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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 2001
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
A Delaware Corporation IRS Employer No. 36-3217140
101 North Wacker Drive, Chicago, Illinois 60606
Telephone No.: 312/372-6300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $2.50 par value per share New York Stock Exchange
Chicago Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On February 14, 2002, 33,256,665 shares of the Registrant's common stock
were outstanding. The aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $40,500,000.
Certain portions of the Registrant's definitive proxy statement dated
February 26, 2002 for the Annual Meeting of Stockholders to be held April 11,
2002 are incorporated by reference into Part III of this report.
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HARTMARX CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
ITEM No. Page
-------- ----
PART I
1 Business............................................................................. 1
2 Properties........................................................................... 6
3 Legal Proceedings.................................................................... 6
4 Submission of Matters to a Vote of Security Holders.................................. 8
Executive Officers of the Registrant................................................. 8
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters................ 9
6 Selected Financial Data.............................................................. 10
7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11
7A Quantitative and Qualitative Disclosures About Market Risk........................... 21
8 Financial Statements and Supplementary Data.......................................... 21
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 44
PART III
10 Directors and Executive Officers of the Registrant................................... 44
11 Executive Compensation............................................................... 45
12 Security Ownership of Certain Beneficial Owners and Management....................... 45
13 Certain Relationships and Related Transactions....................................... 45
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 45
PART I
Item 1--Business
General and Operating Segments
Hartmarx Corporation, a Delaware corporation, functions essentially as a
holding company, overseeing the various operations of its subsidiaries and
providing these subsidiaries with resources and services in financial,
administrative, legal, human resources, advertising and other areas. The
management of the respective operations has responsibility for optimum use of
the capital invested in them and for planning their growth and development in
coordination with the strategic plans of Hartmarx and the other operating
entities (collectively, the "Company").
Established in 1872, the Company believes it is the largest manufacturer and
marketer of men's suits, sport coats and slacks ("men's tailored clothing") in
the United States. From this established position, Hartmarx has diversified
into men's and women's sportswear, including golfwear, dress furnishings
(shirts and ties) and women's career apparel.
The Company operates exclusively in the apparel business. Its operations are
comprised of: (i) Men's Apparel Group ("MAG") which designs, manufactures and
markets men's tailored clothing, slacks and sportswear (including golfwear) and
dress furnishings (shirts and ties); products are sold under a broad variety of
business and casual apparel brands, both owned and under license to an
extensive range of retail, catalog and e-commerce channels; and (ii) Women's
Apparel Group, comprised of International Women's Apparel ("IWA"), which
markets women's career apparel and sportswear to department and specialty
stores under owned and licensed brand names, and Barrie Pace, a direct mail
business offering a wide range of apparel and accessories to business and
professional women through its catalogs. The Operating Segment Information on
page 12 in Item 7 and on pages 42 and 43 in the accompanying Notes to
Consolidated Financial Statements further describes the Company's operations.
Substantially all of the Company's products are sold to a wide variety of
retail channels under established brand names or the private labels of major
retailers. The Company owns two of the most recognized brands in men's tailored
clothing--Hart Schaffner & Marx(R), which was introduced in 1887, and
Hickey-Freeman(R), which dates from 1899. The Company also offers its products
under other brands which it owns such as Sansabelt(R), Racquet Club(R), Palm
Beach(R), Brannoch(R), Barrie Pace(R), Hawksley & Wight(R), Naturalife(R),
Pusser's of the West Indies(R), Cambridge(R), Coppley(R), Keithmoor(R),
Riserva(TM) and Royal Shirt(TM)/; and under exclusive license agreements for
specified product lines including Tommy Hilfiger(R), Jack Nicklaus(R), Bobby
Jones(R), Burberry(R) men's tailored clothing, Austin Reed(R), Perry Ellis(R),
Kenneth Cole(R), Ted Baker(R), Evan-Picone(R), Daniel Hechter(R), Gieves &
Hawkes(R), Pringle of Scotland(R), Claiborne(R), Pierre Cardin(R), and KM by
Krizia(TM). To broaden the distribution of the apparel sold under its owned and
licensed trademarks, the Company has also entered into over 30 license or
sublicense agreements with third parties for specified product lines to
produce, market and distribute products in 30 countries outside the United
States. Additionally, the Company has direct marketing activities primarily in
Europe, but also in Asia, North America and South America, selling golfwear in
11 countries. /
The Company has expanded its product offerings through acquisitions in the
last few years. Effective July 1, 2001, a wholly-owned subsidiary of the
Company acquired certain assets, properties and operations of the Consolidated
Apparel Group, L.L.C. ("CAG"), a privately-held marketer of popular priced
sportswear. On August 27, 1999, a wholly owned subsidiary of the Company
acquired 100% of the capital stock of The Royal Shirt Company, Ltd. ("Royal"),
a Canadian based manufacturer and marketer of dress and sport shirts. Effective
December 1, 1998, a wholly-owned subsidiary of the Company acquired 100% of the
capital stock of The Coppley, Noyes and Randall Limited ("Coppley"), a leading
Canadian manufacturer and marketer of men's tailored clothing and other
apparel. In November 1998, the Company purchased the wholesale apparel business
1
of Pusser's Ltd. ("Pusser's") from an entity which operates restaurants, pubs
and retail stores carrying nautical and tropical sportswear apparel and other
products marketed under the Pusser's name. Assets acquired include the
trademarks associated with all apparel products along with inventories
associated with the wholesale business. CAG, Royal, Coppley and Pusser's are
hereafter referred to as "the new businesses".
During fiscal 2001, the Company initiated a number of gross margin
improvement and cost reduction actions in response to reduced consumer
confidence which affected sales of apparel at retail and to the overall weak
apparel environment. These actions included the closing of six facilities
engaged in fabric cutting and sewing operations, one distribution center and
several administrative offices, the wind-up of certain moderate tailored
clothing operations, early voluntary retirement programs and other
administrative workforce reductions. Accordingly, in fiscal 2001, the Company
reported a restructuring charge of $11.6 million, which includes costs for
severance and related fringe benefits, estimated closing costs for owned
facilities or exit costs for leased facilities and the writedown of fixed
assets to estimated fair values for facilities closed or to be closed. The
Company's operating results reflected additional costs and inefficiencies
associated with these operations and related facility and employee reductions.
In the aggregate, the number of employees in both manufacturing, selling and
administrative areas has been reduced by approximately 30% during fiscal 2001
and the Company currently employs approximately 5,000 people.
In 2001, the Company's liquidity was adversely impacted, principally by the
adverse business conditions, but also from the cash requirements to fund the
acquisition of CAG and additional limitations and liquidity requirements
imposed under our senior credit facility in advance of the January 15, 2002
maturity of the Company's 10 7/8% senior subordinated notes. During the third
fiscal quarter, the Company completed the acquisition of CAG for approximately
$18 million in cash plus assumed debt and other liabilities. This acquisition
was consistent with the strategy of expanding apparel offerings in non-tailored
product categories. The cash outlays associated with the acquisition, however,
reduced credit availability and liquidity. Moreover, the slowdown in 2001 of
the U.S. economy generally, and the retail apparel sector in particular, has
adversely affected operating performance and financial condition. The impact of
the September 11 terrorist attacks in the U.S. further exacerbated retailers'
and consumer confidence and spending for apparel products.
This 2001 Annual Report on Form 10-K contains forward-looking statements
that are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Wherever possible, the Company has
identified these forward-looking statements by words such as "anticipates",
"believes", "estimates", "expects", "projects", "plans" and similar phrases.
Additionally, the Company may from time to time make other oral or written
statements that are also forward-looking statements. While the Company believes
that the assumptions underlying such forward-looking information are reasonable
based on present conditions, forward-looking statements made by the Company are
not guarantees of future performance as actual results could differ materially
from those expressed or implied in the forward-looking statements as a result
of various factors. Accordingly, the Company has identified various important
risk factors which could cause the Company's actual financial results to differ
materially from any such results which might be projected, forecasted or
estimated by the Company in written or oral forward-looking statements
including, but not limited to the following:
. The apparel environment is cyclical and the level of consumer spending on
apparel often declines when disposable income declines. The overall retail
economy in the United States could affect retailers' expectations of
future apparel product sales. A more pessimistic evaluation by retailers
compared to 2001 could adversely affect both the advance order and
in-stock product lines marketed by the Company. The Company's sales and
earnings could also be adversely impacted to the extent that the financial
strength of its existing or new retail customers worsens.
. Following the amendments to its senior credit facility related to the
completion of the exchange offer for the Company's 10 7/8% senior
subordinated notes in January 2002, the Company believes that it has
2
sufficient liquidity to meet its working capital needs. However, if
current recessionary economic trends worsen, operating cash flow and
capital resources could be insufficient to meet requirements or could
result in the inability to meet certain of the Company's financial
covenants under its senior credit facility.
. The Company's largest customer represented approximately 21% of
consolidated sales in fiscal 2001. The Company's ten largest customers in
2001 represented approximately 51% of consolidated sales. The Company
believes it maintains an excellent business relationship with these
customers. However, an unanticipated decline in sales with the Company's
largest customers could adversely affect profitability as it would be
difficult to immediately replace this business with new customers or
increase volume with other existing customers.
. Substantially all of the Company's men's and women's sportswear, men's
ties, women's career wear and a portion of its tailored suits, sport
coats, slack and dress shirts production are manufactured utilizing
independent contractors, mostly located outside of the United States. The
percentage of the Company's products manufactured or assembled outside of
the United States is increasing. The Company is dependent upon the
contractors' ability to deliver such products on a timely basis. Labor,
delivery or transportation difficulties regarding contractor sourced
products which result in delays not readily controllable by the Company
could negatively affect operating profits. Also, unanticipated political
or economic disruptions in these countries and/or currency fluctuations
could adversely impact overall Company profitability.
. Continuation of the trend towards casual dressing in the workplace could
further reduce the demand for the Company's tailored clothing products,
especially for tailored suits. While the Company markets several
sportswear and casual product lines, consumer receptiveness to the
Company's casual and sportswear products may be less than anticipated.
. Sales derived from products which utilize licensed brand names represent
an important current component of the Company's overall revenues and
profitability. The Company also serves as a licensing agent for several of
its principal licensors. While the Company believes the relationships with
its principal licensors to be favorable and the termination of any single
licensing agreement would not have a material adverse effect on its
business taken as a whole, the long-term prospects of the Company assume
the continuation of a significant percentage of existing licensing
arrangements and ongoing consumer acceptance of the products sold under
these licensed brands.
. The tailored clothing market relating to suit units has experienced unit
declines for the past several years. The Company has been, among other
things, reducing overall product costs, including increased off-shore
sourcing and introducing new brands with higher gross margin potential,
and placing less emphasis on brands which do not have the potential of
achieving acceptable profit margins. If these efforts do not meet with
consumer acceptance, sales and profitability could be adversely affected.
. Fabric purchases from the Company's ten largest fabric suppliers
approximated 45 percent of the total fabric requirements in fiscal 2001.
As is customary in the industry, there are no long-term contracts with
fabric suppliers. The Company believes that there are alternative sources
of supply available to satisfy its raw material requirements. However, a
prolonged, unanticipated disruption of scheduled deliveries from these
suppliers could adversely affect production scheduling and ultimately the
Company's ability to meet customer delivery dates.
. During 2001, the Company's variable rate debt (based on the Prime or LIBOR
rates in effect from time to time) averaged approximately $89 million
under its senior credit facility. The reduction in the applicable
borrowing rate benchmarks were favorable during 2001, partially offset by
higher borrowing levels. A large increase in total borrowings and/or in
the borrowing rates under the senior credit facility could adversely
affect profitability.
. The Company relies on the continuing willingness of suppliers and trade
factors to extend credit to finance inventory purchases. There can be no
assurance that such suppliers and factors will continue to extend credit
to the Company on the same basis as in the past should they become
concerned about the Company's ability to generate adequate liquidity and
service debt.
3
. The Company is not aware of and has assumed no significant adverse impact
of pending or threatened litigation matters.
Certain of the above described risk factors are also discussed in the
"Liquidity and Capital Resources" caption contained in Item 7--Management's
Discussion of Financial Condition and Results of Operations of this Form 10-K.
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.
Products Produced and Services Rendered
The Company's merchandising strategy is to market a wide selection of men's
tailored clothing, sportswear and dress furnishings, and women's career apparel
and sportswear across a wide variety of fashion directions, price points and
distribution channels. MAG represented 91% of sales in both 2001 and 2000, and
93% in 1999. Women's Apparel Group represented approximately 9% of sales in
2001 and 2000, and 7% of sales in 1999. As a manufacturer and marketer, the
Company is responsible for the design, manufacture and sourcing of its apparel.
The majority of its men's tailored clothing and slacks are manufactured in
eight Company operated facilities located in the United States and three
facilities in Canada. Some of its dress furnishings are produced at a
Company-operated facility in Canada. The Company utilizes domestic and foreign
contract manufacturers to produce its remaining products, principally men's and
women's sportswear, as well as women's career apparel and sportswear in
accordance with Company specifications and production schedules. Approximately
eighteen percent of the catalog sales are of products provided by a
wholly-owned subsidiary of the Company.
Sources and Availability of Raw Materials
Raw materials, which include fabric, linings, thread, buttons and labels,
are obtained from domestic and foreign sources based on quality, pricing,
fashion trends and availability. The Company's principal raw material is
fabric, including woolens, cottons, polyester and blends of wool and polyester.
The Company procures and purchases its raw materials directly for its owned
manufacturing facilities and may also procure and retain ownership of fabric
relating to garments cut and assembled by contract manufacturers. In other
circumstances, fabric is procured by the contract manufacturer directly but in
accordance with the Company's specifications. For certain of its product
offerings, the Company and selected fabric suppliers jointly develop fabric for
the Company's exclusive use. Approximately 55 percent of the raw materials
purchased by the Company is imported from foreign mills. A substantial portion
of these purchases is denominated in United States dollars. Purchases from the
Company's largest fabric supplier represented approximately 11 percent of the
Company's total fabric requirements in fiscal 2001, down from 20 percent in
2000 and approximately 25 percent in 1999. No other supplier accounts for over
6% of the Company's total raw material requirements. As is customary in the
industry, the Company has no long-term contracts with its suppliers. The
Company believes that a variety of alternative sources of supply are available
to satisfy its raw material requirements.
Product lines are developed primarily for two major selling seasons, spring
and fall, with smaller lines for the summer and holiday seasons. The majority
of the Company's products are purchased by its customers on an advance order
basis, five to seven months prior to shipment. Seasonal commitments for a
portion of the expected requirements are made approximately three to five
months in advance of the customer order. Certain of the Company's businesses
maintain in-stock inventory programs on selected product styles giving
customers the capability to order electronically with resulting shipment within
one to two business days. Programs with selected fabric suppliers provide for
availability to support in-stock marketing programs. The normal production
process from fabric cutting to finished production is five to six weeks for
tailored suits and sport coats and three to four weeks for tailored slacks. A
substantial portion of sportswear and women's apparel is produced by
unaffiliated contractors utilizing Company designs.
Competition and Customers
The Company emphasizes quality, fashion, brand awareness and service in
engaging in this highly competitive business. While no manufacturer of men's
clothing accounts for more than a small percentage of the
4
total amount of apparel produced by the entire industry in the United States,
the Company believes it is the largest domestic manufacturer and marketer of
men's tailored clothing and men's slacks with expected retail prices over $50.
The Company's women's apparel sales do not represent a significant percentage
of total women's apparel sales. The Company's customers include major
department and specialty stores (certain of which are under common ownership
and control), value-oriented retailers and direct mail companies. Sales in the
United States were approximately 96% of total revenues. The Company's largest
customer, Dillard's Department Stores, represented approximately 21%, 20% and
18% of consolidated sales in 2001, 2000 and 1999, respectively. No other
customer exceeded 8% of net sales. The company's top ten customers represented
approximately 51% of total sales in 2001, 53% in 2000 and 52% in 1999.
Trademarks, Licensing Agreements and Research
A significant portion of the Company's sales are of products carrying brands
and trademarks owned by the Company. As noted previously, the Company also
manufactures and markets products pursuant to exclusive license agreements with
others. While the terms and duration of these license agreements vary,
typically they provide for certain minimum payments and are subject to renewal
and renegotiation.
In the apparel industry, new product development is directed primarily
towards new fashion and design changes and does not require significant
expenditures for research. The Company's fixed assets include expenditures for
new equipment developed by others. The Company does not spend material amounts
on research activities relating to the development of new equipment.
Conditions Affecting the Environment
Regulations relating to the protection of the environment have not had a
significant effect on capital expenditures, earnings or the competitive
position of the Company. The making of apparel is not energy intensive, and the
Company is not engaged in producing fibers or fabrics.
Employees
The Company presently has approximately 5,000 employees, of which
approximately 95% are employed in MAG. Most of the employees engaged in
manufacturing and distribution activities in the United States and Canada are
covered by union contracts with the Union of Needletrades, Industrial & Textile
Employees. The Company considers its employee relations to be satisfactory.
Seasonality; Working Capital
The men's tailored clothing business has two principal selling seasons,
spring and fall. Additional lines for the summer and holiday seasons are
marketed in men's and women's sportswear. Men's tailored clothing, especially
at higher price points, generally tends to be less sensitive to frequent shifts
in fashion trends, economic conditions and weather, as compared to men's
sportswear or women's career apparel and sportswear. While there is typically
little seasonality to the Company's sales on a quarterly basis, seasonality can
be affected by a variety of factors, including the mix of advance and fill-in
orders, the distribution of sales across retail trade channels and overall
product mix between traditional and fashion merchandise. The Company generally
receives orders from its wholesale customers approximately five to seven months
prior to shipment. Some of the Company's operating businesses also routinely
maintain in-stock positions of selected inventory in order to fill customer
orders on a quick response basis.
Sales and receivables are recorded when inventory is shipped, with payment
terms generally 30 to 60 days from the date of shipment. With respect to the
tailored clothing advance order shipments, customary industry trade terms are
60 days from the seasonal billing dates of February 15 and August 15. The
Company's borrowing needs are typically lowest in July and January. Financing
requirements begin to rise as inventory levels increase in anticipation of the
spring and fall advance order shipping periods. Peak borrowing levels occur in
late March and September, just prior to the collection of receivables from
men's tailored clothing advance order shipments.
