for the period
ending August 31, 2006, the Company was in compliance with all covenants under
the Credit Facility and its other borrowing agreements. At August 31, 2006, the
Company had approximately $18.9 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
August 31, 2006, borrowing availability ranged from $33 million to $115 million.
At August 31, 2006, additional borrowing availability under the Credit Facility
was approximately $69 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. The $24.8 million of principal
reductions at August 31, 2006, reflected as current, consists of $.8 million of
required payments and $24.0 million representing the Company's estimate of
additional debt reduction over the twelve month period subsequent to August 31,
2006.
Note 5 - Pension Plans
Components of net periodic pension expense for the Company's defined benefit and
non-qualified supplemental pension plans for the three months and nine months
ended August 31, 2006 and 2005 were as follows (000's omitted):
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------ -------------------------------
2006 2005 2006 2005
------------- ------------- -------------- -------------
Service cost $ 1,220 $ 1,253 $ 3,898 $ 3,985
Interest cost 3,617 3,877 10,845 10,857
Expected return on plan assets (4,890) (4,894) (14,698) (14,173)
Recognized net actuarial gain 136 (246) 40 (259)
Net amortization 866 847 2,598 2,540
------- ------- -------- --------
Net periodic pension expense $ 949 $ 837 $ 2,683 $ 2,950
======= ======= ======== ========
-15-
Through August 31, 2006, approximately $6.3 million of contributions had been
made to the Company's pension plans. In September 2006, the Company contributed
an additional $2 million to its principal pension plan. The Company anticipates
contributions to its plans in the range of $8 million to $10 million during
fiscal 2006.
Note 6 - Inventories
Inventories at each date consisted of (000's omitted):
Aug. 31, Nov. 30, Aug. 31,
2006 2005 2005
------------ ------------- -------------
Raw materials $ 42,754 $ 39,478 $ 37,770
Work-in-process 6,420 8,488 7,539
Finished goods 123,236 105,297 104,975
------------ ------------- -------------
$ 172,410 $ 153,263 $ 150,284
============ ============= =============
Inventories are stated at the lower of cost or market. At August 31, 2006,
November 30, 2005 and August 31, 2005, approximately 46%, 48% and 48%,
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 7 - Acquisitions
On August 29, 2006, the Company acquired certain assets, properties and
operations of Sweater.com, Inc. ("Sweater.com"), a designer and marketer of high
quality women's knitwear, tops and related products sold to leading specialty
stores under its "One Girl Who ..." brand and directly through its Sweater.com
website.
On October 31, 2005, the Company acquired certain assets, properties and
operations of Simply Blue, Inc. and Seymour Blue, LLC (together "Simply Blue"),
a designer and marketer of upscale women's jeans products sold through leading
specialty and department stores. The acquisitions of Sweater.com and Simply Blue
are expected to provide for strategic growth opportunities in womenswear and
further diversification of product categories.
The purchase price for Sweater.com as of the acquisition date was $12.4 million,
subject to certain post-closing adjustments. Additional cash purchase
consideration is due if Sweater.com achieves certain specified financial
performance targets over a five-year period commencing December 1, 2006. 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 annual periods in
order for the additional cash consideration to be paid. At the minimum level of
performance (annualized operating earnings, as defined in the purchase
agreement, of at least $2.0 million), additional annual consideration of $.5
million would be paid over the five year period commencing December 1, 2006. The
amount of consideration increases with increased level of earnings and there is
no maximum amount of incremental purchase price.
-16-
The purchase price for Simply Blue as of the acquisition date was $21.0 million.
Additional cash purchase consideration is due if Simply Blue achieves certain
specified financial performance targets over a five-year period commencing
December 1, 2005. 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 annual periods in order for the additional consideration to be paid. At
the minimum level of performance (annualized operating earnings, as defined in
the purchase agreement, of at least $6.7 million), additional annual
consideration of $1.3 million, less deductions as defined in the purchase
agreement, would be paid over the five year period commencing December 1, 2005.
The amount of consideration increases with increased levels of earnings and
there is no maximum amount of incremental purchase price. The additional
consideration anticipated applicable to the nine months ended August 31, 2006
was approximately $.8 million.
The Sweater.com and Simply Blue acquisitions are being accounted for under the
purchase method of accounting. Accordingly, the results of Sweater.com and
Simply Blue are included in the consolidated financial statements from the
respective acquisition date. Sweater.com's and Simply Blue's results of
operations and assets are included in the Women's Apparel Group segment.
The Company has allocated the purchase price to the Sweater.com and Simply Blue
assets acquired and liabilities assumed at estimated fair values, considering a
number of factors, including the assistance of an independent third party
appraisal. Any contingent consideration payable subsequent to the acquisition
will first be applied to reduce the estimated amount due seller for Sweater.com
and thereafter to increase goodwill for Sweater.com or Simply Blue, as
appropriate. The allocation for Sweater.com 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):
Sweater.com Simply Blue
----------- -----------
Cash consideration $ 12,354 $ 21,000
Direct acquisition costs 100 150
-------- --------
Total purchase price $ 12,454 $ 21,150
======== ========
Allocation of purchase price:
Cash $ 6 $ 125
Accounts receivable 1,315 2,101
Inventories 2,596 945
Other current assets 260 454
Intangible assets 8,765 16,200
Goodwill -- 2,077
Property, plant and equipment 228 116
Other assets 52 21
Current liabilities (475) (889)
Estimated amount due to seller (293) --
-------- --------
Total purchase price $ 12,454 $ 21,150
======== ========
-17-
The components of the Intangible Assets listed in the above table as of the
acquisition date were determined by the Company with the assistance of an
independent third party appraisal and were as follows (000's omitted):
Sweater.com Simply Blue
-------------------------------- --------------------------------
Amount Life Amount Life
------------- ------------- ------------- -------------
Tradename $ 6,540 Indefinite $ 11,850 Indefinite
Customer relationships 2,050 10 years 2,650 10 years
Design services agreement - 1,450 5 years
Covenant not to compete 100 10 years 250 10 years
License agreement 75 5 years -
------------- -------------
$ 8,765 $ 16,200
============= =============
The tradenames were deemed to have an indefinite life and, accordingly, are 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, design services agreement, covenant not to
compete and license agreement are being amortized based on estimated weighted
cash flows over their life.
