UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended August 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-8501
HARTMARX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3217140
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Wacker Drive
Chicago, Illinois 60606
----------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 312/372-6300
------------
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark /whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark /whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes __X__ No _____
At September 30, 2005 there were 37,111,968 shares of the Company's common
stock outstanding.
HARTMARX CORPORATION
INDEX
Page
Number
------
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statement of Earnings for the
three months and nine months ended August 31, 2005
and August 31, 2004 3
Unaudited Condensed Consolidated Balance Sheet
as of August 31, 2005, November 30, 2004 and
August 31, 2004 4
Unaudited Condensed Consolidated Statement of Cash Flows
for the nine months ended August 31, 2005
and August 31, 2004 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
Part II - OTHER INFORMATION
Item 6. Exhibits 24
Signatures
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
HARTMARX CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF EARNINGS
(000's Omitted, except per share amounts)
Three Months Ended Nine Months Ended
August 31, August 31,
------------------------------ -------------------------------
2005 2004 2005 2004
------------ ------------- ------------- -------------
Net sales $ 152,134 $ 155,783 $ 441,698 $ 434,779
Licensing and other income 690 934 1,738 1,837
------------ ------------- ------------- -------------
152,824 156,717 443,436 436,616
------------ ------------- ------------- -------------
Cost of goods sold 101,758 108,200 292,581 301,909
Selling, general and administrative expenses 38,664 38,750 119,247 113,358
------------ ------------- ------------- -------------
140,422 146,950 411,828 415,267
------------ ------------- ------------- -------------
Operating earnings 12,402 9,767 31,608 21,349
Interest expense 1,757 1,512 5,138 4,634
------------ ------------- ------------- -------------
Earnings before taxes 10,645 8,255 26,470 16,715
Tax provision (4,060) (3,265) (10,255) (6,605)
------------ ------------- ------------- -------------
Net earnings $ 6,585 $ 4,990 $ 16,215 $ 10,110
============ ============= ============= =============
Earnings per share:
Basic $ .18 $ .14 $ .45 $ .29
============ ============= ============= =============
Diluted $ .18 $ .14 $ .44 $ .28
============ ============= ============= =============
Dividends per common share $ - $ - $ - $ -
============ ============= ============= =============
Average shares outstanding:
Basic 36,652 35,285 36,331 34,708
====== ====== ====== ======
Diluted 37,466 36,459 37,174 36,142
====== ====== ====== ======
(See accompanying notes to unaudited condensed
consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(000's Omitted)
Aug. 31, Nov. 30, Aug. 31,
2005 2004 2004
-------------- ------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 2,158 $ 2,356 $ 2,752
Accounts receivable, less allowance
for doubtful accounts of $5,889,
$6,735 and $8,956 131,879 119,033 135,579
Inventories 150,284 130,139 133,069
Prepaid expenses 13,148 6,843 6,982
Deferred income taxes 29,747 21,783 14,521
-------------- ------------- --------------
Total current assets 327,216 280,154 292,903
-------------- ------------- --------------
GOODWILL 24,130 24,131 23,264
-------------- ------------- --------------
INTANGIBLE ASSETS 34,171 35,594 36,247
-------------- ------------- --------------
DEFERRED INCOME TAXES 19,250 34,167 49,875
-------------- ------------- --------------
OTHER ASSETS 6,488 7,441 7,115
-------------- ------------- --------------
INTANGIBLE PENSION ASSET 39,411 39,411 42,860
-------------- ------------- --------------
PROPERTIES
Land 1,886 1,908 1,980
Buildings and building improvements 43,778 35,749 36,452
Furniture, fixtures and equipment 102,498 102,733 105,280
Leasehold improvements 27,833 24,664 25,933
-------------- ------------- --------------
175,995 165,054 169,645
Accumulated depreciation and amortization (138,951) (137,411) (141,433)
-------------- ------------- --------------
Net properties 37,044 27,643 28,212
-------------- ------------- --------------
TOTAL ASSETS $ 487,710 $ 448,541 $ 480,476
============== ============= ==============
(See accompanying notes to unaudited condensed
consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's Omitted, except share data)
Aug. 31, Nov. 30, Aug. 31,
2005 2004 2004