5
Item 2--Properties
The Company's principal executive and administrative offices are located in
Chicago, Illinois. Its office, manufacturing and distribution operations are
conducted at the following locations:
Approximate Expiration
floor area date of
in square material
Location feet Principal Use leases
-------- ----------- ------------- ----------
Anniston, AL........................... 76,000 Manufacturing 2005
Buffalo, NY............................ 280,000 Manufacturing; warehousing; office 2015
Cape Girardeau, MO..................... 171,000 Manufacturing; warehousing *
Chicago, IL............................ 102,000 Executive and administrative offices 2004
Des Plaines, IL........................ 361,000 Manufacturing; warehousing *
Easton, PA............................. 220,000 Warehousing; office *
Erlanger, KY........................... 225,000 Warehousing 2004
Michigan City, IN (2 locations)........ 305,000 Warehousing; office *
New York, NY........................... 104,000 Sales offices/showrooms/retail store 2005
Rector, AR............................. 52,000 Manufacturing *
Rochester, NY.......................... 223,000 Manufacturing; warehousing; office *
Rock Island, IL........................ 43,000 Manufacturing *
Rouses Point, NY....................... 30,000 Warehousing 2005
Somerset, KY........................... 225,000 Manufacturing *
Hamilton, Ontario, Canada (3 locations) 163,000 Manufacturing; warehousing; office 2003
Concord, Ontario, Canada............... 24,000 Manufacturing; office 2005
--------
*Propertiesowned by the Registrant
The Company believes that its properties are well maintained and its
manufacturing equipment is in good operating condition and sufficient for
current production. For information regarding the terms of the leases and
rental payments thereunder, refer to the "Commitments and Contingencies" note
to the Consolidated Financial Statements on pages 35 and 36 of this Form 10-K.
Substantially all of the Company's assets, including real property and
equipment, are pledged as security under its senior credit facility or subject
to mortgages with other lenders.
Item 3--Legal Proceedings
The Lincoln Company LLC Matters. Background. On August 13, 2001, The Lincoln
Company LLC ("Lincoln") announced its intention to commence a tender offer for
all of the Company's outstanding shares of common stock. In its Schedule TO
filed with the Securities and Exchange Commission, Lincoln proposed to pay
shareholders $4.50 cash per share, represented that it had "arranged financing"
to cover the purchase, refinance the Company's existing debt and provide for
the working capital needs of the Company, and that its investors had "committed
$70 million in cash equity" for the transaction.
On August 16, 2001, the Hartmarx Board of Directors (the "Board") formed an
Ad Hoc Committee of Independent Directors (the "Committee") to investigate and
review Lincoln's offer and any other offers or transactions proposed to the
Company. Despite repeated requests for basic information relating to the
identity of Lincoln's equity holders and Lincoln's financing commitments, the
Committee received no responsive information from Lincoln. On September 7,
2001, and again on September 14, 2001, the Board advised Lincoln that all
discussions and investigations of Lincoln's offer had been terminated on
account of Lincoln's refusal to provide the requested information. On September
17, 2001, Lincoln belatedly provided the Committee with information about its
financing and equity funding. That information revealed that, even as of
September 17, 2001, Lincoln had only proposals, not commitments, for debt
financing and equity investments, and even these
6
proposals did not provide funding for the purchase of Hartmarx common stock by
means of a tender offer. After reviewing the materials provided by Lincoln, the
Board advised Lincoln on September 28, 2001 that, among other things, due to
Lincoln's misrepresentations, the Company would not participate in any further
discussions with Lincoln about its offer.
As a result of Lincoln's proposal, the following actions were commenced:
The Federal Court Litigation. On September 7, 2001, the Company filed a
verified complaint in the United States District Court for the Northern
District of Illinois, Eastern Division (the "Court"), against A. Robert Abboud,
Spencer Hays, The Lincoln Company LLC and The Tom James Company, alleging that
the defendants violated the federal securities laws by making false and
misleading statements of material fact in connection with Lincoln's August 13,
2001 offer. The complaint alleged that the defendants never arranged the
necessary financing to complete the $4.50 per share cash tender offer announced
on August 13, 2001 or to commence a $4.50 per share tender offer at any time
thereafter.
On September 13, 2001, the defendants filed an answer to Hartmarx's
complaint, generally denying the allegations. On that same date, A. Robert
Abboud & Co., Lincoln and The Tom James Company (the "Lincoln Parties") filed a
counterclaim against the Company and a third-party complaint against certain of
the Company's directors, alleging that the Company and the defendant directors
violated the securities laws and breached their fiduciary duties in responding
to Lincoln's offer. Shortly thereafter, the Lincoln Parties filed an amended
counterclaim and third-party complaint containing substantially the same
allegations set forth in their initial counterclaim and third-party complaint.
On October 1, 2001, Lincoln withdrew its offer to acquire the Company.
Thereafter, on October 15, 2001, following discussions between the parties and
with the assistance of the Court, Lincoln issued a corrective press release,
admitting, among other things, that at the time of its August 13, 2001 offer,
it did not have financing arranged to complete the transaction. On October 17,
2001, the Court dismissed the complaint and the amended counterclaim and
third-party complaint as moot.
Subsequently, on October 24, 2001, the Company filed a motion for an award
of attorneys' fees and costs incurred in the litigation on the grounds that the
Lincoln Parties filed various motions, pleadings and other papers in the
litigation in violation of Rule 11 of the Federal Rules of Civil Procedure.
After the submission of briefs and a hearing, the Court entered an order
awarding the Company $99,200 in fees and costs, said award to be paid jointly
and severally by the Lincoln Parties and its counsel. The Lincoln Parties have
appealed that ruling and the matter is on appeal before the United States Court
of Appeals for the Seventh Circuit.
The Delaware Chancery Court Actions. Following the announcement of Lincoln's
offer, the following actions were filed in the Chancery Court of the State of
Delaware: Harbor Finance Partners v. Samaual A.T. Bakhsh, et al., Civil Action
No. 19055 (filed on August 14, 2001); Sandra Summerfield v. Elbert O. Hand, et
al., Civil Action No. 19060 (filed on August 16, 2001); Boris Dorfman v. Elbert
O. Hand, et al., Civil Action No. 19070 (filed on August 23, 2001, but not yet
served on all defendants); and Miriam Thurm v. Elbert O. Hand, et al., Civil
Action No. 19086 (filed on August 30, 2001, but not yet served on all
defendants). Plaintiffs in each of these actions allege that the Company's
directors breached their fiduciary duties by, among other things, refusing to
accept Lincoln's offer or negotiate with Lincoln, refusing to solicit other
offers or put the Company up for auction, and erecting and/or refusing to
remove barriers to the acquisition of the Company. Plaintiffs purport to bring
the actions as class actions on behalf of themselves and all other shareholders
of the Company. Plaintiffs in each of the actions seek injunctive and
declaratory relief, monetary damages and an award of their attorneys' fees and
costs.
The Illinois Chancery Court Action. On August 27, 2001, another purported
class action captioned Robert Crockett v. Hartmarx Corporation, et al., No. 01
CH 14297, was filed in Circuit Court of Cook County, Illinois, County
Department, Chancery Division, against the Company and its directors. Like the
complaints in the Delaware Chancery Court actions, the complaint in this action
alleges breaches of fiduciary duty on the part of the directors for failing to
respond to Lincoln's offer or negotiate with Lincoln regarding its offer.
Plaintiff seeks
7
injunctive and declaratory relief, monetary damages and an award of attorneys'
fees and costs. To date, plaintiff has not served all of the defendants named
in the complaint or otherwise taken any steps to advance this litigation.
After consultation with counsel, management believes that there are
meritorious defenses to the claims asserted in the Delaware and Illinois
Chancery Court actions, especially in light of the District Court's rulings in
the Federal Court Litigation discussed above, and that the resolution of these
actions will not have a material adverse effect on the Company's business,
financial position or results of operations. The Company intends to defend
these actions vigorously. The Company filed motions to dismiss the Harbor
Finance Partners and Summerfield actions on September 10, 2001 and September
17, 2001, respectively, and plans to move for the dismissal of the Dorfman,
Thurm and Crockett actions once they are properly served on the named
defendants.
The Company is involved in various other claims and lawsuits incidental to
its business. In the opinion of management, these claims and lawsuits will not
have a material adverse effect on the Company's business, financial position or
results of operations.
Item 4--Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Each of the executive officers of the Registrant listed below has served the
Registrant in various executive capacities for the past five years. Each
officer is elected annually by the Board of Directors, normally for a one-year
term and is subject to removal powers of the Board.
Years of
Service
with
Name Position Age Company
---- -------- --- --------
Elbert O. Hand.... Chairman and Chief Executive Officer (Director since 1984) 62 37
Homi B. Patel..... President and Chief Operating Officer (Director since 1994) 52 22
Glenn R. Morgan... Executive Vice President, Chief Financial Officer and Treasurer 54 22
Taras R. Proczko.. Senior Vice President, General Counsel and Secretary 47 21
Linda J. Valentine Vice President, Compensation and Benefits 51 21
Andrew A. Zahr.... Vice President and Controller; Chief Accounting Officer 58 29
Mr. Hand was elected to his current position as Chairman and Chief Executive
Officer in October 1992.
Mr. Patel was elected to his current position as President and Chief
Operating Officer in February 1993. In April 2002, Mr. Patel will become Chief
Executive Officer.
Mr. Morgan was elected to his current position as Executive Vice President
and Chief Financial Officer and Treasurer in April 2001. From September 1995 to
April 2001, he served as Executive Vice President and Chief Financial Officer.
Mr. Proczko was elected to his current position as Senior Vice President,
General Counsel and Secretary in December 2001. From January 2000 to November
2001, he served as Vice President, Corporate Counsel and Secretary. From March
1993 to December 1999, he served as Assistant General Counsel.
Ms. Valentine was elected to her current position as Vice President,
Compensation and Benefits in February 1993.
Mr. Zahr was elected to his current position as Vice President and
Controller in April 1998. From July 1994 to April 1998, he served as Controller.
8
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters
Hartmarx Corporation common stock is traded on the New York and Chicago
Stock Exchanges. The quarterly composite price ranges of the Company's common
stock for the past three fiscal years were as follows:
2001 2000 1999
----------- ----------- -----------
High Low High Low High Low
----- ----- ----- ----- ----- -----
First Quarter. $3.78 $2.28 $3.97 $3.13 $6.13 $3.94
Second Quarter 3.61 2.55 3.22 2.16 5.25 4.31
Third Quarter. 3.75 1.95 3.03 2.20 5.06 3.63
Fourth Quarter 3.53 1.53 3.13 2.34 4.94 3.69
The most recent quarterly dividend paid was in November 1991, in the amount
of $.15 per share. The Company's senior credit facility contains limitations on
restricted payments, which, as currently amended, prohibits the payment of
dividends. The current financing agreements also contain limitations on share
repurchases related to borrowing availability as well as various restrictive
covenants pertaining to earnings before interest, taxes, depreciation and
amortization ("EBITDA"), additional debt incurrence, capital expenditures,
asset sales, operating leases, and ratios relating to maximum funded debt to
EBITDA and minimum fixed charge coverage, as well as other customary covenants,
representations and warranties, funding conditions and events of default. The
Company is in compliance with all covenants under these agreements. Item 7 of
this Form 10-K contains additional discussion regarding compliance with
covenants under the Company's senior Credit Facility during 2001.
As of February 14, 2002, there were approximately 4,300 holders of the
Common Stock. The number of holders was estimated by adding the number of
registered holders furnished by our registrar together with the number of
participants in our Savings Investment-Employee Stock Ownership Plan.
9
Item 6--Selected Financial Data
The following table summarizes data for the fiscal years 1997 through 2001.
The Company's complete annual financial statements and notes thereto for fiscal
2001 appear elsewhere in this Annual Report on Form 10-K.
Income Statement Data
In Thousands, Except Per Share Data
For Years Ended November 30 2001/(1)/ 2000 1999/(2)/ 1998 1997/(3)/
----------------------------------- -------- -------- -------- -------- --------
Net sales................................................................. $601,585 $680,647 $726,805 $725,002 $718,135
Licensing and other income................................................ 3,098 3,114 2,894 1,882 3,375
Cost of sales............................................................. 444,930 490,751 541,730 540,545 544,003
Operating expenses........................................................ 156,624 163,134 156,560 144,121 143,482
Earnings before restructuring charge, non-cash charge, interest, taxes and
extraordinary item....................................................... 3,129 29,876 31,409 42,218 34,025
Restructuring charge...................................................... 11,625 -- -- -- --
Non-cash charge re: termination of systems project........................ -- -- 11,195 -- --
Earnings (loss) before interest, taxes and extraordinary item............. (8,496) 29,876 20,214 42,218 34,025
Interest expense.......................................................... 14,409 15,686 17,669 18,633 17,480
Earnings (loss) before taxes and extraordinary item....................... (22,905) 14,190 2,545 23,585 16,545
Tax (provision) benefit................................................... 9,045 (5,605) (965) (8,965) 8,695
Net earnings (loss) before extraordinary item............................. (13,860) 8,585 1,580 14,620 25,240
Extraordinary item, net of tax............................................ (69) 227 -- -- --
Net earnings (loss)....................................................... (13,929) 8,812 1,580 14,620 25,240
Diluted earnings (loss) per share:
before extraordinary item............................................... (.46) .29 .05 .42 .74
after extraordinary item................................................ (.46) .30 .05 .42 .74
Cash dividends per share.................................................. -- -- -- -- --
Diluted average number of common shares and equivalents................... 30,013 29,568 32,861 34,885 34,167
Balance Sheet Data
In Thousands, Except Per Share Data
At November 30
-----------------------------------
Cash...................................................................... $ 1,555 $ 1,755 $ 2,133 $ 5,292 $ 1,626
Accounts receivable....................................................... 143,261 135,421 144,921 131,342 136,854
Inventories............................................................... 149,613 167,111 176,214 207,679 193,780
Other current assets...................................................... 28,193 26,766 21,668 19,115 24,484
Net properties............................................................ 35,691 36,407 38,994 51,034 45,782
Other assets/deferred taxes............................................... 97,044 71,015 75,743 70,260 67,857
Total assets.............................................................. 455,357 438,475 459,673 484,722 470,383
Accounts payable, accrued expenses and taxes.............................. 96,836 113,815 100,152 93,768 100,098
Total debt................................................................ 171,553 125,547 170,373 179,994 178,001
Shareholders' equity...................................................... 186,968 199,113 189,148 210,960 192,284
Equity per share.......................................................... 6.19 6.69 6.43 6.06 5.62
Other Data
In Thousands
For Years Ended November 30
---------------------------
Earnings before restructuring charge, non-cash charge, interest, taxes,
depreciation, amortization and extraordinary item........................ $ 9,969 $ 36,976 $ 38,492 $ 49,450 $ 41,673
Depreciation and amortization of fixed assets............................. 6,840 7,100 7,083 7,232 7,648
Capital expenditures...................................................... 9,801 4,494 7,820 12,753 10,086
--------
(1) 2001 results reflect restructuring charges of $11.6 million, as well as
additional non-recurring items included in the cost of sales and operating
expense captions, all associated with the Company's facility closings and
other cost reduction actions described elsewhere in this Form 10-K.
(2) 1999 results reflect a second quarter non-cash writedown of systems
development costs of $11.2 million (pre-tax), $6.9 million (after-tax) or
$.21 per share.
(3) 1997 included favorable non-cash income tax adjustments to the tax
valuation reserve related to recognition of net operating loss
carryforwards of $15.0 million. Excluding this adjustment, net earnings
before extraordinary item and diluted earnings per share would have been
$10.3 million or $.30 per share.
10
Management's Discussion and Analysis of Financial Condition and Results of
Operations, along with the Financing and Taxes on Earnings footnotes to the
Consolidated Financial Statements, provide additional information relating to
the comparability of the information presented above.
Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company operates exclusively in the apparel business. Its operations are
comprised of: (i) Men's Apparel Group ("MAG"), which designs, manufactures and
markets men's tailored clothing, slacks, sportswear (including golfwear) and
dress furnishings (shirts and ties); products are sold under a broad variety of
apparel brands, both owned and under license, to an extensive range of retail,
catalog and e-commerce channels; and (ii) Women's Apparel Group, comprised of
International Women's Apparel ("IWA"), which markets women's career apparel and
sportswear to department and specialty stores under owned and licensed brand
names, and Barrie Pace, a direct mail business offering a wide range of apparel
and accessories to business and professional women through its catalogs.
Operating results in 2001 reflected a recessionary economy generally and
weak sales of apparel at retail. In response to these conditions, the Company
accelerated its gross margin improvement and cost reduction actions initiated
previously. These actions during 2001 included the wind-up of certain moderate
tailored clothing operations, the closing of six facilities engaged in fabric
cutting and sewing operations, one distribution center and several
administrative offices, early voluntary retirement programs and other
administrative workforce reductions. Accordingly, in fiscal 2001, the Company
reported a restructuring charge of $11.6 million, which includes costs for
severance and related fringe benefits, estimated closing costs for owned
facilities or exit costs for leased facilities and the writedown of fixed
assets to estimated fair values for facilities closed or to be closed. In
addition to the restructuring charge, operating results reflected other costs
and inefficiencies included in the reported cost of sales and selling, general
and administrative expenses captions in the accompanying Consolidated Statement
of Earnings associated with the wind-up of certain operations, primarily
associated with moderate tailored clothing product categories, facility and
employee reductions. Annualized operating expense savings of approximately $12
million are expected to be realized from the non-manufacturing staff reductions
in 2001, representing about 20% of the non-manufacturing workforce.
The Company's liquidity was adversely impacted in 2001, principally by the
adverse business conditions, but also from the cash requirements to fund the
acquisition of Consolidated Apparel Group, L.L.C. ("CAG"), a privately-held
marketer of popular-priced sportswear, and additional limitations and liquidity
requirements imposed under its senior credit facility ("Credit Facility") in
advance of the January 15, 2002 maturity of the Company's 10 7/8% senior
subordinated notes ("Notes"). During the third fiscal quarter, the Company
completed the acquisition of CAG for approximately $18 million in cash plus
assumed debt and other liabilities. This acquisition was consistent with the
strategy of expanding apparel offerings in non-tailored product categories. The
cash outlays associated with this acquisition, however, reduced credit
availability and liquidity. The impact of the September 11 terrorist attacks in
the U.S. further exacerbated retailers' and consumer confidence and spending
for apparel products during the fourth quarter of fiscal 2001.