The Sweater.com and Simply Blue acquisitions were financed utilizing borrowing
availability under the Company's Credit Facility.
Pro forma amounts are not included for Sweater.com as the amounts would not be
significant. The pro forma financial information presented below gives effect to
the Simply Blue acquisition as if it had occurred as of the beginning of the
Company's fiscal year 2005. The pro forma amounts below reflect interest on the
purchase price assuming the acquisition occurred as of December 1, 2004, 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 2005 fiscal year or of future operating performance (in millions,
except per share amounts):
Three Months Ended Nine Months Ended
August 31, 2005 August 31, 2005
--------------------- ---------------------
Net sales $157.8 $455.6
Net earnings 7.4 17.8
Net earnings per share:
Basic .20 .49
Diluted .20 .48
In July 2004, the Company acquired certain assets, properties and operations of
Exclusively Misook, Inc. ("Misook"). The purchase price for Misook as of the
acquisition date was $32.6 million. Additional cash purchase consideration is
due if Misook achieves specified performance targets over a five year period
commencing August 1, 2004. The amount of contingent consideration related to
fiscal 2005 accrued as of
-18-
November 30, 2005 for Misook, approximately $3.8 million, was paid in the first
quarter of fiscal 2006. The additional consideration anticipated applicable to
the nine months ended August 31, 2006 was approximately $3.4 million.
Note 8 - Shipping and Handling
Amounts billed to customers for shipping and handling are included in sales. The
cost of goods sold caption includes the following components: product cost,
including inbound freight, duties, internal inspection costs, internal transfer
costs, production labor and other manufacturing overhead costs. The warehousing,
picking and packing of finished products totaled $16.7 million for the first
nine months of 2006; $14.9 million for the first nine months of 2005; $5.6
million for the third quarter of 2006; and $5.0 million for the third quarter of
2005. Such amounts are included as a component of Selling, General and
Administrative Expenses.
Note 9 - Operating Segments
The Company is engaged in the manufacturing and marketing of apparel and has two
operating segments for purposes of allocating resources and assessing
performance, which are based on products distributed. The Company's customers
comprise major department and specialty stores, value oriented retailers and
direct mail companies. Products are sold over a wide range of price points under
a broad variety of apparel brands, both owned and under license, to an extensive
range of retail channels. Its operations are comprised of the Men's Apparel
Group and Women's Apparel Group. The 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, including denim products, 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
and nine months ended and as of August 31, 2006 and August 31, 2005 is
summarized as follows (in millions):
Men's Women's
Apparel Apparel
Group Group Adj. Consol.
--------------- -------------- -------------- ---------------
Three Months Ended August 31,
2006
Sales $ 106.9 $ 30.8 $ -- $ 137.7
Earnings (loss) before taxes 3.5 4.2 (6.8) 0.9
2005
Sales $ 129.6 $ 22.5 $ -- $ 152.1
Earnings (loss) before taxes 13.1 2.7 (5.2) 10.6
Nine Months Ended August 31,
2006
Sales $ 350.5 $ 84.0 $ -- $ 434.5
Earnings (loss) before taxes 21.0 9.6 (19.4) 11.2
Total assets 307.2 104.8 93.0 505.0
2005
Sales $ 377.3 $ 64.4 $ -- $ 441.7
Earnings (loss) before taxes 36.2 7.4 (17.1) 26.5
Total assets 319.9 68.3 99.5 487.7
-19-
During the three months and nine months ended August 31, 2006 and August 31,
2005, 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.
Goodwill and intangible assets related to acquisitions were as follows (in
millions):
Aug. 31, Nov. 30, Aug. 31,
2006 2005 2005
------------ ------------ ------------
Men's Apparel Group:
Goodwill $ 24.2 $ 24.1 $ 24.1
============ ============ ============
Women's Apparel Group:
Intangible assets $ 56.3 $ 49.6 $ 34.1
============ ============ ============
Goodwill $ 2.9 $ 2.1 -
============ ============ ============
The increase in intangible assets from November 30, 2005 to August 31, 2006
reflects the acquisition of Sweater.com. The increase from August 31, 2005 to
November 30, 2005 reflects the acquisition of Simply Blue. The increase in
goodwill from November 30, 2005 to August 31, 2006 reflects the additional
consideration anticipated related to Simply Blue.