-------------- ------------- -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 25,709 $ 25,679 $ 15,658
Accounts payable and accrued expenses 74,446 72,905 76,408
-------------- ------------- -----------
100,155 98,584 92,066
Total current liabilities
-------------- ------------- -----------
NON-CURRENT LIABILITIES 25,526 25,402 21,408
-------------- ------------- -----------
LONG-TERM DEBT 91,537 76,353 116,839
-------------- ------------- -----------
ACCRUED PENSION LIABILITY 26,617 26,416 44,272
-------------- ------------- -----------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued - - -
Common shares, $2.50 par value; 75,000,000
shares authorized; 37,075,936 shares issued at
August 31, 2005, 36,023,846 shares issued at
November 30, 2004 and 35,855,814 shares
issued at August 31, 2004 92,690 90,060 89,640
Capital surplus 68,424 63,784 63,826
Retained earnings 87,355 71,140 65,385
Unearned employee benefits (2,963) (1,332) (1,439)
Common shares in treasury, at cost,
0 at August 31, 2005,
41,204 at November 30, 2004 and
35,109 at August 31, 2004 - (344) (249)
Accumulated other comprehensive income (loss) (1,631) (1,522) (11,272)
-------------- ------------- -----------
Total shareholders' equity 243,875 221,786 205,891
-------------- ------------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 487,710 $ 448,541 $ 480,476
============== ============= ===========
(See accompanying notes to unaudited condensed
consolidated financial statements)
HARTMARX CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000's Omitted)
Nine Months Ended
-------------------------------------
Increase (Decrease) in Cash and Cash Equivalents Aug. 31, Aug. 31,
2005 2004
-------------- ---------------
Cash Flows from operating activities:
Net earnings $ 16,215 $ 10,110
Reconciling items to adjust net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization of fixed assets 3,618 4,188
Amortization of long lived assets, intangible assets, and
unearned employee benefits 2,593 3,671
Tax effect of option exercises 1,455 1,674
Changes in assets and liabilities, net of effect of
acquisition:
Accounts receivable, inventories, prepaid expenses
and other assets (39,125) (24,734)
Accounts payable, accrued expenses and
non-current liabilities (891) 5,539
Taxes and deferred taxes on earnings 7,031 4,386
-------------- -------------
Net cash provided by (used in) operating activities (9,104) 4,834
-------------- -------------
Cash Flows from investing activities:
Payments made re: acquisitions (2,203) (33,517)
Capital expenditures (13,023) (3,243)
Cash proceeds from sale of asset held for sale 300 -
-------------- -------------
Net cash used in investing activities (14,926) (36,760)
-------------- -------------
Cash Flows from financing activities:
Borrowings under Credit Facility 15,719 28,561
Payment of other debt (505) (468)
Grant proceeds related to facility renovation 3,437 -
Financing fees and expenses (400) -
Change in checks drawn in excess of bank balances 1,287 300
Proceeds from exercise of stock options 3,269 2,257
Other equity transactions 1,025 1,064
-------------- -------------
Net cash provided by financing activities 23,832 31,714
-------------- -------------
Net decrease in cash and cash equivalents (198) (212)
Cash and cash equivalents at beginning of period 2,356 2,964
-------------- -------------
Cash and cash equivalents at end of period $ 2,158 $ 2,752
============== =============
Supplemental cash flow information:
Net cash paid (received) during the period for:
Interest $ 5,118 $ 4,513
Income taxes 1,672 (235)
(See accompanying notes to unaudited condensed
consolidated financial statements)
HARTMARX CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
The accompanying financial statements are unaudited, but in the opinion of
management include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations,
financial position and cash flows for the applicable period presented. Results
of operations for any interim period are not necessarily indicative of results
for any other periods or for the full year. These unaudited interim financial
statements should be read in conjunction with the financial statements and
related notes contained in the Annual Report on Form 10-K for the year ended
November 30, 2004. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
Note 2
The calculation of basic earnings per share for each period is based on the
weighted average number of common shares outstanding. The calculation of
diluted earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock using the treasury stock method. The number of
shares in computing basic and diluted shares were as follows (000's omitted):
Three Months Ended Nine Months Ended