Results of Operations
Consolidated revenues were $602 million in 2001 compared to $681 million in
2000 and $727 million in 1999. Reported earnings before interest, taxes, the
$11.6 million restructuring charge in 2001 and an $11.2 million non-cash charge
in 1999, were $3.1 million in 2001 compared to $29.9 million in 2000 and $31.4
million in 1999. Results for 2001 also reflected non-recurring costs and
expenses reflected as a component of cost of sales and operating expenses
associated principally with the wind-up of certain moderate tailored clothing
operations, which includes such items as underutilization of production
facilities prior to closing and inventory losses associated with operations
being eliminated. EBIT in 2001, excluding the restructuring costs and other
non-recurring items described above, was approximately $16 million.
11
The following summarizes sales and earnings before interest, taxes,
restructuring and non-cash charges ("EBIT") for the Company's business groups
(in millions):
Year Ended November 30,
----------------------
2001 2000 1999
------ ------ ------
Sales:
Men's Apparel Group... $547.4 $619.8 $672.6
Women's Apparel Group. 54.2 60.8 54.2
------ ------ ------
Total............. $601.6 $680.6 $726.8
====== ====== ======
EBIT:
Men's Apparel Group... $ 12.1 $ 36.9 $ 37.9
Women's Apparel Group. 3.4 5.7 5.7
Other and adjustments. (12.4) (12.7) (12.2)
------ ------ ------
Total............. $ 3.1 $ 29.9 $ 31.4
====== ====== ======
EBIT amounts for 2001 noted above exclude the $11.6 million restructuring
charge, but include the other non-recurring items previously noted.
EBIT for 1999 excludes the $11.2 million non-cash charge re termination of a
systems project.
MAG sales were $547 million in 2001, including $31 million incremental
revenues resulting from the acquisition of CAG, $620 million in 2000 and $673
million in 1999. The decline in 2001 was principally in tailored clothing,
reflecting both lackluster consumer demand for tailored apparel and previously
stated actions to reduce revenues in lower profit potential, moderate priced
tailored clothing product categories. Revenues in 2000 compared to 1999
reflected lower orders for suit units and planned reductions associated with
brands or programs being deemphasized which do not have the likelihood of
achieving acceptable long term profitability rates; partially offsetting these
conditions were unit increases in selected tailored sport coat and slack brands
and sportswear growth in Nicklaus golfwear and Tommy Hilfiger casual pants. MAG
EBIT before restructuring was $12 million in 2001 compared to $37 million in
2000 and $38 million in 1999, with tailored clothing products representing the
most significant contributor to earnings and cash flow in each year. The $25
million decline in 2001 EBIT compared to 2000 primarily reflected the lower
sales, the non-recurring items, and $4 million of incremental costs associated
with developing the sportswear product lines, partially offset by the inclusion
of CAG since July. The $1 million decline in 2000 EBIT compared to 1999
reflected the improved operating margins, which about offset the unfavorable
impact of the lower sales and incremental costs associated with developing the
Company's sportswear product lines.
Women's Apparel Group sales, comprising approximately 9% of the consolidated
total in 2001 and 2000 and 7% in 1999, aggregated $54 million in 2001, $60
million in 2000 and $54 million in 1999. Revenues in 2001 were adversely
affected by lower in-stock and catalog business because of the generally soft
retail business. Revenues in 2000 primarily reflected higher catalog sales, as
the number and size of catalogs distributed in 2000 were more than in 1999.
Women's Apparel Group EBIT was $3 million in 2001 and $6 million in 2000 and
1999. EBIT in 2001 reflected the impact of the lower sales and higher product
development and catalog costs. EBIT in 2000 reflected the favorable impact from
the higher catalog sales, which was about offset by higher advertising and
promotional costs associated with the distribution of additional catalogs, as
well as a small decline in the Women's Apparel Group's substantial gross margin
rate on its wholesale sales.
Gross Margins. The reported consolidated gross margin percentage of sales
was 26.0% in 2001, 27.9% in 2000 and 25.5% in 1999. The decline in the 2001
gross margin rate compared to 2000 primarily related to the non-recurring
items. Excluding the effect of the non-recurring items, the gross margin rate
was approximately 27.5%. The 2001 gross margin rate was favorably impacted by
..1% because of the inclusion of CAG but was adversely affected by lower
manufacturing volume in owned manufacturing facilities, as well as inventory
12
dispositions in the moderate tailored clothing product categories. The
improvement in the 2000 gross margin rate compared to 1999 reflected a change
in the revenue product mix encompassing the elimination/reduction of certain
low margin moderate priced tailored clothing products and programs, improved
sourcing from various ongoing tailored product lines and a higher percentage of
women's and men's sportswear product categories. Gross margins in the moderate
priced tailored clothing product lines improved in the latter part of 1999 from
lower product costs and favorable product mix changes related to the
repositioning efforts previously discussed; however, this gross margin
enhancement during 1999 was largely offset by lower sales of higher margin
tailored clothing products sold at the higher price points and markdowns
resulting from the disposition of excess sportswear units.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $157 million in 2001, $163 million in 2000 and
$157 million in 1999. As a percentage of sales, the expense rate was 26.0% in
2001 compared to 24.0% in 2000 and 21.5% in 1999. The dollar decrease in 2001
reflected the actions taken to reduce the number of employees and other
non-employee costs, which were starting to be realized towards the end of the
fiscal year. The current period also included $4.0 million of incremental
sportswear product development costs, $3.8 million of expenses related to CAG,
higher expenses associated with women's catalog sales and costs associated with
the October opening of the Hickey-Freeman retail store in New York City. The
dollar increase in 2000 included the higher costs associated with the
distribution of additional catalogs in the Barrie Pace operation, costs related
to development of the sportswear product lines, as well as higher employee
benefit costs and the inclusion of the Royal shirt operations for a full year.
The increase relative to sales for both periods reflected changes in revenue
mix towards products with higher gross margin rates which have higher operating
expense ratios to sales; also, the decline in in-stock tailored clothing units
could not be immediately matched with commensurate operating expense reductions.
Advertising expenditures, including costs related to the Barrie Pace
catalog, were $25 million in 2001 compared to $31 million in 2000 and $28
million in 1999, representing 4.1%, 4.5% and 3.9% of consolidated sales,
respectively. The decrease in 2001 primarily reflected reduced MAG and catalog
expenditures in light of the lower sales. The increase in 2000 principally
reflected higher amounts associated with the distribution of Barrie Pace
catalogs.
Licensing and Other Income. This caption is principally comprised of income
generated from licensing and aggregated $3.1 million in 2001 and 2000 and $2.9
million in 1999.
Earnings before Restructuring Charge, Non-Cash Charge, Interest and Taxes
("EBIT"). EBIT, excluding the restructuring charge, was $3.1 million in 2001 or
..5% of sales. After consideration of the restructuring charge in 2001 and the
non-cash charge in 1999, reported EBIT was a loss of $8.5 million compared to
earnings of $29.9 million in 2000 and $20.2 million in 1999, representing
(1.4%), 4.4% and 2.8% of sales, respectively. The percentage decline in 2001
compared to 2000 was principally attributable to the higher operating expense
ratio to sales. The slight percentage improvement in 2000 compared to 1999
reflected the impact of the product mix changes on the overall lower sales
level.
Restructuring Charge (2001). The restructuring charge in 2001 reflected
actions to reduce both manufacturing costs and overhead as well as to lower
general and administrative costs. The $11.6 million charge included costs
related to closing six facilities engaged in fabric cutting and sewing
operations, one distribution center and several administrative offices,
severance and fringe benefits related to manufacturing employees, voluntary
early retirement programs and other administrative workforce reductions and
writedown of fixed assets to estimated fair values.
Non-Cash Charge (1999). The non-cash charge of $11.2 million in 1999
reflected the second quarter writedown of capitalized systems development costs
related to the termination of an enterprise resource planning system project,
which had been anticipated to be implemented Company-wide. After extensive
evaluation, the Company, in consultation with its advisors, concluded that
Company-wide implementation of the application software purchased would not be
appropriate.
13
Interest Expense. Interest expense was $14.4 million in 2001, $15.7 million
in 2000 and $17.7 million in 1999. Interest expense represented 2.4% of sales
in 2001 compared to 2.3% in 2000 and 2.4% in 1999. The dollar decrease in 2001
from 2000 primarily reflected lower average borrowing rates which were
partially offset by higher average borrowings. The dollar decrease in 2000 from
1999 reflected significantly lower average borrowings which were in part offset
by higher average borrowing rates. The effective interest rate for all
borrowings, including non-cash amortization costs, was 8.7% in 2001, 9.6% in
2000 and 8.5% in 1999. The Company's weighted average short term borrowing rate
was 7.5% in 2001, 8.3% in 2000 and 6.6% in 1999. Interest expense included
non-cash amortization of financing fees and expenses of $.7 million in 2001 and
$.5 million in 2000 and 1999.
Pre-Tax Earnings (Loss). The reported pre-tax loss was $22.9 million in 2001
compared to pre-tax earnings of $14.2 million in 2000 and pre-tax earnings of
$2.5 million in 1999. Pre-tax earnings excluding the restructuring charge and
other non-recurring items in 2001 was $1.5 million and $13.7 million in 1999
(excluding the non-cash charge).
Income Taxes. The Company's effective tax rate was 39.5% in 2001 and 2000
compared to 38% in 1999, resulting in a tax benefit of $9.0 million in 2001 and
a tax provision of $5.6 million in 2000 and $1.0 million in 1999. The increase
in the effective rate for 2000 was principally attributable to proportionately
higher non-US income compared to the previous year.
Net Earnings (Loss). Reported earnings (loss) after consideration of the
restructuring and other non-recurring items in 2001 and non-cash charge in 1999
were a loss of $13.9 million or $.46 per diluted share in 2001 compared to
earnings of $8.6 million or $.29 per diluted share in 2000 and earnings of $1.6
million or $.05 per diluted share in 1999. There was also a small extraordinary
item in 2001 and 2000 each related to purchases of the Company's Notes. Net
earnings excluding the restructuring and other non-recurring items were $.9
million or $.03 per diluted share in 2001 compared to $8.6 million or $.29 per
diluted share in 2000 and $8.5 million or $.26 per diluted share in 1999.
Liquidity and Capital Resources
Total debt at November 30, 2001 of $171.6 million increased $46.0 million
compared to the year earlier level. The increase in debt primarily reflected
the financing requirements associated with the acquisition of CAG, the cash
used in operating activities and capital expenditures. Although not impacting
overall debt levels, the Company retired $27.2 million face value of its Notes
during the first half of fiscal 2001, utilizing proceeds from $17.4 million of
new mortgage financing and availability under its Credit Facility. The $25.0
million of borrowings classified as current at November 30, 2001 reflects the
anticipated debt reduction during fiscal 2002. Total debt, including short term
borrowings and current maturities, represented 48% of the Company's total $359
million capitalization at November 30, 2001, compared to 39% at November 30,
2000; the higher debt capitalization ratio primarily reflected the increase in
total debt.
The Securities and Exchange Commission ("SEC") recently issued Financial
Reporting Release No. 61, which sets forth the views of the SEC regarding
certain disclosures relating to liquidity and capital resources. The
information provided below describing the Company's debt, credit facilities,
guarantees and future commitments is included here to facilitate a review of
the Company's liquidity.
The slowdown of the U.S. economy generally, and the retail apparel sector in
particular, adversely affected the Company's 2001 operating performance and
financial condition. The impact of the September 11 terrorist attacks in the
U.S. further eroded consumer confidence exacerbating the weakness in demand and
retail spending for apparel products later in fiscal 2001. The Company's
liquidity was further constrained by other factors, including the cash
requirements to fund the acquisition of CAG and additional limitations imposed
on the Company under the Credit Facility preceding the January 15, 2002
maturity of the Company's Notes. The third quarter acquisition of CAG was
consistent with the Company's strategy of expanding apparel offerings in non-
14
tailored product categories. However, the $18 million cash purchase price plus
debt and other liabilities assumed associated with this acquisition reduced
credit availability and liquidity.
Several amendments to the Company's Credit Facility were completed during
2001 to address (i) the need to revise various financial covenants and minimum
excess availability levels resulting from the Company's unfavorable operating
performance, (ii) additional financing resources required related to the CAG
acquisition, and (iii) financing alternatives regarding the January 15, 2002
maturity of the $34.7 million of outstanding Notes.
In March 1994, the Company issued $100 million principal amount of Notes in
a public offering at which time it also entered into the Credit Facility with a
group of lenders for an initial $175 million commitment and three-year term.
The Credit Facility currently provides for maximum revolving borrowings of $200
million (subject to borrowing base calculations and minimum excess availability
requirements), including a $50 million letter of credit sub-facility. The
Credit Facility is in effect through June 2003.
During fiscal 1999 and 2000, the Company purchased a total of $23.1 million
face value of its Notes. During the second quarter of fiscal 2001, the Company
entered into mortgage financings with durations of ten and fifteen years on two
if its owned manufacturing facilities (average interest rate of 7.5%). The
$17.4 million proceeds from these mortgages, along with availability under the
Credit Facility, were used to repurchase an additional $27.2 million face value
of Notes resulting in $34.7 million of Notes outstanding as of November 30,
2001. In January 2002, the remaining outstanding Notes were either paid at
maturity or exchanged pursuant to the exchange offer discussed below.
On August 31, 2001, the Credit Facility was amended to add a new term loan
facility in the aggregate principal amount of $15 million with interest at
prime plus 5.5%. Proceeds from the term loan were used to repay revolving
borrowings under the Credit Facility. Other amendments to the Credit Facility
dated July 10, 2001 and October 15, 2001 established certain minimum excess
borrowing availability levels and substantially all of the Company's assets,
including real property, equipment and capital stock of its subsidiaries, were
provided as security to the Credit Facility lenders. These amendments also
required that the Company obtain (i) by November 26, 2001 a commitment for at
least $25 million of junior capital, consisting of either equity or debt junior
to the Credit Facility with funding to be completed by December 14, 2001, and
(ii) by December 14, 2001 at least $10 million of net cash proceeds from
mortgage loans with respect to certain properties, from asset sales or from the
issuance of equity. A covenant governing cumulative adjusted earnings before
interest, taxes, depreciation and amortization ("EBITDA") was implemented for
the period September 1, 2001 through May 31, 2002 to replace covenants related
to debt service coverage and debt leverage that will be reinstated at revised
levels effective as of August 31, 2002 and November 30, 2002, respectively.
Additionally, the effective borrowing rate benchmark was increased by 1%.
The Company did not obtain the commitment for junior capital by November 26,
2001. Alternatively, on December 13, 2001, the Company entered into a Credit
Facility amendment whereby the requirement to obtain $25 million of junior
capital by December 14, 2001 would be satisfied by the completion of an
exchange offer for the Notes (under terms satisfactory to the Credit Facility
lenders), and the requirement to obtain $10 million of additional liquidity
proceeds was extended to June 30, 2002 ($5.8 million of such proceeds realized
as of January 31, 2002). This amendment also adjusted various covenants under
the Credit Facility to reflect more current and anticipated business levels and
provided borrowing availability which the Company believes under current
circumstances will be sufficient to fund its operations after making the cash
payments to the holders of the Notes who exchanged their Notes in the exchange
offer and pay the unexchanged Notes at maturity. The exchange offer was
accepted by 91.2% of the holders and was successfully completed on January 16,
2002. For each $1,000 principal amount of Notes outstanding, the Company paid
$200 in cash and issued $800 principal amount of new 12 1/2% senior unsecured
notes and 93 shares of common stock. Upon completion of the exchange offer,
$25.3 million of new senior unsecured notes due, September 15, 2003, and 2.9
million additional common shares were issued and as of that date all of the
$34.7 million of Notes have been retired.
15
The Credit Facility includes various other events of default and contains
certain restrictions on the operation of its business, including covenants
pertaining to capital expenditures, asset sales, operating leases and
incurrence or existence of additional indebtedness and liens, as well as other
customary covenants, representations and warranties, and events of default. The
Company is currently in compliance with all covenants under the Credit Facility
and its other borrowing agreements.
There are a number of factors which can affect the Company's ability to (i)
remain in compliance with the financial covenants currently contained in its
Credit Facility, and to a lesser extent, in its other borrowing arrangements
or, alternatively, (ii) to obtain replacement financing for its Credit
Facility. The following summarizes the most significant items:
. The apparel environment is cyclical, and the level of consumer spending on
apparel often declines during recessionary periods when disposable income
declines. The tailored clothing market relating to suits has experienced
unit declines for the past several years which has been only partially
offset by increasing demand for sport coats and dress slacks. The Company
has, among other things, reduced overall product costs by increasing the
use of offshore sourcing and introducing new brands with higher gross
margin potential, and placing less emphasis on brands which do not have
the potential of achieving acceptable profit margins. If these efforts do
not meet with consumer acceptance, or if the tailored clothing market
continues to decline, sales and profitability would be adversely affected.
. Continuation of the trend toward casual dressing in the workplace could
further reduce the demand for tailored clothing products, especially for
tailored suits. While the Company markets several sportswear and casual
product lines, consumer receptiveness to these casual and sportswear
product offerings may not offset the declines in the tailored clothing
unit sales.
. The Company's customers include major U.S. department and specialty stores
(certain of which are under common ownership and control), mass
merchandisers, value-oriented retailers and direct mail companies. The ten
largest customers accounted for approximately 51% of consolidated sales in
fiscal 2001 with the largest customer representing approximately 21% of
sales. Several of the Company's major customers have reported declines in
sales during various monthly periods of 2001. 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.
. Sales derived from products which utilize licensed brand names represent
an important current component of the Company's overall revenues. While
the Company believes that the relationships with its principal licensors
are favorable and that the termination of any single licensing agreement
would not have a material adverse effect on its business taken as a whole,
its long term prospects rely on the continuation of a significant
percentage of existing licensing arrangements and ongoing consumer
acceptance of the products sold under these licensed brands.
. The completion on January 16, 2002 of the previously described exchange
offer satisfied the principal debt service requirement for fiscal 2002.
The Company's Credit Facility requires, among other things, that the
Company maintain cumulative consolidated adjusted earnings before
interest, taxes, depreciation and amortization and other specified
non-cash items at or above a prescribed minimum for designated periods. If
the Company is not able to maintain its minimum cumulative adjusted
earnings amount or satisfy the $4.2 million remaining additional liquidity
proceeds requirement, particularly if current recessionary economic trends
persist, or if there is insufficient cash flow and capital resources to
meet debt service obligations, the Company would need its lenders to
approve a modification of such earnings covenants, to refinance or further
restructure its debt obligations or to obtain additional equity capital.
. The Company relies on the continuing willingness of suppliers and trade
factors to extend credit to finance inventory purchases. If suppliers and
trade factors become concerned about the Company's ability to generate
adequate liquidity and service debt, they may delay shipments to the
Company or require
16
payment in advance. There can be no assurance that such suppliers and
factors will continue to extend credit to the Company on the same basis as
in the past. Such possible actions by suppliers and factors could have an
adverse effect on the Company's ability to continue operating its business
in the normal course.