Sales and long-lived assets by geographic region are as follows (in millions):
Sales Long-Lived Assets
----------------------------------------------------------- -------------------------
Three Months Ended Nine Months Ended
August 31, August 31, August 31,
----------------------------- -------------------------- -------------------------
2006 2005 2006 2005 2006 2005
-------- -------- -------- -------- -------- --------
USA $ 134.3 $ 147.5 $ 418.9 $ 426.1 $ 158.4 $ 138.1
Canada 3.2 4.2 14.8 14.6 3.3 3.0
All Other 0.2 0.4 0.8 1.0 0.1 0.1
-------- -------- -------- -------- -------- --------
$ 137.7 $ 152.1 $ 434.5 $ 441.7 $ 161.8 $ 141.2
======== ======== ======== ======== ======== ========
-20-
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 10 - Other Comprehensive Income
Comprehensive income, which includes all changes in the Company's equity during
the period, except transactions with stockholders, was as follows (000's
omitted):
Nine Months Ended
August 31,
--------------------------------
2006 2005
-------------- -------------
Net earnings $ 6,955 $ 16,215
Other comprehensive income (loss):
Change in fair value of foreign
exchange contracts 15 (132)
Currency translation adjustment 719 23
-------------- -------------
Comprehensive earnings $ 7,689 $ 16,106
============== =============
The change in Accumulated Other Comprehensive Income (Loss) was as follows
(000's omitted):
Accumulated
Fair Value of Foreign Other
Minimum Foreign Currency Comprehensive
Pension Exchange Translation Income
Liability Contracts Adjustment (Loss)
------------- ---------------- ---------------- ---------------
Fiscal 2006
------------------------
Balance November 30, 2005 $(9,895) $ 1 $2,166 $(7,728)
Change in fiscal 2006 -- 15 719 734
------- ----- ------ -------
Balance August 31, 2006 $(9,895) $ 16 $2,885 $(6,994)
======= ===== ====== =======
Fiscal 2005
------------------------
Balance November 30, 2004 $(3,425) $ 123 $1,780 $(1,522)
Change in fiscal 2005 -- (132) 23 (109)
------- ----- ------ -------
Balance August 31, 2005 $(3,425) $ (9) $1,803 $(1,631)
======= ===== ====== =======
-21-
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):
Nine months ended August 31, 2006 Pre-tax Tax After-Tax
----------------------------------------- --------------- --------------- ----------------
Fair value of foreign exchange contracts $ 25 $ (10) $ 15
Foreign currency translation adjustment 719 - 719
--------------- --------------- ----------------
$ 744 $ (10) $ 734
=============== =============== ================
Nine months ended August 31, 2005
----------------------------------------
Fair value of foreign exchange contracts $ (210) $ 78 $ (132)
Foreign currency translation adjustment 23 - 23
--------------- --------------- ----------------
$ (187) $ 78 $ (109)
=============== =============== ================
Note 11 - Revisions
Certain prior year amounts related to Capital Surplus and Retained Earnings
have been revised to conform to the current period presentation as follows
(000's omitted). These revisions had no impact on reported net shareholders'
equity, net earnings, or compliance with debt covenants.
Capital Retained
November 30, 2005 Surplus Earnings
------------- -------------
As reported $ 68,783 $ 94,695
Revision of losses associated with reissuance of treasury shares 17,565 (17,565)
------------- -------------
As revised $ 86,348 $ 77,130
============= =============
August 31, 2005
As reported $ 68,424 $ 87,355
Revision of losses associated with reissuance of treasury shares 17,565 (17,565)
------------- -------------
As revised $ 85,989 $ 69,790
============= =============
The Consolidated Statement of Shareholders" Equity to be included in Form 10-K
for the year ended November 30, 2006 will reflect the following revisions
relating to Capital Surplus and Retained Earnings for the periods ended
November 30, 2005 (000's omitted):
Capital Retained
Surplus Earnings
------------- --------------
Balance at November 30, 2003, as reported $65,642 $55,275
Revision of losses associated with reissuance of treasury shares 13,216 (13,216)
------------- --------------
Balance at November 30, 2003, as revised 78,858 42,059
Net earnings for the year - 15,865
Shares issued, primarily to employee benefit plans 156 -
Long-term incentive plan awards, net of forfeitures 900 -
-22-
Stock options exercised (156) (1,417)
Vesting of restricted stock awards (2,932)
Tax effect of option exercises and vesting of restricted stock awards 1,591 -
-------------- ---------------
Balance at November 30, 2004, as revised 81,349 53,575
Net earnings for the year - 23,555
Shares issued to employee benefit plans 948 -
Long-term incentive plan awards, net of forfeitures 1,417 -
Stock options exercised 1,179 -
Tax effect of option exercises 1,455 -
-------------- ---------------
Balance at November 30, 2005, as revised $86,348 $77,130
============== ===============
Note 12 - Recent Accounting Pronouncements
In March 2005, the FASB issued Statement of Financial Accounting Standards
Interpretation Number 47 ("FIN 47"), "Accounting for Conditional Asset
Retirement Obligations." FIN 47 provides clarification regarding the meaning of
the term "conditional asset retirement obligation" as used in SFAS 143,
"Accounting for Asset Retirement Obligations." FIN 47 is effective no later
than the end of the Company's fiscal year ending November 30, 2006. The Company
does not anticipate that adoption of this Interpretation will have a material
affect on its financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS 154, "Accounting for Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS 154 changes the requirements with regard to the accounting for and
reporting a change in an accounting principle. The provisions of SFAS 154
require, unless impracticable, retrospective application to prior periods
presented in financial statements for all voluntary changes in an accounting
principle and changes required by the adoption of a new accounting
pronouncement in the unusual instance that the new pronouncement does not
indicate a specific transition method. SFAS 154 also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in an accounting estimate, which requires
prospective application of the new method. SFAS 154 is effective for all
changes in an accounting principle made in fiscal years beginning after
December 15, 2005. The Company plans to adopt SFAS 154 with its fiscal year
beginning December 1, 2006. Because SFAS 154 is directly dependent upon future
events, the Company cannot determine what effect, if any, the expected adoption
of SFAS 154 will have on its financial condition, results of operations or cash
flows.