August 31, August 31,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------ ------
Basic 36,652 35,285 36,331 34,708
Dilutive effect of:
Stock options and awards 753 867 795 829
Restricted stock awards 61 307 48 605
------- ------ -------- -------
Diluted 37,466 36,459 37,174 36,142
======= ====== ======== =======
For the three months and nine months ended August 31, 2005 and August 31, 2004,
the following number of options and restricted stock awards were not included
in the computation of diluted earnings per share as the average price per share
of the Company's common stock was below the grant or award price for the
respective period:
Three Months Ended Nine Months Ended
August 31, August 31,
------------------- ------------------
2005 2004 2005 2004
------- ------- ------- -------
Anti-dilutive:
Stock options 1,304 59,135 438 74,550
Restricted stock awards 191,500 201,500 191,500 201,500
The Company accounts for its employee stock based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost related to stock options is reflected in net earnings, as all
options granted under those plans had an exercise price equal to or greater
than the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net earnings and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation (in millions, except per share amounts):
Three Months Ended Nine Months Ended
August 31, August 31,
--------------------------- -------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net earnings, as reported $ 6.6 $5.0 $16.2 $10.1
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects (0.3) (0.1) (0.6) (0.4)
------------ ------------ ---------- ------------
Pro forma net earnings $ 6.3 $4.9 $15.6 $9.7
============ ============ ========== ============
Earnings per share:
Basic - as reported $ .18 $ .14 $ .45 $ .29
============ ============ ========== ============
Basic - pro forma $ .17 $ .14 $ .43 $ .28
============ ============ ========== ============
Diluted - as reported $ .18 $ .14 $ .44 $ .28
============ ============ ========== ============
Diluted - pro forma $ .17 $ .13 $ .42 $ .27
============ ============ ========== ============
The fair value of each option granted in the respective period is estimated at
the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
Note 3
Long-term debt comprised the following (000's omitted):
Aug. 31, Nov. 30, Aug. 31,
2005 2004 2004
----------- ---------- -----------
Borrowings under Credit Facility $ 82,649 $ 66,930 $ 97,234
Industrial development bonds 17,250 17,250 17,250
Mortgages and other debt 17,347 17,852 18,013
----------- ---------- -----------
117,246 102,032 132,497
Less - current 25,709 25,679 15,658
----------- ---------- -----------
Long-term debt $ 91,537 $ 76,353 $ 116,839
=========== ========== ===========
Pursuant to an amendment dated on January 3, 2005, and effective January 1,
2005, the Credit Facility was amended, extending its term by three years to
February 28, 2009; the Company retains its option to extend the term for an
additional year, to February 28, 2010. The Company paid $.4 million to the
lender group related to the January 2005 amendment to the Credit Facility. The
Credit Facility provides for a $50 million letter of credit sub-facility.
Interest rates under the Credit Facility continue to be based on a spread in
excess of LIBOR or prime as the benchmark rate and on the level of excess
availability. The weighted average interest rate was approximately 5.2% at
August 31, 2005, based on LIBOR and prime rate loans. The facility provides for
an unused commitment fee of .375% per annum based on the $200 million maximum,
less the outstanding borrowings and letters of credit issued. Eligible
receivables and inventories provide the principal collateral for the
borrowings, along with certain other tangible and intangible assets of the
Company.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. During fiscal 2005 and
as of August 31, 2005, the Company was in compliance with all covenants under
the Credit Facility and its other borrowing agreements. At August 31, 2005, the
Company had approximately $23 million of letters of credit outstanding,
relating to either contractual commitments for the purchase of inventories from
unrelated third parties or for such matters as workers' compensation
requirements in lieu of cash deposits. Such letters of credit are issued
pursuant to the Company's Credit Facility and are considered as usage for
purposes of determining borrowing availability. During the twelve months ended
August 31, 2005, borrowing availability ranged from $43 million to $102
million. At August 31, 2005, additional borrowing availability under the Credit
Facility was approximately $79 million.