. The Company's total indebtedness, including short term borrowings and
current maturities, represented 48% of total capitalization at November
30, 2001. Among other things, a substantial portion of the Company's
indebtedness is at variable interest rates, and it would be adversely
impacted should short term interest rates increase rapidly. The Company's
relatively high debt leverage would make it more difficult to obtain
additional financing for working capital, capital expenditures, or
acquisitions if additional needs were to arise. Accordingly, the Company's
results of operations could be adversely affected, particularly in the
event of a protracted downturn in general economic conditions.
Other risk factors are described in Item 1--Business of this Form 10-K.
Should any of the risk factors, including those described above, result in a
violation of existing financial covenants under the Credit Facility or other
indebtedness, a default could result if not waived by the Company's lenders. A
default could result in the inability to borrow additional amounts under the
Credit Facility and/or the acceleration of outstanding indebtedness causing it
to become immediately due and payable. The Company has from time to time
engaged in discussions with other potential lenders concerning alternative or
additional sources of financing. While the Company believes alternative sources
of financing are available, there can be no assurance that alternative
financing would be available and if so, on acceptable terms.
The Company's various borrowing arrangements are described in the
accompanying Notes to the Consolidated Financial Statements and are either
fixed rate or variable rate borrowing arrangements. None of the arrangements
have rating agency "triggers" which would impact either the borrowing rate or
borrowing commitment. The Company has not entered into off balance sheet
financing arrangements, other than operating leases, and has made no financial
commitments or guarantees with any unconsolidated subsidiaries or special
purpose entities. All of the Company's subsidiaries are wholly owned and
included in the accompanying consolidated financial statements. There have been
no related party transactions nor any other transactions which have not been
conducted on an arm's-length basis.
The accompanying Notes to Consolidated Financial Statements contain
information regarding payments required under existing borrowing arrangements,
lease obligation commitments and other contractual obligations. The following
presents a summary of the Company's significant contractual obligations:
Payments Due by Period
---------------------------
Less
than 1-3 4-5 After
Contractual Obligations 1 year years years 5 years Total
----------------------- ------ ------ ----- ------- ------
Long-Term Debt.................... $ 9.9 $126.5 $ 1.4 $33.8 $171.6
Capital Lease Obligations......... -- -- -- -- --
Operating Leases.................. 10.4 19.2 16.0 56.1 101.7
Unconditional Purchase Obligations -- -- -- -- --
Other Long-Term Obligations....... -- -- -- -- --
----- ------ ----- ----- ------
Total Contractual Cash Obligations $20.3 $145.7 $17.4 $89.9 $273.3
===== ====== ===== ===== ======
At November 30, 2001, the Company had outstanding $21.7 million of letters
of credit 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 $200 million Credit Facility and are
considered as usage for purposes of determining the maximum available credit
line and excess availability. The Company has also entered into surety bond
arrangements aggregating $8.3 million with unrelated parties for the purposes
of satisfying workers' compensation deposit requirements of various states
where the Company has operations. At November 30, 2001, there were an
17
aggregate of approximately $3 million of outstanding foreign exchange contracts
directly related to inventory purchase commitments during 2002. The Company has
not committed to and has not provided any guarantees of other lines of credit,
stand-by letters of credit, repurchase obligations, etc., to any other third
party.
At November 30, 2001, net accounts receivable of $143.3 million, including
$16.0 million attributable to CAG, increased $7.8 million from November 30,
2000. Excluding CAG, receivables declined $8.2 million, attributable to the
lower sales. The allowance for doubtful accounts was $10.3 million compared to
$7.8 million last year, representing 6.7% of gross receivables in 2001 and 5.4%
in 2000; the increase reflected the inclusion of CAG and higher anticipated
requirements. Inventories at November 30, 2001 of $149.6 million included $2.3
million attributable to CAG. Excluding CAG, inventories were $147.3 million
compared to $167.1 million at November 30, 2000 and $176.2 million at November
30, 1999. These reductions of 13% in 2001 vs. 2000 and 5% in 2000 vs. 1999
reflected, among other things, the lower sales and related actions to reduce
inventory commitments in light of the generally lackluster environment at
retail for apparel products, as well as the de-emphasis or elimination of
certain brands or programs that did not offer the prospects of adequate
profitability over the longer term.
Deferred income taxes at November 30, 2001 aggregated $63.2 million compared
to $52.9 million at November 30, 2000. Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", requires, among other things,
the recognition of deferred tax assets, including the future benefit associated
with operating loss carryforwards, a periodic evaluation of the likelihood that
the deferred tax assets are realizable and the establishment of a valuation
allowance, in certain circumstances, to offset deferred tax assets to the
extent realization is not considered more likely than not. The Company has
concluded that it is more likely than not that its deferred tax assets will be
fully realized and that a tax valuation reserve is not required. Approximately
$43 million of the total deferred income taxes has been classified as
non-current, principally associated with the benefit recognized attributable to
expected future utilization of operating loss carryforwards. At November 30,
2001, the Company had approximately $129 million of federal tax operating loss
carryforwards available to offset future taxable income. Approximately $124
million of the $129 million of available operating loss carryforwards expire
over the 2007-2010 periods, with the remainder available through 2021.
Investments and other assets of $53.7 million increased $17.7 million
compared to November 30, 2000, principally attributable to the goodwill
recorded from the acquisition of CAG. At November 30, 2001, net properties of
$35.7 million decreased by $.7 million, as the $.9 million applicable to CAG
and capital additions were more than offset by depreciation expense and
adjustments to reflect the closing or disposition of certain facilities
associated with the restructuring. Capital additions were $9.8 million in 2001
compared to $4.5 million in 2000 and $6.4 million in 1999 (excluding
expenditures associated with the terminated systems project). Capital
expenditures in 2001 included $5.9 million related to the new
Hickey-Freeman/Bobby Jones flagship store and leasehold improvements for
sportswear offices in New York City; capital additions in fiscal 2002 are not
anticipated to exceed $6.5 million. Depreciation expense was $6.8 million in
2001 and $7.1 million in 2000 and 1999. The capital expenditure limitations
contained in the Company's current borrowing agreements have not, and are not
expected to, delay capital expenditures otherwise planned by the Company.
Shareholders' equity of $187.0 million at November 30, 2001 represented
$6.19 book value per share compared to $6.69 book value per share at November
30, 2000. The $12.1 million equity decrease during 2001 reflected the net loss
for the year, partially offset by ongoing equity sales to employee benefit
plans and recognition of previously unearned employee benefits principally
associated with the Company's employee stock ownership plan. Dividends have not
been paid since 1991. The Credit Facility, as amended, prohibits the payment of
dividends.
Critical Accounting Policies
Financial Reporting Release No. 60 recently released by the SEC recommends
that all registrants include a discussion of "critical" accounting policies or
methods used in the preparation of financial statements.
18
The Company's significant accounting policies are contained in the
accompanying Notes to Consolidated Financial Statements. The financial
statements have been prepared in conformity with generally accepted accounting
principles and, accordingly, include amounts based on informed estimates and
judgments of management with due consideration given to materiality.
Accordingly, actual results could differ from those estimates. The following
represents those critical accounting policies where materially different
amounts would be reported under different conditions or using different
assumptions.
. Receivables, net of valuation allowances--At November 30, 2001, accounts
receivable, net of $10.3 million allowance for doubtful accounts, were
$143.3 million. The valuation allowance was determined based upon the
Company's evaluation of known requirements, aging of receivables,
historical experience and the current economic environment. While the
Company believes it has appropriately considered known or expected
outcomes, its customers' ability to pay their obligations, including those
to the Company, could be adversely affected by declining sales of apparel
at retail resulting from such factors as contraction in the economy or a
general decline in consumer spending.
. Inventory valuation--At November 30, 2001, inventories were $149.6
million, and reflected the LIFO valuation method as well as reductions
from cost in order to state inventories at the lower of cost or market.
The lower of cost or market valuation considers the estimated realizable
value in the current economic environment associated with disposing of
surplus inventories. Should the current economic climate significantly
contract further resulting in retailers being unwilling to accept
deliveries of advance orders placed (or the Company electing not to ship
inventories to those retailers where additional credit risk is not deemed
appropriate), or a significant contraction in the Company's "in-stock"
replenishment business for selected product categories, additional
downward valuation adjustments could be required. The potential additional
downward valuation adjustments could result from unanticipated additional
excess quantities of finished goods and raw materials, and/or from lower
disposition values offered by the parties who normally purchase surplus
inventories.
. Deferred tax assets--At November 30, 2001, the accompanying Consolidated
Balance Sheet reflects $63.2 million of deferred tax assets, principally
related to tax operating loss carryforwards. As described in the Notes to
Consolidated Financial Statements, the Company had approximately $129
million of tax operating loss carryforwards available to offset future
taxable income. In general, such carryforwards must be utilized within 15
years of incurring the net operating loss (within 20 years with respect to
the tax loss incurred in 2001). At November 30, 2001, the Company
concluded that it is more likely than not that there would be sufficient
taxable earnings to fully utilize the operating loss carryforwards and no
tax valuation allowance was required. Should the Company experience a
pre-tax loss in fiscal 2002 resulting from further revenue declines and/or
the inability to improve operating margins, a tax valuation reserve may be
required in whole or in part.
Recent Accounting Pronouncements
Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
Handling Costs", and Emerging Issues Task Force Issue No. 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase
or Promotion of the Vendor's Products", relate to various items to be
considered as net revenues. The Company's billings to customers for shipping
and handling costs and the consideration given to customers to promote the sale
of the Company's products are not significant.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting (SAB) No. 101--"Revenue Recognition in Financial
Statements", which was amended by SAB No. 101A in March 2000 and SAB No. 101B
in June 2000. The Company believes that its revenue recognition, presentation
and disclosures are in compliance with these SABs and the adoption of these
SABs did not effect the Company's results of operations or its financial
position for fiscal 2001 or 2000.
Effective December 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 138. As
19
disclosed in the accompanying Consolidated Statement of Shareholders' Equity
and related Notes to Consolidated Financial Statements, the effects of the
adoption of the new standards did not significantly affect the Company's
results of operations, its financial position, or its cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the pooling of interest method of accounting for business
combinations initiated after June 30, 2001 and for purchase businesses
combinations completed on or after July 1, 2001. SFAS No. 141 also requires
that the Company recognize acquired intangible assets apart from goodwill if
the acquired intangible assets meet certain criteria. SFAS No. 142 requires
companies to cease amortizing goodwill that existed at June 30, 2001 on the
date of adoption of this standard, requires that goodwill resulting from
acquisitions completed after June 30, 2001 not be amortized and establishes a
new method of testing goodwill for impairment, if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The Company applied the provisions of SFAS No. 141 in
accounting for its acquisition of Consolidated Apparel Group ("CAG"), which was
effective July 1, 2001. The Company expects to early adopt the provisions of
SFAS No. 142, effective December 1, 2001. During fiscal 2002, the Company will
perform the required impairment tests of goodwill and indefinite-lived
intangible assets. Although the Company has not yet determined the effect of
these tests on its results of operations and financial position, the impact, if
any, is not expected to be significant.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143--"Accounting for Asset Retirement Obligations" and in August 2001, SFAS No.
144--"Accounting for the Impairment or Disposal of Long-Lived Assets" was
issued. SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for the Company's fiscal year beginning
December 1, 2002. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and is effective for the Company's
fiscal year beginning December 1, 2002. The Company has not completed its
analysis of the effect of these statements, but believes that adoption of these
statements will not have a significant effect on its reported financial
position, results of operations, cash flows or financial statement disclosures.
Outlook
The Company entered fiscal 2001 with a cautious first half outlook. While
the extent of the full year revenue decline was more than anticipated, the
Company's aggressive restructuring actions initiated and completed during
fiscal 2001 in response to the business downturn, including the elimination of
six owned production facilities permanently reducing fixed manufacturing
overheads and lowering overall unit product costs, enhance the prospect of
gross margin improvements going forward. Additionally, the 20% reduction in the
non-manufacturing workforce during 2001 lowered the Company's non-manufacturing
overhead structure with an expected annualized expense savings of about $12
million. The substantial portion of the restructuring actions were completed by
fiscal 2001 year end, positioning the Company to be profitable for the 2002
fiscal year without relying on increased revenues.
The above noted restructuring actions were necessary to address current
business conditions. In addition, the Company continued to implement its longer
term strategy of increasing its presence in sportswear product categories with
the acquisition of CAG, which provided the Company with an established
moderately priced sportswear business serving a retail distribution channel
where the previous penetration was minimal, and through the introduction of the
Ted Baker line of sportswear, tailored clothing and womenswear.
The disappointing 2001 operating results, along with the requirements
associated with the CAG acquisition, increased financing needs which adversely
impacted liquidity. This in turn required adjustments to financial covenants in
the Credit Facility. With the completion in January 2002 of the previously
described exchange offer, the Company effectively extended maturities of $25.3
million of unsecured debt to September 2003, and believes it has adequate
financial resources in place for its current business plan; nonetheless, the
Company is considering extending or refinancing its senior credit facility in
advance of its June 2003 maturity.
20
Increasing shareholder value through long-term sales and earnings growth
remains a key objective. While 2001 was a setback towards realization of this
objective, the Company believes that actions implemented in fiscal 2001 to
diversify the Company's product offerings and lower its manufacturing and
administrative cost structure better position the Company for an improvement in
operating results for 2002.
Item 7A--Quantitative and Qualitative Disclosures About Market Risk
The Company enters into foreign exchange forward contracts from time to time
to limit the currency risks associated with purchase obligations denominated in
foreign currencies. The Company does not hold financial instruments for trading
purposes or engage in currency speculation. Foreign exchange contracts are
generally for amounts not to exceed forecasted purchase obligations 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. 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. As of
November 30, 2001, the Company had entered into foreign exchange contracts,
aggregating approximately $3 million corresponding to approximately 5 billion
Italian lire and 50 million Japanese yen, primarily related to inventory
purchases applicable to fiscal 2002.
The Company is subject to the risk of fluctuating interest rates in the
normal course of business, primarily as a result of borrowings under its Credit
Facility, which bear interest at variable rates. The variable rates may
fluctuate over time based on economic conditions, and the Company could be
subject to increased interest payments if market interest rates rise rapidly.
In the last three years, the Company has not used derivative financial
instruments to manage interest rate risk.
Item 8--Financial Statements and Supplementary Data
Page
----
Financial Statements:
Report of Independent Accountants.................................................................... 22
Consolidated Statement of Earnings for the three years ended November 30, 2001....................... 23
Consolidated Balance Sheet at November 30, 2001 and 2000............................................. 24
Consolidated Statement of Cash Flows for the three years ended November 30, 2001..................... 25
Consolidated Statement of Shareholders' Equity for the three years ended November 30, 2001........... 26
Notes to Consolidated Financial Statements........................................................... 27
Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts................................................... F-1
Schedules not included have been omitted because they are not applicable or the required information
is included in the consolidated financial statements and notes thereto.............................
Supplementary Data:
Quarterly Financial Summary (unaudited).............................................................. 44
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Directors of Hartmarx Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Hartmarx Corporation and its subsidiaries at November 30, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended November 30, 2001, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of Hartmarx Corporation's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 24, 2002
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management of Hartmarx Corporation is responsible for the preparation of the
Company's financial statements. These financial statements have been prepared
in accordance with generally accepted accounting principles and necessarily
include certain amounts based on management's reasonable best estimates and
judgments, giving due consideration to materiality.
In fulfilling its responsibility, management has established cost-effective
systems of internal controls, policies and procedures with respect to the
Company's accounting, administrative procedures and reporting practices which
are believed to be of high quality and integrity. Such controls include
approved accounting, control and business practices and a program of internal
audit. The Company's business ethics policy, which is regularly communicated to
all key employees of the organization, is designed to maintain high ethical
standards in the conduct of Company affairs. Although no system can ensure that
all errors or irregularities have been eliminated, management believes that the
internal accounting controls in place provide reasonable assurance that assets
are safeguarded against loss from unauthorized use or disposition, that
transactions are executed in accordance with management's authorization, and
that financial records are reliable for preparing financial statements and
maintaining accountability for assets.
The Audit and Finance Committee of the Board of Directors meets periodically
with the Company's independent public accountants, management and internal
auditors to review auditing and financial reporting matters. This Committee is
responsible for recommending the selection of independent accountants, subject
to ratification by shareholders. Both the internal and independent auditors
have unrestricted access to the Audit and Finance Committee, without Company
management present, to discuss audit plans and results, their opinions
regarding the adequacy of internal accounting controls, the quality of
financial reporting and other relevant matters.