In June 2006, the FASB issued Statement of Financial Accounting Standards
Interpretation Number 48 ("FIN 48"), "Accounting for Uncertainty in Income
Taxes - an interpretation of SFAS No. 109". FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes
that a company should use a more-likely-than-not recognition threshold based on
the technical merits of the tax position taken. Tax positions that meet the
more-likely-than-not recognition threshold should be measured in order to
determine the tax benefit to be recognized in the financial statements. FIN 48
is effective for the Company's fiscal year beginning December 1, 2007. The
Company has not yet determined the impact, if any, of adopting FIN 48 on its
financial statements.
-23
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure about fair value measurements.
SFAS 157 is effective for the Company's fiscal year beginning December 1, 2007.
The Company is currently evaluating the potential impact, if any, of SFAS 157
on its financial statements.
In September 2006, FASB issued Statement of Financial Accounting Standards No.
158, "Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106 and
132(R) ("SFAS 158"). SFAS 158 requires an employer that is a business entity
and sponsors one or more single employer benefit plans to (1) recognize the
funded status of the benefit in its statement of financial position, (2)
recognize as a component of other comprehensive income, net of tax, the gains
or losses and prior service costs or credits that arise during the period but
are not recognized as components of net periodic benefit cost, (3) measure
defined benefit plan assets and obligations as of the date of the employer's
fiscal year end statement of financial position and (4) disclose in the notes
to financial statements additional information about certain effects on net
periodic benefit cost for the next fiscal year that arise from delayed
recognition of the gains or losses, prior service costs on credits, and
transition asset or obligations. SFAS 158 is effective no later than the end of
the Company's fiscal year ended November 30, 2007. Since SFAS 158 was recently
issued, management has not yet determined whether SFAS 158 will be adopted
early in its statement of financial position as of November 30, 2006 or if SFAS
158 will be adopted in its statement of financial position as of November 30,
2007. If SFAS 158 had been effective as of August 31, 2006, total assets would
have been approximately $18 million lower, total liabilities would have been
approximately $9 million higher and shareholders' equity would have been
approximately $27 million lower. Because our net pension liabilities are
dependent upon future events and circumstances, the impact at the time of
adoption of SFAS 158 may differ from these amounts. Adoption of SFAS 158 will
not have any effect on the Company's compliance with its debt covenants.
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, including denim products, and accessories to department and
specialty stores under owned and licensed brand names and directly to
consumers, offering a wide range of apparel and accessories to business and
professional women through catalogs and its e-commerce website. For the nine
months ended August 31, Men's Apparel Group segment sales represented 81% of
consolidated sales in 2006 compared to 85% in 2005; Women's Apparel Group
segment sales represented 19% of consolidated sales in 2006 compared to 15% in
2005.
The Company's principal operational challenges have been to address the
following:
< The continuing consolidation of national and regional retailers, an
important distribution channel, along with market share declines
experienced by certain department store retailers.
-24-
< 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.
< Ongoing deflation of apparel prices and large retailers' increasing
emphasis on direct sourcing of their product offerings.
The Company has continued to expand its non-tailored clothing product offerings
through acquisitions, internally developed programs and new licensing
arrangements. On August 29, 2006, the Company acquired certain assets,
properties and operations of Sweater.com, Inc. ("Sweater.com"), a designer and
marketer of high quality women's knitwear, tops and related products sold to
leading specialty stores under its "One Girl Who ..." brand and directly
through its Sweater.com website. The purchase price for Sweater.com as of the
acquisition date was approximately $12.4 million, subject to certain post
closing adjustments. On October 31, 2005, the Company acquired certain assets,
properties and operations of Simply Blue, Inc. and Seymour Blue, LLC (together
"Simply Blue"), a designer and marketer of upscale women's jeans products sold
through leading specialty and department stores. The purchase price for Simply
Blue as of the acquisition date was $21 million. The acquisitions of
Sweater.com and Simply Blue are expected to provide for strategic growth
opportunities in womenswear and further diversification of non-tailored product
categories. As described in the Notes to Unaudited Condensed Consolidated
Financial Statements, additional cash purchase consideration is due if either
Sweater.com or Simply Blue achieves certain specified financial performance
targets over a five-year period. Simply Blue contributed $18.4 million in
revenues and approximately $.06 in earnings per diluted share to year-to-date
results in 2006. There were no third quarter revenues associated with
Sweater.com. 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. Additional contingent consideration is due if Misook achieves certain
specified financial performance targets over the five year period following the
acquisition. Approximately $5.0 million of aggregate contingent consideration
has been paid through August 31, 2006 related to the Misook acquisition. 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 non-tailored
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, it is the Company's intention to
increase the direct-to-consumer marketing of its products, including
internet-based marketing for certain womenswear and higher end men's sportswear
products.
Sales of non-tailored apparel product categories (men's sportswear, golfwear,
pants and womenswear) represented 47% of total sales during the first nine
months of 2006 compared to 45% for the first nine months of 2005. For the
fiscal year ended November 30, non-tailored apparel sales represented 46% of
total sales in 2005 compared to 47% in 2004.
The declines in third quarter and year-to-date sales and earnings were
generally in the tailored clothing product category and largely attributable to
the moderate priced tailored clothing and pant product lines marketed to the
mainstream department store channel included in the Company's Men's Apparel
Group segment results. Tailored clothing manufacturing levels were also lower
compared to the prior year which unfavorably affected gross margins. Third
quarter results this year reflected approximately $12 million lower sales in
-25-
the Men's Apparel Group moderate priced product lines compared to the prior
year's third quarter. During the third quarter, the Company initiated the
closing of a fabric cutting operation and a pants sewing facility, along with a
reduction in a tailored clothing sewing operation applicable mainly to moderate
priced product lines, affecting 200 production workers in the aggregate.