Mortgages and other debt includes the Company's ongoing guarantee of a $2.5
million industrial development bond retained by a former subsidiary, due
September 1, 2007, on which the annual interest rate of 8.5% is paid
semi-annually and there is no collateral.
Note 4
Components of net periodic pension expense for the Company's defined benefit
and non-qualified supplemental pension plans for the three months and nine
months ended August 31, 2005 and August 31, 2004 were as follows (000's
omitted):
Three Months Ended Nine Months Ended
August 31, August 31,
---------------------- ---------------------
2005 2004 2005 2004
-------- ---------- ---------- ----------
Service cost $ 1,253 $ 1,225 $ 3,985 $ 3,655
Interest cost 3,877 3,640 10,857 11,252
Expected return on plan assets (4,894) (4,005) (14,173) (12,401)
Recognized net actuarial gain (246) (83) (259) (18)
Net amortization 847 847 2,540 2,540
-------- ---------- ---------- ----------
Net periodic pension expense $ 837 $ 1,624 $ 2,950 $ 5,028
======== ========== ========== ==========
Through August 31, 2005, approximately $2.6 million of contributions had been
made to the Company's pension plans. In September, an additional $2 million was
contributed to the Company's principal pension plan. The Company anticipates
aggregate contributions in the $6 million to $8 million range will be made in
fiscal 2005.
Note 5
Inventories at each date consisted of (000's omitted):
Aug. 31, Nov. 30, Aug. 31,
2005 2004 2004
------------ ------------- -------------
Raw materials $ 37,770 $ 37,560 $ 35,904
Work-in-process 7,539 7,674 6,634
Finished goods 104,975 84,905 90,531
------------ ------------- -------------
$ 150,284 $ 130,139 $ 133,069
============ ============= =============
Inventories are stated at the lower of cost or market. At August 31, 2005,
November 30, 2004 and August 31, 2004, approximately 48%, 45% and 45%,
respectively, of the Company's total inventories are valued using the last-in,
first-out (LIFO) method representing certain work-in-process and finished
goods. The first-in, first-out (FIFO) method is used for substantially all raw
materials and the remaining inventories.
Note 6
On July 20, 2004, the Company acquired certain assets, properties and
operations of Exclusively Misook, Inc. ("Misook"), a designer and marketer of
upscale women's knit products sold through leading specialty and department
stores. The purchase price for Misook as of the acquisition date was $32.6
million. Additional cash purchase consideration is due as Misook achieves
certain specified financial performance targets over a five-year period
commencing August 1, 2004. This additional contingent cash purchase
consideration is calculated based on a formula applied to operating results. A
minimum level of performance, as defined in the purchase agreement, must be
achieved during any of the periods in order for additional consideration to be
paid. The additional consideration anticipated applicable to the nine months
ending August 31, 2005 was approximately $2.9 million. At the minimum level of
performance (annualized operating earnings, as defined, of at least $12
million), additional annual consideration of $3.6 million would be paid over
the five year period following the acquisition. The amount of consideration
increases with increased levels of earnings and there is no maximum amount of
incremental purchase price.
If the Misook business is sold within five years of the acquisition date ("Sale
Transaction"), the purchase agreement provides, at the option of the seller,
for a lump sum payment covering the remaining earnout period based on the
average annual contingent consideration earned prior to the date of the Sale
Transaction.
The Misook acquisition has been accounted for under the purchase method of
accounting. Accordingly, the results of Misook are included in the consolidated
financial statements from the acquisition date. Misook's results of operations
and assets are included in the Women's Apparel Group segment.
The Misook acquisition was financed utilizing borrowing availability under the
Company's Credit Facility.
Regarding the 2001 acquisition of the Consolidated Apparel Group, no additional
contingent consideration can be earned by the former owners subsequent to
November 30, 2004, pursuant to a November 2004 amendment to the purchase
agreement.