22
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(000's Omitted)
Fiscal Year Ended November 30,
-----------------------------
2001 2000 1999
-------- -------- --------
Net sales................................................................. $601,585 $680,647 $726,805
Licensing and other income................................................ 3,098 3,114 2,894
-------- -------- --------
604,683 683,761 729,699
-------- -------- --------
Cost of goods sold........................................................ 444,930 490,751 541,730
Selling, general and administrative expenses.............................. 156,624 163,134 156,560
-------- -------- --------
601,554 653,885 698,290
-------- -------- --------
Earnings before restructuring charge, non-cash charge, interest, taxes and
extraordinary item...................................................... 3,129 29,876 31,409
Restructuring charge...................................................... 11,625 -- --
Non-cash charge for termination of systems project........................ -- -- 11,195
-------- -------- --------
Earnings (loss) before interest, taxes and extraordinary item............. (8,496) 29,876 20,214
Interest expense.......................................................... 14,409 15,686 17,669
-------- -------- --------
Earnings (loss) before taxes and extraordinary item....................... (22,905) 14,190 2,545
Tax (provision) benefit................................................... 9,045 (5,605) (965)
-------- -------- --------
Earnings (loss) before extraordinary item................................. (13,860) 8,585 1,580
Extraordinary item, net................................................... (69) 227 --
-------- -------- --------
Net earnings (loss)....................................................... $(13,929) $ 8,812 $ 1,580
======== ======== ========
Earnings (loss) per share (basic and diluted):
Before extraordinary item.............................................. $ (.46) $ .29 $ .05
======== ======== ========
After extraordinary item............................................... $ (.46) $ .30 $ .05
======== ======== ========
(See accompanying notes to consolidated financial statements)
23
HARTMARX CORPORATION
CONSOLIDATED BALANCE SHEET
(000's Omitted)
November 30,
--------------------
2001 2000
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................ $ 1,555 $ 1,755
Accounts receivable, less allowance for doubtful accounts of $10,335 in 2001 and
$7,770 in 2000................................................................. 143,261 135,421
Inventories...................................................................... 149,613 167,111
Prepaid expenses................................................................. 8,293 8,867
Deferred income taxes............................................................ 19,900 17,899
--------- ---------
Total current assets......................................................... 322,622 331,053
--------- ---------
INVESTMENTS AND OTHER ASSETS........................................................ 53,740 36,014
--------- ---------
DEFERRED INCOME TAXES............................................................... 43,304 35,001
--------- ---------
PROPERTIES
Land............................................................................. 2,008 2,289
Buildings and building improvements.............................................. 36,565 42,971
Furniture, fixtures and equipment................................................ 102,314 107,244
Leasehold improvements........................................................... 23,786 18,548
--------- ---------
164,673 171,052
Accumulated depreciation and amortization........................................ (128,982) (134,645)
--------- ---------
Net properties................................................................... 35,691 36,407
--------- ---------
TOTAL ASSETS........................................................................ $ 455,357 $ 438,475
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt............................................. $ 25,000 $ 15,077
Accounts payable................................................................. 33,516 43,666
Accrued payrolls................................................................. 17,064 24,904
Other accrued expenses........................................................... 46,256 45,245
--------- ---------
Total current liabilities.................................................... 121,836 128,892
--------- ---------
LONG-TERM DEBT...................................................................... 146,553 110,470
--------- ---------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value; 2,500,000 authorized and unissued................ -- --
Common shares, $2.50 par value; 75,000,000 shares authorized; 36,280,064 shares
issued at November 30, 2001, and 36,328,564 shares issued at November 30,
2000........................................................................... 90,700 90,821
Capital surplus.................................................................. 80,236 82,237
Retained earnings................................................................ 46,794 60,723
Unearned employee benefits....................................................... (3,931) (5,716)
Common shares in treasury, at cost, 6,076,646 at November 30, 2001 and
6,564,404 at November 30, 2000................................................. (26,801) (28,952)
Accumulated other comprehensive income (loss).................................... (30) --
--------- ---------
Total shareholders' equity................................................... 186,968 199,113
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $ 455,357 $ 438,475
========= =========
(See accompanying notes to consolidated financial statements)
24
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(000's Omitted)
Fiscal Year Ended November 30,
-----------------------------
2001 2000 1999
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from operating activities:
Net earnings (loss)........................................................ $(13,929) $ 8,812 $ 1,580
Reconciling items to adjust net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of fixed assets.......................... 6,840 7,100 7,083
Amortization of long-lived assets...................................... 1,363 505 452
Amortization of unearned employee benefits............................. 794 1,249 1,407
Non-cash charge included in restructuring.............................. 3,687 -- --
Extraordinary item, net................................................ 69 (227) --
Non-cash charge re: termination of systems project..................... -- -- 11,195
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................. (2,081) 9,500 (3,899)
Inventories......................................................... 29,049 9,103 38,244
Prepaid expenses.................................................... 1,103 (2,204) (3,387)
Other assets........................................................ (2,667) (682) 687
Accounts payable and accrued expenses............................... (34,381) 13,663 (11,624)
Taxes and deferred taxes............................................ (10,296) 2,315 (973)
-------- -------- --------
Net cash provided by (used in) operating activities........................... (20,449) 49,134 40,765
-------- -------- --------
Cash Flows from investing activities:
Capital expenditures....................................................... (9,801) (4,494) (7,820)
Cash paid for acquisitions, net of cash acquired........................... (17,461) -- (1,610)
Cash proceeds from sale of assets held for sale............................ 542 -- --
-------- -------- --------
Net cash used in investing activities......................................... (26,720) (4,494) (9,430)
-------- -------- --------
Cash Flows from financing activities:
Increase (decrease) in borrowings under Credit Facility.................... 41,247 (21,885) (9,486)
Purchase of 10 7/8% Senior Subordinated Notes.............................. (27,236) (22,965) (142)
Proceeds from mortgage financing........................................... 17,375 -- --
Proceeds from term loan.................................................... 15,000 -- --
Payment of debt............................................................ (437) (72) (67)
Purchase of treasury shares................................................ -- (1,163) (29,711)
Other equity transactions.................................................. 1,020 1,067 4,912
-------- -------- --------
Net cash provided by (used in) financing activities........................... 46,969 (45,018) (34,494)
-------- -------- --------
Net decrease in cash and cash equivalents..................................... (200) (378) (3,159)
Cash and cash equivalents at beginning of year................................ 1,755 2,133 5,292
-------- -------- --------
Cash and cash equivalents at end of year...................................... $ 1,555 $ 1,755 $ 2,133
======== ======== ========
Supplemental cash flow information
Net cash paid during the year for:
Interest............................................................... $ 15,000 $ 15,900 $ 17,500
Income taxes........................................................... 1,200 3,300 1,300
(See accompanying notes to consolidated financial statements)
25
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
($000's Omitted)
Comon Stock Unearned Treasury Stock
-------------------- Capital Retained Employee -------------------
Shares Par Value Surplus Earnings Benefits Shares Amount
---------- --------- ------- -------- -------- --------- --------
Balance at November 30, 1998................. 34,839,431 $87,099 $81,994 $ 50,331 $(8,464) $ --
Net earnings for the year.................... 1,580
Shares issued, primarily to employee benefit
plans...................................... 1,048,567 2,621 1,989
Long-term incentive plan awards.............. 175,750 439 533 (972)
Allocation of unearned employee benefits..... (868) 2,275
Purchase of treasury shares.................. 6,683,107 (29,711)
Stock options exercised...................... 37,066 93 186 (5,155) 23
---------- ------- ------- -------- ------- --------- --------
Balance at November 30, 1999................. 36,100,814 90,252 83,834 51,911 (7,161) 6,677,952 (29,688)
Net earnings for the year.................... 8,812
Shares issued, primarily to employee benefit
plans...................................... (780) (420,485) 1,855
Long-term incentive plan awards, net of
forfeitures................................ 239,250 598 125 (752)
Allocation of unearned employee benefits..... (948) 2,197
Stock options exercised and vesting of
restricted stock awards.................... (11,500) (29) 6 (9,956) 44
Purchase of treasury shares.................. 316,893 (1,163)
---------- ------- ------- -------- ------- --------- --------
Balance at November 30, 2000................. 36,328,564 90,821 82,237 60,723 (5,716) 6,564,404 (28,952)
Net loss for the year........................ (13,929)
Shares issued, primarily to employee benefit
plans...................................... (901) (476,297) 2,101
Forfeiture of long-term incentive plan awards (48,500) (121) (191) 31
Allocation of unearned employee benefits..... (960) 1,754
Stock options exercised...................... 51 (11,461) 50
Initial unrealized loss on implementation of
SFAS No. 133...............................
Change in fair value of foreign contracts....
---------- ------- ------- -------- ------- --------- --------
Balance at November 30, 2001................. 36,280,064 $90,700 $80,236 $ 46,794 $(3,931) 6,076,646 $(26,801)
========== ======= ======= ======== ======= ========= ========
Accumulated
Other Other
Comprehensive Comprehensive
Income (Loss) Loss
------------- -------------
Balance at November 30, 1998................. $ --
Net earnings for the year....................
Shares issued, primarily to employee benefit
plans......................................
Long-term incentive plan awards..............
Allocation of unearned employee benefits.....
Purchase of treasury shares..................
Stock options exercised......................
----- --------
Balance at November 30, 1999................. --
Net earnings for the year....................
Shares issued, primarily to employee benefit
plans......................................
Long-term incentive plan awards, net of
forfeitures................................
Allocation of unearned employee benefits.....
Stock options exercised and vesting of
restricted stock awards....................
Purchase of treasury shares..................
----- --------
Balance at November 30, 2000................. --
Net loss for the year........................ $(13,929)
Shares issued, primarily to employee benefit
plans......................................
Forfeiture of long-term incentive plan awards
Allocation of unearned employee benefits.....
Stock options exercised......................
Initial unrealized loss on implementation of
SFAS No. 133............................... (306) (306)
Change in fair value of foreign contracts.... 276 276
----- --------
Balance at November 30, 2001................. $ (30) $(13,959)
===== ========
(See accompanying notes to consolidated financial statements)
26
HARTMARX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Accounting Policies
Principal Business Activity--The Company and its subsidiaries (the
"Company") are engaged in the manufacturing and marketing of quality men's and
women's apparel. The Company's products are sold principally in the United
States.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and all subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to the current year's
presentation.
Use of Estimates--The financial statements have been prepared in conformity
with generally accepted accounting principles and, accordingly, include amounts
based on informed estimates and judgments of management with consideration
given to materiality. Actual results could differ from those estimates, but
management believes such differences will not materially affect the Company's
financial position, results of operations or cash flows.
Fair Value of Financial Instruments--The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their short-term
nature. The carrying amount of debt and credit facilities approximate fair
value due to their stated interest rate approximating a market rate. These
estimated fair value amounts have been determined using available market
information or other appropriate valuation methodologies.
Cash and Cash Equivalents--The Company considers as cash equivalents all
highly liquid investments with an original maturity of three months or less.
Inventories--Inventories are stated at the lower of cost or market. At
November 30, 2001 and 2000, approximately 48% and 49%, respectively, of the
Company's total inventories at each year end 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.
Property, Plant and Equipment--Properties are stated at cost. Additions,
major renewals and betterments are capitalized; maintenance and repairs which
do not extend asset lives are charged against earnings. Profit or loss on
disposition of properties is reflected in earnings, and the related asset costs
and accumulated depreciation are removed from the respective accounts.
Depreciation is generally computed on the straight-line method based on useful
lives of 20 to 45 years for buildings, 5 to 20 years for building improvements,
3 to 15 years for furniture, fixtures and equipment and 3 to 5 years for
software. Leasehold improvements are amortized over the terms of the respective
leases or useful lives, whichever is shorter.
Intangibles--Intangible assets are included in "Investments and Other
Assets" and aggregated $23.7 million and $4.1 million at November 30, 2001 and
2000, respectively. Accumulated amortization, which is provided on a
straight-line basis over their economic lives, usually 10 years or less, was
$1.9 million and $1.1 million at November 30, 2001 and 2000, respectively.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of--If
facts and circumstances indicate that the cost of fixed assets or other assets
may be impaired, an evaluation of recoverability would be performed by
comparing the estimated future undiscounted pre-tax cash flows associated with
the asset to the asset's carrying value to determine if a write-down to market
value or discounted pre-tax cash flow value would be required. Long-lived
assets to be disposed of are reported at the lower of the carrying amount or
fair value less estimated costs to sell.
Income Taxes--Deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
27
Revenue Recognition--Sales are recognized at the time the order is shipped
and returns are netted against sales. Catalog sales are net of expected returns
and exclude sales tax. Income from licensing arrangements is recorded when
received.
Advertising Costs--Advertising expenditures relating to the manufacturing
and marketing businesses are expensed in the period the advertising initially
takes place. Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period
during which the benefits are expected. Advertising costs of $24.7 million in
2001, $30.7 million in 2000 and $28.2 million in 1999 are included in Selling,
General and Administrative Expenses in the accompanying Statement of Earnings.
Prepaid expenses at November 30, 2001 include deferred advertising costs of
$2.2 million ($1.7 million at November 30, 2000), which will be reflected as an
expense during the quarterly period benefitted.
Retirement Plans--The Company and its subsidiaries maintain benefit plans
covering substantially all employees other than those covered by multi-employer
plans. Pension expense or income for the Company's defined benefit plan is
determined using the projected unit credit method. Pension expense under each
multi-employer plan is based upon a percentage of the employer's union payroll
established by industry-wide collective bargaining agreements; such pension
expenses are funded as accrued.
Stock Options--The Company has elected to follow Accounting Principles Board
Opinion No. 25 and related Interpretations under which the Company uses the
intrinsic value method of measuring stock compensation cost. Under this method,
compensation cost is the excess, if any, of the quoted market price of the
Company's stock on the date of grant over the amount the individual must pay
for the stock.
Concentrations of Credit Risk and Financial Instruments--Financial
instruments which subject the Company to credit risk are primarily trade
accounts receivable. The Company sells its products to department stores,
specialty retail stores, off-price marketers, catalogs and through electronic
commerce channels. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Concentrations of credit risk with respect to trade accounts receivable are
mitigated due to the large number and diversity of customers comprising the
Company's customer base. Management believes that the risk associated with
trade accounts receivable is adequately provided for in the allowance for
doubtful accounts.
The only customer that exceeded 10% of consolidated revenues represented
approximately 21%, 20% and 18% of sales in 2001, 2000 and 1999, respectively.
Accounts receivable from the largest customer represented approximately 14% and
12% of the Company's gross accounts receivable at November 30, 2001 and 2000,
respectively.
The Company enters into foreign exchange forward contracts from time to time
to limit the currency risks associated with purchase obligations denominated in
foreign currencies. The Company does not hold financial instruments for trading
purposes or engage in currency speculation. Foreign exchange contracts are
generally in amounts approximating forecasted purchase obligations 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. 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. As of
November 30, 2001, the Company had entered into foreign exchange contracts for
Italian lire and Japanese yen, aggregating approximately $3 million ($10
million at November 30, 2000), principally related to future inventory
purchases.
The Company is subject to the risk of fluctuating interest rates in the
normal course of business, primarily as a result of borrowings under its Credit
Facility, which bear interest at variable rates. The variable rates may
fluctuate over time based on economic conditions, and the Company could be
subject to increased interest payments if market interest rates fluctuate. The
Company does not expect that a change in the interest rates would have a
material adverse effect on the Company's results of operations. In the last
three years, the Company has not used derivative financial instruments to
manage interest rate risk.
28
Per Share Information--The calculation of basic earnings per share in each
year is based on the weighted-average number of common shares outstanding. The
calculation of diluted earnings per share reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted into common stock using the treasury stock method. The
number of shares used in computing basic and diluted earnings per share were as
follows, which includes both allocated and unallocated shares held by The
Hartmarx Savings-Investment and Employee Stock Ownership Plan (000's omitted):
Year Ended
November 30, Basic Diluted
------------ ------ -------
2001.... 30,013 30,013
2000.... 29,452 29,568
1999.... 32,790 32,861
Recent Accounting Pronouncements--
Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
Handling Costs", requires that amounts billed to customers for shipping and
handling costs be reflected as a component of net revenue, if material.
Emerging Issues Task Force Issue No. 00-25, "Accounting for Consideration from
a Vendor to a Retailer in Connection with the Purchase or Promotion of the
Vendor's Products", requires that consideration from a vendor to a customer in
connection with the purchase of the vendor's products or to promote sales of
the vendor's products should be reflected as a reduction of net revenue, if
material. The Company's billings to customers for such shipping and handling
costs and the consideration given to customers to promote the sale of the
Company's products are not significant.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting (SAB) No. 101--"Revenue Recognition in Financial
Statements", which was amended by SAB No. 101A in March 2000 and SAB No. 101B
in June 2000. These SABs, which provide guidance on the recognition,
presentation and disclosure of revenue in financial statements, were effective
in the fourth quarter of fiscal 2000. The Company believes that its revenue
recognition, presentation and disclosures are in compliance with these SABs and
the adoption of these SABs did not effect the Company's results of operations
or its financial position for fiscal 2001 or 2000.
Effective December 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 138. Under these standards, the
fair value of derivatives has been recorded in the financial statements. Upon
adoption of the new standards, the after-tax transition adjustment at December
1, 2000 was an unrealized loss of $.3 million, reflected in the accumulated
other comprehensive income (loss) component of shareholders' equity as of that
date. Changes in fair values of the derivatives are recognized periodically in
other comprehensive income for derivatives designated as hedges of future cash
flows or net income for all other derivatives. The entire transition adjustment
loss reflected as accumulated other comprehensive income (loss) as of December
1, 2000 was reflected in the Company's Consolidated Statement of Earnings
during fiscal 2001 as the currency hedge contracts were settled. The effects of
the adoption of the new standards did not significantly affect the Company's
results of operations, its financial position, or its cash flows.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the pooling of interest method of accounting for business
combinations initiated after June 30, 2001 and for purchase businesses
combinations completed on or after July 1, 2001. SFAS No. 141 also requires
that the Company recognize acquired intangible assets apart from goodwill if
the acquired intangible assets meet certain criteria. SFAS No. 142 requires
companies to cease amortizing goodwill that existed at June 30, 2001 on the
date of adoption of this standard, requires that goodwill resulting from
acquisitions completed after June 30, 2001 not be amortized and establishes a
new method of testing goodwill for impairment, if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
29
its carrying value. The Company applied the provisions of SFAS No. 141 in
accounting for its acquisition of Consolidated Apparel Group ("CAG"), which was
effective July 1, 2001, and goodwill related to the acquisition of CAG is not
being amortized. The Company expects to early adopt the provisions of SFAS No.
142, effective December 1, 2001, at which time goodwill amortization resulting
from acquisitions completed before June 30, 2001, which is not significant,
will cease.
The Company's business combinations prior to July 1, 2001 were accounted for
using the purchase method of accounting. At November 30, 2001, the net carrying
amount of goodwill related to those acquisitions other than CAG is
approximately $1.3 million compared to approximately $1.5 million at November
30, 2000. During fiscal 2002, the Company will perform the required impairment
tests of goodwill and indefinite-lived intangible assets. Although the Company
has not yet determined the effect of these tests on its results of operations
and financial position, the impact, if any, is not expected to be significant.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143--"Accounting for Asset Retirement Obligations" and in August 2001, SFAS No.
144--"Accounting for the Impairment or Disposal of Long-Lived Assets" was
issued. SFAS 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for the Company's fiscal year beginning
December 1, 2002. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and is effective for the Company's
fiscal year beginning December 1, 2002. The Company has not completed its
analysis of the effect of these statements, but believes that adoption of these
statements will not have a significant effect on its reported financial
position, results of operations, cash flows or financial statement disclosures.