Approximately $.8 million of severance and other related costs were recognized
during the third quarter. Additional headcount reductions in the above noted
tailored clothing sewing operation and related selling, general and
administrative personnel involved in moderate priced product lines are expected
during the fourth quarter. These operations also are incurring operational
inefficiencies as production levels decline, which will continue until these
wind-downs are completed by the end of the fiscal year. Certain of the
operations performed at the facilities being closed will be assimilated into
other production facilities of the Company. Therefore, the potential savings are
not readily quantifiable. The Company's ongoing strategy is to reduce its
investment in these product lines and to redeploy invested capital to higher
price point product categories marketed to upscale department and specialty
stores.
Liquidity and Capital Resources
November 30, 2005 to August 31, 2006
------------------------------------
For the nine months ended August 31, 2006, net cash provided by operating
activities was $12.0 million compared to $9.1 million used in operating
activities for the nine months ended August 31, 2005. The $21.1 million of
incremental cash provided by operating activities during the current nine month
period compared to the prior period was primarily attributable to lower working
capital requirements, principally related to reduced accounts receivable levels
from the lower sales this year compared to higher receivable levels last year;
this favorable working capital change was in part offset by the lower earnings.
Cash used in investing activities was $18.8 million in 2006 and $14.9 million
in 2005. The $3.9 million increase primarily reflected the $12.4 paid for the
acquisition of Sweater.com and $1.5 million higher contingent earnout payments
related to acquisitions, offset by $10.4 million lower capital expenditures.
Cash provided by financing activities was $8.1 million in 2006 compared to
$23.8 million in 2005. The $15.7 million decrease principally reflects the $7.9
million acquisition of treasury shares this year and lower proceeds from stock
option exercises and grant proceeds received related to a facility
modernization.
Since November 30, 2005, net accounts receivable decreased $9.4 million or 7.6%
to $113.7 million, principally attributable to the lower shipments. The current
period included $1.3 million of receivables attributable to Sweater.com,
acquired as of August 29, 2006. Inventories of $172.4 million increased $19.1
million or 12.5%, including $2.6 million attributable to Sweater.com. The
remaining increase of $16.5 million reflected the lower third quarter sales,
lower in-stock sales than anticipated, earlier receipt of foreign sourced goods
in advance of anticipated production and shipment and retailers' requests to
delay delivery of goods. The increase in inventory levels is expected to
moderate by the end of the Company's November 30 fiscal year. Total debt,
including current maturities, increased $12.6 million to $132.2 million and was
the principal component of net cash provided by financing activities; this
change reflected decreases in working capital requirements, offset by $12.4
million paid for Sweater.com and $7.9 million associated with treasury stock
purchases. Total debt represented 35% of total capitalization at August 31,
2006 compared to 33% at November 30, 2005. Shareholders' equity increased $3.2
million, as the $6.9 million of net earnings for the nine months ended August
31, 2006, the proceeds from stock option exercises and recording of stock
compensation expense were substantially offset by the purchase of treasury
shares.
-26-
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, 2005.
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 7.1% at August 31, 2006,
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 7.4% at August 31,
2006 compared to 6.2% at August 31, 2005.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. As of and for the period
ending August 31, 2006, 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. If the tailored clothing market declines further or if large
retailers increase their direct sourcing of tailored clothing, 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. The ten largest customers represented
approximately 55% of consolidated sales during fiscal 2005 with the two largest
customers (Dillard's and Nordstrom's) representing approximately 31% of sales.
There has been several changes in ownership control regarding certain of the
Company's customers, including Federated's acquisition of the May Company
stores and the sale of certain retail store groups formerly owned by Saks,
Inc., which has adversely impacted the Company's sales and earnings of its
moderate priced product lines marketed to the mainstream department store
channel. A decision by the controlling management of a group of stores or any
other significant customer which would result in further declines in 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, results of operations and cash flows.
-27-
At August 31, 2006, the Company had approximately $18.9 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. 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
$33 million to $115 million. At August 31, 2006, additional borrowing
availability under the Credit Facility was approximately $69 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 August 31, 2006, there were an aggregate of $.4
million of outstanding foreign exchange contracts primarily attributable to
approximately .3 million Euros for anticipated inventory purchases to be made
in the next three 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.
August 31, 2005 to August 31, 2006
----------------------------------
Net accounts receivable of $113.7 million at August 31, 2006 decreased $18.2
million from the year earlier amount, attributable to the lower sales. The
current period included $4.9 million of net receivables related to Sweater.com
and Simply Blue. At August 31, 2006, inventories of $172.4 million increased
$22.1 million or 14.7%. Inventories attributable to Sweater.com and Simply Blue
aggregated $3.8 million. The balance of the increase was attributable to the
Men's Apparel Group and principally reflected the lower third quarter sales,
lower in-stock sales than anticipated and earlier receipt of foreign sourced
inventories in advance of anticipated production and shipment. The increase in
intangible assets to $56.3 million at August 31, 2006 from $34.2 million in the
year earlier period was attributable to the fair value of intangible assets
acquired in the Sweater.com and Simply Blue transactions, less amortization of
Simply Blue and Misook intangible assets with finite lives. Net properties of
$35.7 million at August 31, 2006 decreased $1.3 million, as capital additions
were less than depreciation expense. Total debt of $132.2 million at August 31,
2006 increased $14.9 million compared to the year earlier level, reflecting $37
million of payments related to acquisitions and $7.9 million of treasury stock
purchases, in part offset by the trailing year earnings and lower working
-28-
capital requirements. Total debt represented 35% of total capitalization at
August 31, 2006 compared to 32% at August 31, 2005.