Acquisitions
During the third quarter of 2001, the Company acquired certain assets,
properties and operations of the Consolidated Apparel Group, L.L.C. ("CAG"), a
privately held marketer of popular priced sportswear. The acquisition was
consistent with the Company's previously stated strategy to expand its apparel
offerings in non-tailored product categories. The purchase price for the assets
acquired was $18 million, subject to adjustment, plus the assumption of debt
and other specified payables and accruals. The cash portion of the purchase
price consisted of a closing payment of $8.3 million, including interest, and
deferred payments of $9.8 million plus interest, of which all but $.3 million
was paid by November 30, 2001. Additional contingent consideration is payable
to the seller based upon the achievement of specified levels of earnings before
interest and taxes of the business during five annual periods within a
specified period beginning July 1, 2001, or upon a change of control. These
contingent payments, if any, would be considered as additional purchase price
and, accordingly, reflected as goodwill. At November 30, 2001, goodwill
recorded related to this acquisition was $18.5 million, all deductible for tax
purposes over fifteen years. The goodwill is included in total assets of the
Men's Apparel Group. CAG's results of operations have been included in the
Company's financial statements since the effective date of the acquisition. The
following pro forma information is provided for the acquisition assuming it
occurred as of December 1, 1999 for fiscal 2000 and December 1, 2000 for fiscal
2001 (in millions, except per share amounts):
Year Ended
November 30,
--------------
2001 2000
------ ------
Net sales.............................................. $625.2 $724.5
Net earnings (loss) before taxes and extraordinary item (20.5) 16.4
Net earnings (loss).................................... (12.4) 10.1
Diluted earnings (loss) per share...................... (.41) .34
The pro forma amounts above include $1.5 million of purchase accounting
adjustments to state acquired inventories at fair value which were fully
reflected as an adjustment to cost of sales for the respective period. The pro
forma amounts above for all periods do not include amortization of goodwill.
The pro forma amounts above
30
for all periods reflect interest on the purchase price, assuming the
acquisition occurred as of December 1, 1999, with interest calculated at the
Company's borrowing rate under its Credit Facility for the respective period.
The pro forma net earnings (loss) above assume an income tax benefit or
provision at the Company's consolidated tax rate of 39.5%. The pro forma
amounts above for all periods do not take into consideration certain costs and
expenses that were not continued subsequent to the date of acquisition.
At the effective date, amounts assigned to each major asset and liability
caption of the balance sheet, including purchase price adjustments, were as
follows (in millions):
Assets
Cash...................... $ 0.6
Accounts receivable....... 6.0
Inventories............... 11.0
Prepaid expenses.......... 0.7
Goodwill.................. 16.0
Other assets.............. 0.2
Fixed assets.............. 0.9
-----
Total assets.......... 35.4
-----
Liabilities
Accounts payable.......... 0.6
Accrued expenses.......... 5.2
Debt assumed.............. 11.6
-----
Total liabilities..... 17.4
-----
Purchase Price............... $18.0
=====
Effective December 1, 1998, the Company acquired 100% of the capital stock
of The Coppley, Noyes and Randall Limited ("Coppley"), a Canadian based
manufacturer and marketer of men's apparel. On August 27, 1999, the Company
acquired 100% of the capital stock of The Royal Shirt Company, Ltd. ("Royal"),
a Canadian based manufacturer and marketer of dress and sport shirts for men
and women. Royal continues as a manufacturing resource for products marketed by
the Company. Regarding the Coppley and Royal acquisitions, the fair value of
assets acquired was $20.3 million and liabilities assumed were $18.7 million.
The results of operations of CAG, Coppley and Royal since the date of their
respective acquisition are included in the accompanying financial statements.
Financing
In March 1994, the Company issued $100 million principal amount of 10 7/8%
Senior Subordinated Notes due January 15, 2002 ("Notes") in a public offering
at which time it entered into a then three-year financing agreement providing
for a senior credit facility ("Credit Facility") with a group of lenders. The
Credit Facility currently provides for maximum revolving borrowings of $200
million (subject to the borrowing base calculations and minimum excess
availability requirements), including a $50 million letter of credit
sub-facility. The Credit Facility currently is in effect through June 2003.
During fiscal 1999 and 2000, the Company purchased a total of $23.1 million
face value of its Notes. During the second quarter of fiscal 2001, the Company
entered into mortgage financings on two if its owned manufacturing facilities.
The average interest rate on the mortgages, which have durations of ten and
fifteen years, is 7.5%. The $17.4 million proceeds from these mortgages, along
with availability under the Credit Facility, were used to repurchase in open
market transactions $27.2 million face value of Notes resulting in $34.7
million of Notes outstanding as of November 30, 2001. The extraordinary items
for 2000 and 2001 reflected the purchases made at a small discount to par or at
par and applicable write-off of issue costs.
31
Several amendments to the Company's Credit Facility were completed during
fiscal 2001 to address (i) the unfavorable operating performance which required
revisions to certain previously established financial covenants which were not
achieved, (ii) additional financing resources required related to the CAG
acquisition and (iii) financing alternatives regarding the January 15, 2002
maturity of the $34.7 million of outstanding Notes. On August 31, 2001, the
Credit Facility was amended to add a new Term Loan facility in the aggregate
original principal amount of $15 million with interest at prime plus 5.5%.
Proceeds from the term loan were used to repay revolving borrowings under the
Credit Facility. Amendments to the Credit Facility dated July 10, 2001 and
October 15, 2001 established certain minimum excess borrowing availability
levels and required the Company to secure the Credit Facility with
substantially all of its respective assets, including real property, equipment
and capital stock of its subsidiaries. These amendments also required that the
Company obtain (i) by November 26, 2001 a commitment for at least $25 million
of junior capital, consisting of either equity or debt junior to the Credit
Facility with a funding to be completed by December 14, 2001, and (ii) by
December 14, 2001 at least $10 million of net cash proceeds from mortgage loans
with respect to certain properties, from asset sales or from the issuance of
equity. Additionally, the effective borrowing rate benchmark was increased by
1%. Financial covenants related to debt leverage and debt service coverage,
among others, were superceded for periods ending May 31, 2001 and modified for
subsequent periods. A minimum cumulative adjusted earnings before interest,
taxes, depreciation and amortization ("EBITDA") covenant was implemented for
the period September 1, 2001 through May 31, 2002 to replace covenants related
to debt service coverage and debt leverage that will be reinstated at revised
levels effective as of August 31, 2002 and November 30, 2002, respectively.
The Company did not obtain the commitment for junior capital by November 26,
2001. Alternatively, on December 13, 2001, the Company entered into an
amendment under its Credit Facility whereby the requirement to obtain $25
million of junior capital by December 14, 2001 would be satisfied by the
completion of an exchange offer for the Company's Notes (under terms
satisfactory to the Credit Facility lenders), and the requirement to obtain $10
million of additional liquidity proceeds ($5.8 million of proceeds realized as
of January 31, 2002) was extended to June 30, 2002. This amendment also
adjusted various covenants under the Credit Facility to reflect current and
anticipated business levels and provides borrowing availability which the
Company believes under current circumstances will be sufficient to fund its
operations after making the cash payments to the holders of the Notes who
exchanged their Notes in the exchange offer and pay the unexchanged Notes at
maturity were made. The exchange offer was accepted by holders of 91.2% of the
Notes and was successfully completed on January 16, 2002. For each $1,000
principal amount of Notes outstanding, the Company paid $200 in cash and issued
$800 principal amount of new 12 1/2% senior unsecured notes due September 15,
2003 and 93 shares of common stock. Upon completion of the exchange offer,
$25.3 million of new senior unsecured notes were issued and outstanding and as
of that date all of the $34.7 million of Notes have been retired.
The Credit Facility includes various other events of default and contains
certain restrictions on the operation of its business, including covenants
pertaining to capital expenditures, asset sales, operating leases and
incurrence or existence of additional indebtedness and liens, as well as other
customary covenants, representations and warranties, and events of default. The
Company is in compliance with all covenants under the Credit Facility and its
other borrowing agreements. While the Company expects that it will satisfy the
various provisions of its Credit Facility, as amended, and its other borrowing
agreements, there can be no assurance that the Company will remain in
compliance with its financial covenants.
At November 30, 2001 and 2000, long term debt, less current maturities,
comprised the following (000's omitted):
2001 2000
-------- --------
Borrowings under Credit Facility...... $ 84,976 $ 43,729
10 7/8% Senior Subordinated Notes, net 34,721 61,900
Term loan............................. 15,000 --
Industrial development bonds.......... 17,250 17,315
Mortgages and other debt.............. 19,606 2,603
-------- --------
171,553 125,547
Less--current......................... 25,000 15,077
-------- --------
Long term debt........................ $146,553 $110,470
======== ========
32
Industrial development bonds ("IDBs"), which mature on varying dates through
2015, were issued by development authorities for the purchase or construction
of various manufacturing facilities having a carrying value of $6.7 million at
November 30, 2001. Interest rates on the various borrowing agreements range
from 7.25% to 8.5% (average of 7.4% at November 30, 2001 and 7.5% at November
30, 2000). Two IDBs totaling $15.5 million are callable by the Company
beginning July 1, 2000 at a 3% premium, declining to par on July 1, 2003.
Mortgages and other long term debt includes $17.1 million principal amount
of mortgages initiated during 2001 as well as the Company's ongoing guarantee
of a $2.5 million industrial development bond retained by a former subsidiary
due September 1, 2007. Interest rates ranged from 7.5% to 8.5% per annum
(average of 7.7% at November 30, 2001 and 8.5% at November 30, 2000).
Accrued interest included in the Other Accrued Expenses caption in the
accompanying balance sheet was $2.7 million at November 30, 2001 and $3.9
million at November 30, 2000.
The approximate principal reductions required during the next five fiscal
years, after reflecting the completion of the exchange offer, are as follows:
$9.9 million in 2002; $125.9 million in 2003; $.6 million in 2004; $.7 million
in 2005; and $.7 million in 2006.
On December 1, 1988, The Hartmarx Employee Stock Ownership Plan ("ESOP"),
subsequently merged with the Hartmarx Savings-Investment Plan during 2001 and
the merged plans are now called the Hartmarx Savings Investment and Employee
Stock Ownership Plan ("SIPSOP"), borrowed $15 million from a financial
institution and purchased from the Company 620,155 shares of treasury stock at
the market value of $24.19 per share. Prior to 1994, the ESOP loan was
guaranteed by the Company, and, accordingly, the amount outstanding had been
included in the Company's consolidated balance sheet as a liability and
shareholders' equity had been reduced for the amount representing unearned
employee benefits. In 1994, the Company purchased the remaining interest in the
loan from the financial institution holding the ESOP note. Company
contributions to the SIPSOP are used to repay loan principal and interest. The
common stock is allocated to SIPSOP participants ratably over the term of the
loan as the loan principal and interest is repaid or accrued and amounts
reflected as unearned employee benefits are correspondingly reduced.
Information related to loan repayments by the SIPSOP or ESOP are as follows
(000's omitted):
2001 2000 1999
------ ------ ------
Principal payments. $1,608 $1,462 $1,331
Interest payments.. 436 582 714
------ ------ ------
Total loan payments $2,044 $2,044 $2,045
====== ====== ======
As of November 30, 2001, 532,986 of the 620,155 shares of common stock owned
by the SIPSOP have been allocated to the accounts of the SIPSOP participants.
There were 87,169 shares committed to be released, and the fair market value of
those unearned SIPSOP shares was approximately $.2 million.
Borrowings Under The Credit Facility
The following summarizes information concerning borrowings under the Credit
Facility (000's omitted):
2001 2000 1999
-------- ------- --------
Outstanding at November 30..................... $ 84,976 $43,729 $ 65,614
Maximum month end balance during the year...... 118,257 91,716 115,500
Average amount outstanding during the year..... 88,700 72,900 93,800
Weighted daily average interest rate during the
year......................................... 7.5% 8.3% 6.6%
Weighted average interest rate on borrowings at
November 30.................................. 7.0% 8.8% 7.0%
33
Inventories
Inventories at fiscal year end were as follows (000's omitted):
November 30
--------------------------
2001 2000 1999
-------- -------- --------
Raw materials.. $ 46,227 $ 55,450 $ 58,352
Work in process 7,758 15,262 19,269
Finished goods. 95,628 96,399 98,593
-------- -------- --------
$149,613 $167,111 $176,214
======== ======== ========
The excess of current cost over LIFO costs for inventories valued using LIFO
was $32.9 million in 2001, $33.9 million in 2000 and $35.3 at November 30, 1999.
Taxes on Earnings
The tax (provision) benefit is summarized as follows (000's omitted):
2001 2000 1999
------ ------- -----
Federal...................... $ -- $ (324) $ (80)
State and local.............. 1,215 (600) 100
Foreign...................... (572) (1,614) (936)
------ ------- -----
Total current......... 643 (2,538) (916)
------ ------- -----
Federal...................... 8,402 (3,248) (99)
State and local.............. -- -- --
Foreign...................... -- 181 50
------ ------- -----
Total deferred........ 8,402 (3,067) (49)
------ ------- -----
Total tax (provision) benefit $9,045 $(5,605) $(965)
====== ======= =====
The difference between the tax (provision) benefit reflected in the
accompanying statement of earnings and the amount computed by applying the
federal statutory tax rate to pre-tax income (loss), taking into account the
applicability of enacted tax rate changes, is summarized as follows (000's
omitted):
2001 2000 1999
-------- ------- ------
Earnings (loss) before taxes and extraordinary item:
United States..................................... $(24,431) $10,515 $ 505
Foreign........................................... 1,526 3,675 2,040
-------- ------- ------
$(22,905) $14,190 $2,545
======== ======= ======
Tax (provision) benefit computed at statutory rate... $ 7,788 $(4,825) $ (865)
State and local taxes on earnings, net of federal tax
benefit............................................ 802 (396) 66
Foreign.............................................. (53) (198) (82)
Other--net........................................... 508 (186) (84)
-------- ------- ------
Total tax (provision) benefit........................ $ 9,045 $(5,605) $ (965)
======== ======= ======
At November 30, 2001 and 2000, there was no valuation allowance offsetting
the deferred tax asset as the Company has concluded it is more likely than not
that the deferred tax asset would be fully realized. The net tax asset recorded
considers recent earnings history plus amounts expected to be realized through
future earnings and available tax planning realization strategies (such as the
ability to adopt the FIFO inventory valuation method for those inventories
currently valued under the LIFO valuation method).
34
At November 30, 2001, the Company had a net deferred tax asset of $63.2
million comprised of deferred tax assets of $75.3 million less deferred tax
liabilities aggregating $12.1 million. The principal deferred tax assets
included operating loss carryforwards of $45.0 million, alternative minimum tax
credit carryforwards ("AMT") and other tax credit carryforwards of $6.2 million
and $24.1 million attributable to expenses deducted in the financial statements
not currently deductible for tax purposes (including allowance for bad debts,
accrued vacation and capitalization of certain inventory costs for tax
purposes). Deferred tax liabilities included excess tax over book depreciation
of $1.3 million and $5.9 million related to employee benefits, principally
pensions.
At November 30, 2000, the Company had a net deferred tax asset of $52.9
million comprised of deferred tax assets of $67.2 million less deferred tax
liabilities aggregating $14.3 million. The principal deferred tax assets
included net operating loss carryforwards of $38.6 million, AMT and other tax
credit carryforwards of $6.4 million and $22.2 million attributable to expenses
deducted in the financial statements not currently deductible for tax purposes.
Deferred tax liabilities included excess tax over book depreciation of $1.5
million and $7.1 million related to employee benefits, principally pensions.
As of November 30, 2001, the Company had approximately $129 million of tax
operating loss carryforwards available to offset future income tax liabilities.
In general, the substantial portion of such carryforwards must be utilized
within fifteen years of incurring the net operating loss; the loss
carryforwards for years prior to 2001 expire from 2007 to 2010; the estimated
$5 million of tax operating losses attributable to the fiscal year ended
November 30, 2001 will be available for utilization through November 30, 2021.
AMT tax credit carryforwards of $6.0 million can be carried forward
indefinitely.
Commitments and Contingencies
The Company and its subsidiaries lease office space, manufacturing,
warehouse and distribution facilities, showrooms and outlet stores,
automobiles, computers and other equipment under various noncancellable
operating leases. A number of the leases contain renewal options ranging up to
10 years.
At November 30, 2001, total minimum rentals under noncancellable operating
leases were as follows (000's omitted):
Years Amount
----- --------
2002..................... $ 10,448
2003..................... 9,973
2004..................... 9,266
2005..................... 8,414
2006..................... 7,538
Thereafter............... 56,054
--------
Total minimum rentals due $101,693
========
Rental expense, including rentals under short term leases, aggregated $11.4
million, $9.8 million and $10.7 million in fiscal 2001, 2000 and 1999,
respectively.
Most leases provide for additional payments of real estate taxes, insurance
and other operating expenses applicable to the property, generally over a base
period level. Total rental expense includes such base period expenses and the
additional expense payments as part of the minimum rentals.
At November 30, 2001, the Company had outstanding $21.7 million of letters
of credit 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 $200 million Credit Facility and are
considered as usage for purposes of determining the maximum available credit
line and excess availability. The Company has also entered into surety bond
arrangements
35
aggregating $8.3 million with unrelated parties for the purposes of satisfying
workers' compensation deposit requirements of various states where the Company
has operations.
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and lawsuits in the
aggregate will not have a material adverse effect on the Company's financial
position or results of operations.
Employee Benefits
Pension Plans
The Company participates with other companies in the apparel industry in
making collectively-bargained payments to pension funds, which are not
administered by the Company. The contribution rate of applicable payroll is
based on the amounts negotiated between the union and the participating
industry employers. Pension costs relating to multi-employer plans were
approximately $.2 million in 2001, $.3 million in 2000 and $.2 million in 1999.
The Multi-Employer Pension Plan Amendments Act of 1980 (the "Act") amended
ERISA to establish funding requirements and obligations for employers
participating in multi-employer plans, principally related to employer
withdrawal or termination of such plans. Effective as of October 1, 1998,
certain current pension costs and obligations related to current, terminated
vested and retired employees of a multi-employer plan were assumed by the
Company's single employer plan.
The Company sponsored pension plan is a non-contributory defined benefit
pension plan covering substantially all eligible non-union employees and
certain union employees who have elected to participate in the plan. Under this
pension plan, non-union retirement benefits are a function of years of service
and average compensation levels during the highest five consecutive salary
years occurring during the last ten years before retirement; union employee
benefits are based on collectively bargained amounts. To the extent that the
calculated retirement benefit under the formula specified in the plan exceeds
the maximum allowable under the provisions of the tax regulations, the excess
is provided on a non-qualified supplemental basis. Under the provisions of the
Omnibus Budget Reconciliation Act of 1993, the annual compensation limit that
can be taken into account for computing benefits and contributions under
qualified plans was reduced from $235,840 to $150,000, effective as of January
1, 1994, subject to indexing increases in subsequent years ($170,000 limitation
for 2001).
Company contributions, if any, are intended to provide for benefits
attributed to service to date and also for those expected to be earned in the
future. There were no employer contributions made or allowed under existing tax
laws and regulations in each of the three years ended November 30, 2001.
Components of net periodic pension expense for the three years ended
November 30, 2001 were as follows (000's omitted):
2001 2000 1999
-------- -------- --------
Service cost.................. $ 5,468 $ 5,792 $ 6,537
Interest cost................. 14,136 13,493 12,788
Expected return on plan assets (16,148) (17,521) (17,649)
Recognized net actuarial gain. -- (1,233) (1,108)
Net amortization.............. 3,363 3,723 2,459
-------- -------- --------
Net periodic pension expense.. $ 6,819 $ 4,254 $ 3,027
======== ======== ========
The above amounts are prior to consideration of periodic pension expense of
$.3 million in 2001, $1.1 million in 2000 and $1.7 million in 1999 related to
the Company's non-qualified supplemental pension plan covering certain
employees providing for incremental pension payments from the Company's funds
so that total pension payments equal amounts that would have been payable from
the Company's principal pension plan but
36
for the limitations imposed by income tax regulations. Service cost in each
year for this non-qualified plan was $.3 million, $.4 million and $.7 million,
respectively; interest cost in each year was $.4 million, $.7 million and $.7
million, respectively; and actuarial (gain) or loss was $(.4) million in 2001
and $.3 million in 1999. The related amounts reflected in the consolidated
balance sheet at November 30, 2001 and 2000 were $9.8 million and $9.9 million,
respectively, net of assets of $.9 million and $.7 million, respectively.
Plan assets consist primarily of publicly traded common stocks, corporate
debt instruments and units of trust funds in a trust administered by the
Trustee of the plan. At November 30, 2001, the plan assets of $168.2 million
included 4,337,399 shares of the Company's stock with a market value of
approximately $7.8 million.
The following sets forth the information related to the change in the
benefit obligation and change in plan assets of the principal pension plan at
November 30 (000's omitted):
November 30,
------------------
2001 2000
-------- --------
Change in Benefit Obligation
Benefit obligation at beginning of year........ $192,147 $187,004
Service cost................................... 5,468 5,792
Interest cost.................................. 14,136 13,493
Actuarial (gain) or loss....................... 16,705 (2,000)
Benefits paid.................................. (13,272) (12,142)
-------- --------
Benefit obligation at end of year.............. 215,184 192,147
-------- --------
Change in Plan Assets
Fair value of plan assets at beginning of year. 186,960 201,071
Actual return on plan assets................... (5,435) (1,969)
Benefits paid.................................. (13,272) (12,142)
-------- --------
Fair value of plan assets at end of year....... 168,253 186,960
-------- --------
Funded status.................................. (46,931) (5,187)
Unrecognized net actuarial (gain) or loss...... 22,424 (15,864)
Unrecognized prior service cost................ 48,810 52,173
-------- --------
Prepaid benefit cost........................... $ 24,303 $ 31,122
======== ========
2001 2000
----- -----
Weighted-Average Assumptions as of November 30
Discount rate.............................. 6.75% 7.50%
Expected return on plan assets............. 8.75% 8.75%
Rate of compensation increase.............. 4.25% 5.00%
Savings Investment and Employee Stock Ownership Plans
The Company offers a qualified defined contribution plan, the Hartmarx
Savings-Investment and Employee Stock Ownership Plan ("SIPSOP"), which is a
combined salary reduction plan under Section 401(k) of the Internal Revenue
Code and an after-tax savings plan. Eligible participants in SIPSOP can invest
from 1% to 16% of earnings among several investment alternatives, including a
Company stock fund. Participation in SIPSOP is required to earn retirement
benefits under the Company's principal pension plan. An employer contribution
is made based on the employee's level of participation, and is invested in
common stock of the Company, although most participants age 55 and over can
elect investments from among several investment alternatives. While employee
contributions up to 16% of earnings are permitted, contributions in excess of
6% are not subject to an employer contribution. Effective July 1, 1998, the
employer contribution was one-fourth of the first, second and
37
third 1% of earnings and one-tenth thereafter. Effective July 1, 1999, the
employer contribution was increased to one-fourth of the first 6% of earnings
contributed by the employee. Effective July 1, 2000, the employer contribution
was increased to thirty percent of the first 6% of earnings contributed by the
employee. Effective July 1, 2001, the employer contribution was increased to
thirty-five percent of the first 6% of earnings contributed by the employee.
The Company's expense is based upon the principal and interest payments on the
loan, the dividends, if any, on unallocated shares, and the cost and market
value of shares allocated to employees' accounts. The Company's annual expense
was $1.4 million in 2001, $1.4 million in 2000 and $1.3 million in 1999. The
Company's annual contributions were $2.0 million in each of the respective
years. At November 30, 2001, the assets of SIPSOP funds had a market value of
approximately $57.5 million, of which approximately $4.5 million was invested
in 2,486,805 shares of the Company's common stock.
Health Care and Post Retirement Benefits
Certain of the Company's subsidiaries make contributions to multi-employer
union health and welfare funds pursuant to collective bargaining agreements.
These payments are based upon wages paid to the Company's active union
employees. Health and insurance programs are also made available to non-union
active employees and their eligible dependents.
Stock Purchase Rights
On December 6, 1995, the Company's Board of Directors approved a new
Stockholder Rights Agreement, which took effect immediately upon the expiration
of the then existing Rights on January 31, 1996 (the "Rights Agreement"). A
dividend of one Right per common share was distributed to stockholders of
record January 31, 1996 and with common shares issued subsequently. This
dividend distribution of the Rights was not taxable to the Company or its
stockholders. On April 13, 2000, the Board of Directors approved an amendment
and restatement of the Rights Agreement which, among other things, (i) adds a
fiduciary duty redemption provision imposing certain procedural requirements on
a new board of directors that wishes to redeem the Rights, and (ii) permits the
purchase of additional shares of the Company's common stock by certain persons,
as defined and within the limits set forth in the Rights Agreement, without
causing the Rights to distribute or become exercisable.
Each Right, expiring January 31, 2006, represents a right to buy from the
Company 1/1000th of a share of Series A Junior Participating Preferred Stock,
$1.00 par value, at a price of $25 per Right. Separate certificates for Rights
will not be distributed, nor will the Rights be exercisable, unless an
Acquiring Person, as defined in the Rights Agreement, acquires 15 percent or
more, or in the case of an Exempt Person, as defined in the Rights Agreement,
in excess of 19.5 percent (the "threshold amount"), or announces an offer that
could result in acquiring the threshold amount of the Company's common shares.
Following an acquisition of the threshold amount of the Company's common shares
(a "Stock Acquisition"), each Right holder, except the threshold amount
stockholder, has the right to receive, upon exercise, common shares valued at
twice the then applicable exercise price of the Right (or, under certain
circumstances, cash, property or other Company securities), unless the
threshold amount stockholder has offered to acquire all of the outstanding
shares of the Company under terms that a majority of the independent directors
of the Company have determined to be fair and in the best interest of the
Company and its stockholders. Similarly, unless certain conditions are met, if
the Company engages in a merger or other business combination following a Stock
Acquisition where it does not survive or survives with a change or exchange of
its common shares or if 50 percent or more of its assets, earning power or cash
flow is sold or transferred, the Rights will become exercisable for shares of
the acquiror's stock having a value of twice the exercise price (or, under
certain circumstances, cash or property). The Rights are not exercisable,
however, until the Company's right of redemption described below has expired.
Generally, Rights may be redeemed for $.01 each (in cash, common shares or
other consideration the Company deems appropriate) until the earlier of (i) the
tenth day following public announcement that the threshold amount or greater
position has been acquired in the Company's stock or (ii) the final expiration
of the Rights. Until exercise, a Right holder, as such, has no rights as a
stockholder of the Company.
38
Stock Option Plans and Restricted Stock
The Company has in effect the 1985 Stock Option Plan ("1985 Plan"), the 1988
Stock Option Plan ("1988 Plan"), the 1995 Incentive Stock Plan ("1995 Plan")
and the 1998 Incentive Stock Plan ("1998 Plan") under which officers, key
employees and directors (with respect to the 1988 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. Generally, options under the 1985 Plan are
exercisable to the extent of 25% each year (cumulative) from the second through
the fifth year, and expire ten years after the date of grant; however, all or
any portion of the shares granted are exercisable during the period beginning
one year after the date of grant for participants employed by the Company for
at least five years. Options granted under the 1988 Plan, 1995 Plan and 1998
Plan have exercise provisions similar to the 1985 Plan, although some grants
become exercisable in cumulative one-third installments on each of the first
three anniversaries of the grant date. No additional grants will be made under
the 1985, 1988 and 1995 Plans. Following the stockholder adoption of the 1998
Incentive Stock Plan in April 1998, shares covered by grants or awards under
the terms of the 1985, 1988 or 1995 Plans which terminate, lapse or are
forfeited will be added to the aggregate number of shares authorized under the
1998 Plan and will be made available for grants under the 1998 Plan. Options
granted under the 1998 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. Under
certain circumstances, vesting may be accelerated for options granted under the
various plans.
The 1988, 1995 and 1998 Plans also provide for the discretionary grant of
stock appreciation rights in conjunction with the option, which allows the
holder to receive a combination of stock and cash equal to the gain in market
price from the grant until its exercise. Under certain circumstances, the
entire gain attributable to rights granted under the 1988 Plan may be paid in
cash; the cash payment under the 1995 Plan and the 1998 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 associated with options outstanding at November 30, 2001, 2000 or 1999.
The 1995 and 1998 Plans also allow for granting of restricted stock awards
enabling the holder to obtain full ownership rights subject to terms and
conditions specified at the time each award is granted.
Information regarding employee stock option activity for the three years
ended November 30, 2001 is as follows:
Price Per Share
------------------------
Number of Weighted
Shares Range Average
---------- --------------- --------
Balance at November 30, 1998.......... 2,797,181 $5.25 to $16.00 $6.42
Granted............................ 498,250 $3.84 to $5.66 $5.42
Expired or terminated.............. (55,247) $5.25 to $8.09 $6.35
----------
Balance at November 30, 1999.......... 3,240,184 $3.84 to $16.00 $6.27
Granted............................ 800,750 $2.50 to $3.84 $3.30
Exercised.......................... --
Expired or terminated.............. (564,458) $3.84 to $16.00 $5.72
----------
Balance at November 30, 2000.......... 3,476,476 $2.50 to $8.09 $5.66
Granted............................ 5,000 $2.59 $2.59
Surrendered, expired or terminated. (1,645,611) $2.50 to $8.09 $6.78
----------
Balance at November 30, 2001.......... 1,835,865 $2.50 to $8.09 $4.65
==========
In accordance with a voluntary stock option surrender program approved by
the Company's shareholders in April 2001, 97 optionees voluntarily surrendered
1,507,000 options having an exercise price of $5.53 or higher.
There were no weighted average shares outstanding used in the calculation of
diluted earnings per share for the year ended November 30, 2001. At November
30, 2001, 2,643,865 shares were reserved for options and
39
restricted stock awards outstanding, and 1,771,939 shares were available for
future stock options and/or restricted stock awards (75,688 shares available at
November 30, 2000).
Information on exercisable employee stock options at each date is as follows:
Options Average
Date Exercisable Price
---- ----------- -------
November 30, 2001 1,633,470 $4.71
November 30, 2000 2,523,461 $6.44
November 30, 1999 2,632,178 $6.44
Information on employee stock options outstanding and exercisable at
November 30, 2001 is as follows:
Weighted Average
----------------
Remaining Weighted
Number Life in Number Average
Range of Prices Outstanding Years Price Exercisable Price
--------------- ----------- --------- ----- ----------- --------
$2.50 to $5.25. 1,513,626 5.6 $4.20 1,311,231 $4.20
$5.53 to $8.09. 322,239 3.5 6.81 322,239 6.81
--------- ----- --------- -----
1,835,865 $4.65 1,633,470 $4.71
========= ===== ========= =====
Information regarding long term incentive restricted stock plan awards
pursuant to the 1995 Plan and 1998 Plan for the three years ended November 30,
2001 is as follows:
Price Per Share
Number ----------------------
of Shares Average Range
--------- ------- --------------
Balance November 30, 1998 453,000 $7.43 $5.94 to $8.09
Granted.................. 175,750 $5.53 $5.53
-------
Balance November 30, 1999 628,750 $6.90 $5.53 to $8.09
Granted.................. 249,250 $3.18 $2.50 to $3.84
Vested................... (11,500) $7.06 $5.53 to $8.09
Cancelled................ (10,000) $6.81 $5.53 to $8.09
-------
Balance November 30, 2000 856,500 $5.82 $2.50 to $8.09
Cancelled................ (48,500) $6.44 $2.50 to $8.09
-------
Balance November 30, 2001 808,000 $5.78 $2.50 to $8.09
=======
The vesting threshold for restricted stock awards outstanding is as follows:
Number of Vesting
Shares Threshold Latest Vesting Date
--------- --------- -------------------
102,500. $ 9.00 July 8, 2006
120,500. $11.50 July 8, 2007
183,000. $12.50 April 8, 2008
159,250. $ 9.00 January 18, 2009
116,750. $ 7.52 November 30, 2009
7,500. $ 7.52 February 21, 2010
118,500. $ 4.25 October 15, 2010
All of the above awards vest at the earliest of ten years from the date of
grant, retirement at age 65, the Company's stock price exceeding or, in some
cases, equaling or exceeding the vesting threshold price for thirty consecutive
calendar days, as shown above, or as otherwise authorized by the Compensation
and Stock Option
40
Committee of the Board of Directors. As of November 30, 2001, 11,500 of the
awards had vested. Expense is being recognized over the anticipated vesting
period of the awards.
The 1995 Stock Plan for Non-Employee Directors ("Director Plan") provides
for a possible annual grant of Director Stock Options ("DSO") to non-employee
members of the Board of Directors at market value on the date of grant, similar
to grants available under the 1988 Plan. In addition, each non-employee
director may 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. 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 market value of a share on the date of the annual
meeting. In 2001 and 2000, DSOs and DDSAs were not awarded to non-employee
directors. Prior to 1998, each non-employee director received a DDSA equal to
150 units. A 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.
Information regarding director stock option activity for the three years ended
November 30, 2001 is as follows:
2001 2000 1999
--------------- --------------- ---------------
Avg. Avg. Avg.
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- ------
Balance beginning of year 281,369 $ 3.52 289,880 $ 3.73 274,555 $ 4.85
Granted:
Fair Market Value..... -- -- -- -- 36,882 4.88
$1.00 Option.......... -- -- -- -- 20,619 1.00
DDSA.................. -- -- -- -- 36,882 --
Exercises:
Fair Market Value..... -- -- -- -- -- --
$1.00 Option.......... (3,110) 1.00 (2,556) 1.00 (42,221) 1.00
DDSA.................. (8,351) -- -- -- -- --
Expired:
Fair Market Value..... (7,140) 12.25 (5,955) 14.69 (36,837) 11.08
------- ------ ------- ------ ------- ------
Balance end of year...... 262,768 $ 3.43 281,369 $ 3.52 289,880 $ 3.73
======= ====== ======= ====== ======= ======
At November 30, 2001, 41,726 shares were available for future DSOs and DDSAs.
The weighted average fair value of options granted was estimated to be
$1.28, $1.68 and $2.68 in 2001, 2000 and 1999, respectively. The fair value of
each option granted in the respective year is estimated at the date of grant
using the Black-Scholes option-pricing model utilizing expected volatility
calculations based on historical data from December 1, 1992 (25% to 39%), the
first day of the fiscal year subsequent to the Company's 1992 restructuring,
and risk free rates based on U.S. government strip bonds on the date of grant
with maturities equal to the expected option term (4.81% to 6.62%). The
expected lives are between five and ten years, and no dividends are assumed.
Pro-forma information related to stock based compensation is as follows (in
millions):
2001 2000 1999
------ ---- ----
Additional compensation expense............ $ 0.4 $1.4 $1.8
Pro forma net earnings (loss).............. (14.2) 7.8 0.5
Pro forma diluted earnings (loss) per share (.47) .27 .02
41
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. The pro forma amounts
may not be representative of the future effects on reported net income and net
income per share.
Restructuring Charge
During fiscal 2001, the Company initiated a number of gross margin
improvement and cost reduction actions in response to the weak sales of apparel
at retail and reduced consumer confidence. These actions included the wind-up
of certain moderate tailored clothing operations, the closing of six facilities
engaged in fabric cutting and sewing operations, one distribution center, and
several administrative offices, the early voluntary retirement programs and
other administrative workforce reductions. Accordingly, the accompanying
statement of earnings reflects a restructuring charge of $11.6 million for the
twelve months ended November 30, 2001, which includes costs for severance and
related fringe benefits, estimated closing costs for owned facilities or exit
costs for leased facilities, and the writedown of fixed assets to estimated
fair values for facilities closed or to be closed.
The $11.6 million restructuring charge and remaining liability balance at
November 30, 2001 consisted of the following (000's omitted):
Lease
Termination Write
Severance and Facility Down of
and Closing Long-lived
Benefits Costs Assets Total
--------- ------------ ---------- -------
Provision during 2001....... $ 4,315 $3,623 $3,687 $11,625
====== =======
Payments during 2001........ (3,150) (196)
------- ------
Balance at November 30, 2001 $ 1,165 $3,427
======= ======
In addition to the amounts included in the restructuring charge noted above,
certain other non-recurring costs are reflected in the cost of goods sold and
operating expenses caption of the accompanying statement of earnings for the
twelve months ended November 30, 2001. Generally accepted accounting principles
require that certain of the non-recurring costs associated with the business
enhancement actions, including inventory dispositions and other costs
associated with operations being eliminated, be included in the cost of sales
and operating expense captions in the accompanying Consolidated Statement of
Earnings.
Non-Cash Charge Re: Systems Project Termination
Results for the fiscal year ended November 30, 1999 included a second
quarter non-cash pre-tax charge of $11.2 million ($6.9 million or $.21 per
share net of tax) to reflect a writedown of capitalized development costs
related to the termination of an enterprise resource planning system project
which had been anticipated to be implemented company-wide ("the non-cash
charge"). The project software had been installed at one operating company
representing less than 5% of consolidated sales, and, after extensive
evaluation, the Company, in consultation with its advisors, concluded that
company-wide implementation would not be appropriate. Legal action has been
initiated against the principal software provider to recover damages incurred;
in accordance with generally accepted accounting principles, no recovery was
assumed in determining the reported non-cash charge.