Results of Operations
Third Quarter 2006 Compared to Third Quarter 2005
In general, third quarter results were adversely impacted by the conditions as
described in the Overview section of this Management's Discussion and Analysis
of Financial Condition and Results of Operations. Consolidated sales declined
to $137.7 million compared to $152.1 million in 2005. The brands principally
marketed to the mainstream department store channel represented approximately
15% of consolidated sales compared to approximately 22% a year ago. The current
period reflected $7.3 million of revenues attributable to Simply Blue, acquired
in October 2005. Men's Apparel Group revenues declined to $106.9 million in the
current quarter compared to $129.6 million in the year earlier period,
primarily attributable to decreases in tailored clothing and pants in the
moderate priced product lines, although tailored clothing revenues declined in
other product lines as well. Men's Apparel Group comparability of unit and
average prices as described below were impacted by the conclusion of a men's
casual pant product category license that was not renewed for fiscal 2006, as
well as off-price sales and customer allowances in the moderate priced tailored
clothing product categories sold in the mainstream department store channel,
partially offset by the expansion of several moderate priced sportswear lines;
the now concluded casual pant program adversely impacted third quarter 2006
sales by approximately $3.8 million. In general, wholesale selling prices for
comparable products were approximately even in 2006 compared to 2005, although
product mix changes impacted comparability of both unit sales and average
wholesale selling prices. Tailored clothing average wholesale selling prices
declined approximately 3% from 2005, reflecting the change in mix to more sport
coat units. Suit unit sales decreased approximately 24% while sport coat units
increased approximately 4%; pant product units decreased approximately 49%,
primarily related to the reduction in casual pants. Pant average wholesale
selling prices increased approximately 18%, reflecting the shift in product mix
away from casual pants. Unit sales of sportswear products increased
approximately 25% and average wholesale selling prices were approximately 20%
lower than 2005, reflecting the additional moderate priced sportswear business
described above. Women's Apparel Group revenues of $30.8 million, increased
$8.3 million, principally attributable to Simply Blue. The addition of the
Simply Blue business significantly increased the number of women's units sold
at an average unit price point lower than the other women's products taken as a
whole, resulting in an increase in women's units and a decrease in average unit
price. Unit sales of women's apparel increased approximately 195% and average
selling prices declined approximately 53%, each attributable to Simply Blue
with its lower per unit cost relative to other women's products. Aggregate
sportswear and other non-tailored clothing product categories, including
women's, represented approximately 44% of total third quarter consolidated
revenues in both fiscal 2006 and 2005.
The consolidated gross margin percentage to sales improved to 34.5% compared to
33.1% last year, attributable to product mix with a higher percentage of
women's product revenues, in part offset by the impact of lower gross margins
in the moderate priced tailored clothing product category, additional import
duties and less favorable manufacturing utilization overall affecting all
tailored clothing production from fewer units produced in owned tailored
clothing manufacturing facilities. The current period also included $.4 million
of severance costs related to the previously described manufacturing operations
which will be closed by the end of the fiscal year. 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 $5.6 million in 2006 and $5.0 million in 2005 of
costs related to warehousing, picking and packing of finished products as a
-29-
component in selling, general and administrative expenses. Consolidated selling,
general and administrative expenses were $45.4 million in 2006 compared to $38.7
million in 2005, representing 33.0% of sales in 2006 compared to 25.4% in 2005;
the higher percentage to sales reflected ongoing expenses which did not decline
with the lower sales. The $6.7 million increase reflected, among other things,
incremental expenses of $2.5 million related to the Simply Blue business, $.4
million of incremental costs associated with moderate priced product lines, $.4
million of incremental stock compensation expense resulting from the adoption of
FASB Statement No. 123(R) effective for the Company's fiscal year beginning on
December 1, 2005, $1.2 million higher costs in the catalog business, and
approximately $1.1 million of incremental costs associated with the two new
retail stores, the launch of the "hickey" brand and additional Hart Schaffner
Marx brand marketing costs.
Operating earnings were $3.0 million in 2006 compared to $12.4 million in 2005
and represented 2.2% of consolidated sales in 2006 and 8.2% of sales in 2005.
Men's Apparel Group operating earnings declined to $3.5 million in 2006
compared to $13.1 million in 2005, attributable principally to the effect of
the lower sales, reduced gross margins in the moderate tailored product
category, unfavorable absorption of fixed manufacturing costs from fewer units
produced and expenses related to brand enhancement of the Company's products
described above. Women's Apparel Group operating earnings increased to $4.2
million in 2006 compared to $2.7 million in 2005, attributable to the
incremental earnings of Simply Blue and improvement at Misook, partially offset
by declines in certain other women's operations.
Interest expense was $2.1 million in 2006 compared to $1.8 million in 2005,
reflecting both the higher borrowing level due to the $21 million paid in
October 2005 for the Simply Blue acquisition, as well as higher rates on Credit
Facility borrowings. Consolidated pre-tax earnings were $.9 million in 2006
compared to $10.6 million in 2005. After reflecting the applicable tax
provision, consolidated net earnings were $.5 million in 2006 compared to $6.6
million in 2005. Diluted earnings per share were $.01 in 2006 compared to $.18
in 2005.
Nine Months 2006 Compared to Nine Months 2005
---------------------------------------------
In general, year-to-date results were adversely impacted by the conditions as
described in the Overview section of this Management's Discussion and Analysis
of Financial Condition and Results of Operations. Consolidated sales for the
nine months ended August 31, 2006 were $434.5 million compared to $441.7
million in 2005. The brands principally marketed to the mainstream department
store channel represented approximately 19% of consolidated sales in fiscal
2006 compared to about 25% in fiscal 2005. The current period reflected $18.4
million of revenues attributable to Simply Blue.