Operating Segment Information
The Company is engaged in the manufacturing and marketing of apparel. The
Company's customers comprise major department and specialty stores, value
oriented retailers and direct mail companies. The
42
Company's Men's Apparel Group designs, manufactures and markets tailored
clothing, slacks, sportswear and dress furnishings; the Women's Apparel Group
markets women's career apparel, sportswear and accessories to both retailers
and to individuals who purchase women's apparel through a direct mail catalog.
Information on the Company's operations for the three years ended November
30, 2001 is summarized as follows (in millions):
Men's Women's
Apparel Apparel
2001 Group Group Adj. Consol.
---- ------- ------- ------ -------
Sales.............................................. $547.4 $54.2 $ -- $601.6
Earnings (loss) before taxes and extraordinary item 2.6 3.4 (28.9) (22.9)
Total assets at year end........................... 318.2 37.5 99.7 455.4
Depreciation and amortization...................... 6.0 0.6 0.2 6.8
Property additions................................. 8.8 0.9 0.1 9.8
Men's Women's
Apparel Apparel
2000 Group Group Adj. Consol.
---- ------- ------- ------ -------
Sales.............................................. $619.8 $60.8 $ -- $680.6
Earnings (loss) before taxes and extraordinary item 36.9 5.7 (28.4) 14.2
Total assets at year end........................... 314.9 32.8 90.8 438.5
Depreciation and amortization...................... 6.2 0.6 0.3 7.1
Property additions................................. 3.9 0.4 0.2 4.5
Men's Women's
Apparel Apparel
1999 Group Group Adj. Consol.
---- ------- ------- ------ -------
Sales........................ $672.6 $54.2 $ -- $726.8
Earnings (loss) before taxes. 37.9 5.7 (41.1) 2.5
Total assets at year end..... 338.8 28.1 92.8 459.7
Depreciation and amortization 6.3 0.5 0.3 7.1
Property additions........... 7.0 0.6 0.2 7.8
During the years ended November 30, 2001, 2000 and 1999, 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
to 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.
The Men's Apparel Group amounts for 2001 include various non-recurring costs
associated with the wind-up of operations affecting moderate tailored clothing
product categories, along with other production facility and administrative
office closings, employee severance and writedowns to state assets at estimated
fair values. These non-recurring costs include $9.5 million of restructuring
charges plus additional amounts reflected in the cost of sales and operating
expense captions in the accompanying Consolidated Statement of Earnings for
fiscal 2001.
Amounts included in the "adjustment" column for earnings before taxes and
extraordinary item consist principally of interest expense and general
corporate expenses. The 2001 earnings before tax amount also includes $2.1
million restructuring charge. The 1999 earnings before tax amount also includes
the pre-tax non-cash charge of $11.2 million. Adjustments of total assets are
for cash, recoverable and deferred income taxes, investments, other assets and
corporate properties. Adjustments of depreciation and amortization and net
property additions are for corporate properties. The Men's Apparel Group total
assets include goodwill related to acquisitions.
43
Quarterly Financial Summary (Unaudited)
Selected quarterly financial and common share information for each of the
four quarters in fiscal 2001 and 2000 is as follows (000's omitted):
First Second Third Fourth
Quarter Quarter(2) Quarter Quarter
-------- ---------- -------- --------
2001(1)
Sales................................... $141,157 $146,078 $159,692 $154,658
Gross profit............................ 39,344 39,340 38,245 39,726
Loss before taxes and extraordinary item (1,480) (6,880) (10,935) (3,610)
Net loss before extraordinary item...... (895) (4,160) (6,620) (2,185)
Net loss................................ (895) (4,229) (6,620) (2,185)
Loss per share (basic and diluted)......
Before extraordinary item............ (.03) (.14) (.22) (.07)
After extraordinary item............. (.03) (.14) (.22) (.07)
2000
Sales................................... 163,189 172,452 175,316 169,690
Gross profit............................ 43,039 46,895 47,814 52,148
Earnings before taxes and extraordinary
items................................. 1,810 2,010 4,815 5,555
Net earnings before extraordinary items. 1,120 1,245 2,990 3,230
Net earnings............................ 1,120 1,472 2,990 3,230
Earnings per share (basic and diluted):
Before extraordinary item............ .04 .04 .10 .11
After extraordinary item............. .04 .05 .10 .11
--------
(1) 2001 results include restructuring charges as follows:
Per
Pre-Tax Net Share
------- ------ -----
First Quarter. $ 595 $ 360 $.01
Second Quarter 2,013 1,218 .04
Third Quarter. 5,892 3,565 .12
Fourth Quarter 3,125 1,890 .06
------- ------ ----
$11,625 $7,033 $.23
======= ====== ====
Certain costs included in the determination of gross profit in the first and
second quarter have been reclassified as a component of the restructuring
charge.
(2) The second quarter of 2001 included a $.1 million extraordinary loss
related to the purchase of the Company's 10 7/8% Senior Subordinated Notes.
The second quarter of 2000 included a $.2 million or $.01 per share
extraordinary gain related to the purchase of Senior Subordinated Notes.
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10--Directors and Executive Officers of the Registrant
Information contained under the caption "Information About Nominees For
Directors" on pages 2 to 3 of the Proxy Statement for the 2002 Annual Meeting
is incorporated herein by reference.
Information on Executive Officers of the Registrant is included as a
separate caption in Part I of this Annual Report on Form 10-K.
44
Item 11--Executive Compensation
Information contained under the caption "Executive Officer Compensation" on
pages 7 to 10 and "Information about Nominees for Directors" on pages 2 to 3 of
the Proxy Statement for the 2002 Annual Meeting is incorporated herein by
reference.
Item 12--Security Ownership of Certain Beneficial Owners and Management
Information contained in the Proxy Statement for the 2002 Annual Meeting
under the captions "Security Ownership of Directors and Officers" on pages 17
and 18 and "Ownership of Common Stock" on pages 19-20 is incorporated herein by
reference.
Item 13--Certain Relationships and Related Transactions
Information contained in the Proxy Statement for the 2002 Annual Meeting
under the caption "Information About Nominees for Directors" on pages 2 to 3 is
incorporated herein by reference.
PART IV
Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
Financial statements for Hartmarx Corporation listed in the Index to
Financial Statements and Supplementary Data on page 21 are filed as part of
this Annual Report.
(a)(2) Financial Statement Schedule
Financial Statement Schedule for Hartmarx Corporation listed in the Index
to Financial Statements and Supplementary Data on page 21 are filed as part
of this Annual Report.
Page
----
(a)(3) Index to Exhibits 46
(b) Reports on Form 8-K
On October 11, 2001, the Company filed a Form 8-K/A related to the
acquisition of Consolidated Apparel Group, L.L.C.
45
HARTMARX CORPORATION
Index to Exhibits
Exhibit
No. and
Applicable
Section of
601 of
Regulation
S-K
----------
*2-A Purchase Agreement dated August 10, 2001 by and among CAG Acquisition Corp., Consolidated
Apparel Group, LLC and Perry Wolfman (Exhibit 2.1 to the Current Report on Form 8-K filed
August 17, 2001).
*3-A Restated Certificate of Incorporation (Exhibit 3-A to Form 10-K for the year ended November 30,
1993), (1).
*3-A-1 Certificate of Amendment for increase in authorized shares of Common Stock (Exhibit 3-A-2 to
Form 10-K for the year ended November 30, 1993), (1).
*3-A-2 Certificate of Amendment adding Article Fourteenth limiting director liability as provided under
Delaware General Corporation Law (S)102(b)(7) (Exhibit 3-A-3 to Form 10-K for the year ended
November 30, 1993), (1).
*3-A-3 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock
(Exhibit 3-A-3 to Form 10-K for the year ended November 30, 1995), (1).
*3-B By-laws of the Company, as amended to the date hereof. (Exhibit 3-B to Form 10-K for the year
ended November 30, 1999), (1).
*4-A Amended and Restated Rights Agreement, dated as of April 13, 2000, by and between the
Company and First Chicago Trust Company of New York, as Rights Agent, which includes as
Exhibit A the Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock and as Exhibit B the form of Rights Certificate (Exhibit 4.1 to Form 8-K filed
April 13, 2000), (1).
4-A-1 First Amendment to Amended and Restated Rights Agreement dated as of December 6, 2001
between the Company and First Chicago Trust Company of New York.
4-B Indenture, dated as of January 16, 2002, between the Company and Bank One, Columbus, N.A.,
Trustee, relating to the 12.5% Senior Unsecured Notes due 2003 of Hartmarx Corporation.
*4-B-1 Indenture, dated as of March 15, 1994, between the Company and Bank One Wisconsin Trust
Company, N.A., Trustee, relating to the 10 7/8% Senior Subordinated Notes due 2002 of
Hartmarx Corporation (Exhibit 4-D to Form 10-Q for the quarter ended February 28, 1994), (1).
*4-B-2 Instrument of Resignation, Appointment and Acceptance, dated July 31, 1995, accepting the
resignation of Bank One Wisconsin Trust Company, N.A. and appointing Bank One Columbus,
N.A. as successor Paying Agent, Registrar and Trustee under the Indenture (Exhibit 4-B-1 to
Form 10-K for the year ended November 30, 1995), (1).
4-B-3 First Supplemental Indenture, dated as of October 30, 2001, between the Company and Bank One,
Columbus, N.A., relating to the 10 7/8% Senior Subordinated Notes due 2002 of Hartmarx
Corporation.
*4-C Amended and Restated Credit Agreement, dated as of August 18, 1999, among the Company, the
Lenders listed therein and General Electric Capital Corporation, as Managing Agent and
Collateral Agent (Exhibit 4-C to Form 10-Q for the quarter ended August 31, 1999), (1).
46
Exhibit
No. and
Applicable
Section of
601 of
Regulation
S-K
----------
*4-C-1 First Amendment to the Amended and Restated Credit Agreement dated November 21, 2000.
(Exhibit 4-C-1 to Form 10-K for the year ended November 30, 2001), (1).
*4-C-2 Second Amendment to the Amended and Restated Credit Facility dated February 28, 2001 (Exhibit
4-C-2 to Form 10-Q for the period ended February 28, 2001), (1).
*4-C-3 Third Amendment to the Amended and Restated Credit Facility dated July 10, 2001 (Exhibit 4-C-3
to Form 10-Q for the period ended May 31, 2001), (1).
*4-C-4 Fourth Amendment to the Amended and Restated Credit Facility dated August 9, 2001 (Exhibit
4-C-4 to Form 10-Q for the period ended August 31, 2001), (1).
*4-C-5 Fifth Amendment to the Amended and Restated Credit Facility dated August 31, 2001 (Exhibit
4-C-5 to Form 10-Q for the period ended August 31, 2001), (1).
*4-C-6 Sixth Amendment to the Amended and Restated Credit Facility dated October 15, 2001 (Exhibit
4-C-6 to Form 10-Q for the period ended August 31, 2001), (1).
4-C-7 Seventh Amendment to the Amended and Restated Credit Facility dated December 13, 2001.
*10-A 1998 Incentive Stock Plan (Exhibit A to Proxy Statement of the Company relating to the 1998
Annual Meeting), (1). **
*10-A-1 1995 Stock Plan for Non-Employee Directors (Exhibit B to Proxy Statement of the Company
relating to the 1995 Annual Meeting), (1). **
*10-B Description of Hartmarx Management Incentive Plan (Information to be included under the caption
"REPORT OF THE COMPENSATION COMMITTEE--Executive Compensation Program--
Short-Term Incentives" on pages 11 and 12 in the Proxy Statement of the Company relating to
the 2002 Annual Meeting), (1). **
*10-C Description of Hartmarx Long Term Incentive Plan (Information to be included under the caption
"REPORT OF THE COMPENSATION COMMITTEE--Executive Compensation Program--
Long-Term Incentives" on page 12 in the Proxy Statement of the Company relating to the 2002
Annual Meeting), (1). **
*10-D-1 Form of Deferred Compensation Agreement, as amended, between the Company and Directors
Farley, Jacobs and Marshall (Exhibit 10-D-1 to Form 10-K for the year ended November 30,
1993), (1). **
*10-D-2 Form of First Amendment to Director Deferred Compensation Agreement between the Company
and Directors Farley, Jacobs and Marshall (Exhibit 10-D-2 to Form 10-K for the year ended
November 30, 1994), (1). **
*10-E-1 Form of Deferred Compensation Agreement, as amended, between the Company and Messrs.
Hand, Patel, Morgan, Proczko and Ms. Valentine (Exhibit 10-E-1 to Form 10-K for the year
ended November 30, 1993), (1). **
*10-E-2 Form of First Amendment to Executive Deferred Compensation Agreement between the Company
and Messrs. Hand, Patel, Morgan, Proczko and Ms. Valentine (Exhibit 10-E-2 to Form 10-K for
the year ended November 30, 1994), (1). **
47
Exhibit
No. and
Applicable
Section of
601 of
Regulation
S-K
----------
*10-F-1 Employment Agreement dated August 1, 1996 between the Company and Elbert O. Hand,
amended and restated effective November 27, 2000 (Exhibit 10-F-1 to Form 10-K for the year
ended November 30, 2000), (1). **
*10-F-2 Employment Agreement dated August 1, 1996 between the Company and Homi B. Patel, amended
and restated effective November 27, 2000 (Exhibit 10-F-2 to Form 10-K for the year ended
November 30, 2000), (1). **
*10-F-3 Employment Agreement dated August 1, 1996 between the Company and Glenn R. Morgan,
amended and restated effective November 27, 2000 (Exhibit 10-F-3 to Form 10-K for the year
ended November 30, 2000), (1). **
*10-G-1 Severance Agreement dated August 1, 1996 between the Company and Elbert O. Hand, amended
and restated effective November 27, 2000 (Exhibit 10-G-1 to Form 10-K for the year ended
November 30, 2000), (1). **
*10-G-2 Severance Agreement dated August 1, 1996 between the Company and Homi B. Patel, amended
and restated effective November 27, 2000 (Exhibit 10-G-2 to Form 10-K for the year ended
November 30, 2000), (1). **
*10-G-3 Severance Agreement dated August 1, 1996 between the Company and Glenn R. Morgan,
amended and restated effective November 27, 2000 (Exhibit 10-G-3 to Form 10-K for the year
ended November 30, 2000), (1). **
*10-G-4 Form of Severance Agreement between the Company and Executive Officers Taras R. Proczko,
Linda J. Valentine and Andrew A. Zahr (Exhibit 10-G-7 to Form 10-K for the year ended
November 30, 2000), (1). **
*10-H-1 Supplemental Benefit Compensation Agreement dated December 23, 1999 between the Company
and Elbert O. Hand (Exhibit 10-H-1 to Form 10-K for the year ended November 30, 1999),
(1). **
*10-H-2 First Amendment to Supplemental Benefit Compensation Agreement between the Company and
Elbert O. Hand, effective November 27, 2000 (Exhibit 10-H-2 to Form 10-K for the year ended
November 30, 2000), (1). **
*10-H-3 Supplemental Benefit Compensation Agreement dated December 23, 1999 between the Company
and Homi B. Patel (Exhibit 10-H-2 to Form 10-K for the year ended November 30, 1999),
(1). **
*10-H-4 First Amendment to Supplemental Benefit Compensation Agreementbetween the Company and
Homi B. Patel, effective November 27, 2000 (Exhibit 10-H-4 to Form 10-K for the year ended
November 30, 2000), (1). **
*10-I Form of Indemnity Agreement between the Company and Directors Bakhsh, Cole, Farley, Hand,
Jacobs, Marshall, Patel, Rohlfs, Scott and Strubel (Exhibit 10-G-1 to Form 10-K for the year
ended November 30, 1993), (1). **
*10-J-1 Deferred Compensation Plan effective January 1, 1996 (Exhibit 10-I to Form 10-K for the year
ended November 30, 1995), (1). **
*10-J-2 Deferred Compensation Plan effective January 1, 2001 (Exhibit 10-J-2 to Form 10-K for the year
ended December 30, 2000), (1). **
10-J-3 Deferred Compensation Plan effective January 1, 2002. **
48
Exhibit
No. and
Applicable
Section of
601 of
Regulation
S-K
----------
12 Statement of Computation of Ratios.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Powers of Attorney, as indicated on page of this Form 10-K.
--------
* Exhibits incorporated herein by reference. (1) File No. 1-8501
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
By: /S/ GLENN R. MORGAN and By: /S/ TARAS R. PROCZKO
----------------------------- -------------------------------
Glenn R. Morgan Taras R. Proczko
Executive Vice President and Senior Vice President, General
Chief Financial Officer Counsel and Secretary
Date: February 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
ELBERT O. HAND* HOMI B. PATEL*
-------------------------- --------------------------
Elbert O. Hand Homi B. Patel
Chairman, Chief Executive President, Chief Operating
Officer, Director Officer, Director
SAMAUAL A.T. BAKHSH* CHARLES MARSHALL*
-------------------------- --------------------------
Samaual A.T. Bakhsh, Charles Marshall, Director
Director
JEFFREY A. COLE* MICHAEL B. ROHLFS*
-------------------------- --------------------------
Jeffrey A. Cole, Director Michael B. Rohlfs,
Director
RAYMOND F. FARLEY* STUART L. SCOTT*
-------------------------- --------------------------
Raymond F. Farley, Stuart L. Scott, Director
Director
DONALD P. JACOBS* ELLA D. STRUBEL*
-------------------------- --------------------------
Donald P. Jacobs, Director Ella D. Strubel, Director
GLENN R. MORGAN* ANDREW A. ZAHR*
-------------------------- --------------------------
Glenn R. Morgan Andrew A. Zahr
Executive Vice President, Vice President and
Chief Financial Officer Controller
Principal Accounting
Officer
By: /S/ GLENN R. MORGAN By: /S/ TARAS R. PROCZKO
----------------------- -----------------------
Glenn R. Morgan Taras R. Proczko
--------
*Pursuant to Power of Attorney
Date: February 26, 2002
50
HARTMARX CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED NOVEMBER 30, 2001, 2000 and 1999
(000's Omitted)
Reserve for Doubtful Accounts
Fiscal Year Ended November 30,
-----------------------------
2001 2000 1999
------- ------- -------
Balance at beginning of year.......... $ 7,770 $ 8,639 $ 8,210
Charged to costs and expenses......... 3,688 1,493 1,769
Deductions from reserves (1).......... (1,586) (2,362) (1,926)
Reserve related to acquired businesses 463 -- 586
------- ------- -------
Balance at end of year................ $10,335 $ 7,770 $ 8,639
======= ======= =======
--------
(1) Notes and accounts written off as uncollectible, net of recoveries of
accounts previously written off as uncollectible.
F-1