Men's Apparel Group revenues were $350.5 million in the current year compared
to $377.3 million in the year earlier period as increases in the sportswear
product categories were more than offset by declines in the casual pant and
tailored clothing product categories. Men's Apparel Group comparability of unit
and average prices as described below were impacted by the conclusion of a
men's casual pant product category license that was not renewed for fiscal 2006
and from more off-price sales and customer allowances, partially offset by the
introduction or expansion of several moderate priced sportswear lines; the now
concluded casual pant program adversely impacted year-to-date sales by
approximately $14.0 million. In general, wholesale selling prices for
comparable products were approximately even in 2006 compared to 2005, although
product mix changes impacted comparability of both unit sales and average
wholesale selling prices. Tailored clothing average wholesale selling prices
declined approximately 2%, reflecting the higher off-price sales, customer
allowances and a larger percentage of sport coat units. Suit unit sales were 9%
lower than a year ago, while sport coat units were approximately the same as
last year; pant product units decreased approximately 41%, primarily related to
-30-
the reduction in casual pants and the prior period reflected initial shipments
of two separates programs (consisting of a coat and pant unit displayed
separately). Pant average wholesale selling prices increased approximately 19%,
reflecting a shift in product mix weighted away from casual pants, partially
offset by more off-price sales and customer allowances. Unit sales of
sportswear products increased approximately 40% and average wholesale selling
prices were approximately 17% lower than 2005, reflecting the additional
moderate priced sportswear business described above. Women's Apparel Group
revenues of $84.0 million, which represented approximately 19% of consolidated
sales in 2006 and 15% in 2005, increased $19.6 million, principally
attributable to Simply Blue. The addition of the Simply Blue business
significantly increased the number of women's units sold at an average unit
price point lower than the other women's products taken as a whole, resulting
in an increase in women's units and a decrease in average unit price. Unit
sales of women's apparel increased approximately 129% and average selling
prices declined approximately 43%, each attributable to Simply Blue with its
lower per unit cost relative to other women's products. Aggregate sportswear
and other non-tailored clothing product categories, including women's,
represented approximately 47% of consolidated nine month revenues in fiscal
2006 compared to 45% in 2005.
The consolidated gross margin percentage to sales declined to 33.5% in the
current year compared to 33.8% in the prior year, as the favorable impact of
product mix from the higher percentage of non-tailored product revenues,
principally women's, was more than offset by the effect of increased off-price
sales and customer allowances mainly in the moderate priced tailored clothing
product category and additional import duties; also, the Company experienced
unfavorable manufacturing utilization overall from fewer units produced in
owned tailored clothing manufacturing facilities affecting all tailored
clothing production, including the inefficiencies related to those
manufacturing operations which will be closed by the end of the fiscal year.
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 $16.7 million in 2006
and $14.9 million in 2005 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 $129.7
million in 2006 compared to $119.2 million in 2005, representing 29.9% of sales
in 2006 compared to 27.0% in 2005. 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, as well as
ongoing expenses which did not decline with the lower sales. The $10.5 million
increase reflected, among other things, incremental expenses of $6.9 million
related to the Simply Blue business, $1.1 million of incremental stock
compensation expense resulting from the adoption of FASB Statement No. 123(R)
effective for the Company's fiscal year beginning on December 1, 2005, and
approximately $3.3 million of incremental costs associated with the two new
retail stores, the launch of the "hickey" brand and additional Hart Schaffner
Marx brand marketing costs, partially offset by $.8 million received related to
an insurance claim (an additional $.6 million is reflected as a reduction of
cost of sales) and a lower provision for anticipated incentive compensation.
Operating earnings were $17.8 million in 2006 compared to $31.6 million in 2005
and represented 4.1% of consolidated sales in 2006 and 7.2% of sales in 2005.
Men's Apparel Group operating earnings declined to $21.0 million in 2006
compared to $36.2 million in 2005, attributable to the effect of the lower
sales, reduced gross margins in the moderate priced tailored clothing product
category, unfavorable absorption of fixed manufacturing costs from fewer units
produced and expenses related to brand enhancement of the Company's products
described above. Women's Apparel Group operating earnings were $9.6 million in
2006 compared to $7.4 million in 2005, attributable to the incremental earnings
of Simply Blue and improvement at Misook, partially offset by declines in
certain other women's operations.
-31-
Interest expense was $6.6 million in 2006 compared to $5.1 million in 2005,
reflecting both the higher borrowing level due to the $21 million paid in
October 2005 for the Simply Blue acquisition as well as higher rates on Credit
Facility borrowings. Consolidated pre-tax earnings were $11.2 million in 2006
compared to $26.5 million in 2005. The effective tax rate was 38.1% compared to
38.7% a year ago, reflecting additional tax credits available to the Company.
After reflecting the applicable tax provision, consolidated net earnings were
$7.0 million in 2006 compared to $16.2 million in 2005. Diluted earnings per
share were $.19 in 2006 compared to $.44 per share in 2005.
The actions currently being taken to further curtail or eliminate certain of
the moderate price product lines marketed principally to the mainstream
department store channel has exacerbated the negative impact in fiscal 2006,
but are believed to better position the Company for significant earnings
recovery in 2007 compared to 2006. The Company's strategies remain directed to
increase revenues and pre-tax margin improvements from a combination of both
internal revenue growth and from acquisitions, while continuing to reduce or
eliminate, where appropriate, those products or programs that are not
contributing sufficient incremental margins. The Company believes that the
recent acquisition of the Sweater.com business and its "One Girl Who ..."
brand, which followed the October 2005 purchase of the Simply Blue Apparel
business, further positions the Company in the luxury, bridge and better price
points sold in upscale retail stores. Other acquisition opportunities continue
to be actively pursued that can produce positive cash flows, are accretive to
earnings in the near to mid-term, and do not create excessive debt leverage. As
of August 31, 2006, 1,167,800 Hartmarx shares were repurchased at a cost of
approximately $7.9 million pursuant to the authorization to repurchase up to 2
million shares. The Company has not repurchased additional shares subsequent to
August 31, through October 6, 2006.
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 2005 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 August 31, 2006, the Company had entered into foreign exchange contracts,
aggregating approximately $.4 million principally attributable to the purchase
-32-
of approximately .3 million Euros primarily for inventory purchases in the next
three 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 August 31, 2006. 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. The ten largest customers represented
approximately 55% of consolidated sales during fiscal 2005 with the two largest
customers representing approximately 20% and 11% of sales, respectively. In
recent months, there were several changes in ownership control regarding
certain of the Company's larger customers, including Federated's acquisition of
the May Company stores and the sale of certain retail store groups formerly
owned by Saks, Inc. A decision by the controlling management of a group of
stores or any other significant customer, whether motivated by competitive
conditions, financial difficulties or otherwise, to decrease the amount of
merchandise purchased from the Company, or change their manner of doing
business, could have a material adverse effect on the Company's financial
conditions and results of operations.
Item 4 - Controls and Procedures
--------------------------------
(A) Evaluation of Disclosure Controls and Procedures. The Company's
management, under the supervision of and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of the end of the period
covered by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are effective 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 and that such information is accumulated and communicated
to management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
(B) Changes in 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 Company's fiscal quarter ended August 31, 2006 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. 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
-33-
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.
-34-
Part II -- OTHER INFORMATION
Item 2. Unregistered Sales of Equity and Use of Proceeds
----------------------------------------------------------
(c) Purchase of equity securities by the issuer and affiliated purchasers.
Maximum Number
Total Number of of Shares
Total Number Shares Purchased as That May Yet Be
of Shares Average Price Part of Publicly Purchased Under
Period Purchased Paid per Share Announced Plan the Plan
--------------------- --------------- --------------- ------------------- ------------------
June 1, 2006 to
June 30, 2006 169,500 $7.19 169,500 1,505,500
July 1, 2006 to
July 31, 2006 673,300 $6.00 673,300 832,200
August 1, 2006 to
August 31, 2006 - - - 832,200
-------------- ------------------
Total 842,800 $6.24 842,800
============== ==================
On October 28, 2005, the Board of Directors authorized the repurchase of up to
2,000,000 shares of the Company's $2.50 par value common stock from time to
time in the open market, through privately negotiated transactions, block
transactions or otherwise. The authorization expires on December 31, 2007. All
shares purchased above were acquired in open-market transactions.
Item 5. Other Information
---------------------------
Hartmarx Retirement Income Security Plan
----------------------------------------
On June 26, 2006, the Company adopted the Hartmarx Retirement Income
Security Plan (the "Plan"). The Plan is a non-contributory trusteed ERISA
non-qualified supplemental executive retirement plan whose purpose is to protect
the after-tax retirement income for certain eligible non-union employees of the
Company and its participating affiliates who have adopted the Plan (the
"Employers") and the surviving spouses of such employees, only in the event that
the benefits of such employees or their surviving spouses under the Hartmarx
Corporation Retirement Income Plan (the "RIP Plan") become subject to Pension
Benefit Guaranty Corporation ("PBGC") limitations. To date, total contributions
into the trust were $25,000. The Plan is designed to ensure funding for
participants' RIP Plan benefits that exceed the maximum benefit insured by the
PBGC so that such benefits are protected against any such forfeiture. The
benefit payable to participants is designed to equal the difference between the
amount of such participant's accrued benefit in the RIP Plan and the maximum
benefit guaranteed by the PBGC on an after tax basis.
Participation is limited generally to certain long-term employees whose
vested RIP Plan benefit exceeds PBGC limitations, are more than 3 years from
their Normal Retirement Date (as defined in the RIP Plan) and who have executed
a participation agreement under the Plan. Participants in the Plan include the
chief executive officer, the executive vice president and chief financial
officer, the senior vice president, general counsel and secretary, and certain
other company and subsidiary officers and employees. Participants become vested
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in benefits under the Plan after certain service requirements are met or, if
earlier, upon death or attainment of age 65. Upon vesting, a participant's
benefit is subject to taxation, and in addition to Company contributions made
into the trust established under the Plan, the Company shall make a tax gross up
payment to or on behalf of participants (or, in the event of a participant's
death, to or on behalf of a participant's surviving spouse) for each calendar
year that a participant or a participant's surviving spouse incurs tax liability
with respect to the benefits vested under the Plan on the participant's behalf.
Participants are eligible to receive a distribution from the Plan only
in the event that the PBGC institutes proceedings to terminate the RIP Plan, and
such participant's RIP Plan benefit is reduced as a result of such plan
termination. Benefits paid to participants from the Plan would be paid as soon
as administratively feasible after the PBGC institutes plan termination
proceedings in a single lump sum that is the actuarial equivalent of benefits
under the Plan.
The Plan may be amended or terminated at any time, at which time all
participants' benefits under the Plan would become 100% vested upon a
termination of the Plan.
The foregoing general description of material features of the
Retirement Income Security Plan is qualified in its entirety by reference to
the provisions of the Retirement Income Security Plan and its associated trust
set forth in Exhibits 10-K-1 and 10-K-2 attached hereto.
Item 6. Exhibits
------------------
10-K-1 Retirement Income Security Plan effective January 1, 2006.
10-K-2 Retirement Income Security Plan Trust effective January 1, 2006.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTMARX CORPORATION
October 10, 2006 By /s/ GLENN R. MORGAN
-------------------------
Glenn R. Morgan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
October 10, 2006 By /s/ ANDREW A. ZAHR
---------------------------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)
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