The amounts of contingent consideration related to fiscal 2004 accrued as of
November 30, 2004 for Misook, approximately $1.2 million, and CAG,
approximately $1.0 million, were each paid in the first quarter of fiscal 2005.
The pro forma financial information presented below gives effect to the Misook
acquisition as if it had occurred as of the beginning of the Company's fiscal
year 2004. The pro forma amounts below reflect interest on the purchase price
assuming the acquisition occurred as of December 1, 2003, with interest
calculated at the Company's borrowing rate under its Credit Facility for the
period. The pro forma earnings below assumes an income tax provision at the
Company's consolidated tax rate for the period. The information presented below
is for illustrative purposes only and is not indicative of results that would
have been achieved if the acquisition had occurred as of the beginning of the
Company's 2004 fiscal year or of future operating performance. Amounts in
millions, except per share amounts:
Three Months Nine Months
Ended Ended
August 31, 2004 August 31, 2004
------------------ ---------------------
Net sales $163.0 $460.5
Net earnings 6.9 14.9
Net earnings per share:
Basic .19 .43
Diluted .19 .41
Impairment tests, which involve the use of estimates related to the fair value
of the applicable reporting unit with which goodwill and intangible assets not
subject to amortization are associated, were performed during the second
quarter. These tests indicated that there was no impairment of the recorded
goodwill and intangible asset not subject to amortization.
Note 7
Amounts billed to customers for shipping and handling are included in sales.
The cost of goods sold caption includes, where applicable, the following
components: product cost, including inbound freight, duties, internal
inspection costs, internal transfer costs and certain other costs of the
distribution network. The warehousing, picking and packing of finished products
totaled $14.9 million in the first nine months of 2005 and $14.2 million in the
first nine months of 2004 and $5.0 million for the third quarter of 2005 and
$4.6 million for the third quarter of 2004, and are included as a component of
Selling, General and Administrative Expenses.
Note 8
The Company is engaged in the manufacturing and marketing of apparel. The
Company's customers comprise major department and specialty stores, value
oriented retailers and direct mail companies. The Company 's Men's Apparel
Group designs, manufactures and markets tailored clothing, slacks, sportswear
and dress furnishings. The Women's Apparel Group markets women's career
apparel, designer knitwear, sportswear and accessories to both retailers and to
individuals who purchase women's apparel through a direct to consumer catalog
and using the internet.
Information on the Company's operations and total assets for the three months
and nine months ended and as of August 31, 2005 and August 31, 2004 is
summarized as follows (in millions):
Men's Women's
Apparel Apparel
Group Group Adj. Consol.
--------------- -------------- -------------- ---------------
Three Months Ended August 31,
2005
Sales $129.6 $22.5 $ - $152.1
Earnings (loss) before taxes 13.1 2.7 (5.2) 10.6
2004
Sales $136.9 $18.9 $ - $155.8
Earnings (loss) before taxes 12.4 1.2 (5.3) 8.3
Nine Months Ended August 31,
2005
Sales $377.3 $64.4 $ - $441.7
Earnings (loss) before taxes 36.2 7.4 (17.1) 26.5
Total assets 319.9 68.3 99.5 487.7
2004
Sales $377.7 $57.1 $ - $434.8
Earnings (loss) before taxes 27.8 5.0 (16.1) 16.7
Total assets 291.3 67.9 121.3 480.5
During the three months and nine months ended August 31, 2005, there were no
intergroup sales. During the three months and nine months ended August 31,
2004, there was $.3 million of sales from the Men's Apparel Group to the
Women's Apparel Group. These sales were eliminated from Men's Apparel Group
sales. During all periods, there was no change in the basis of measurement of
group earnings or loss.
Operating expenses incurred by the Company in generating sales are charged
against the respective group; indirect operating expenses are allocated to the
groups benefitted. Group results exclude any allocation of general corporate
expense, interest expense or income taxes.
Amounts included in the "adjustment" column for earnings (loss) before taxes
consist principally of interest expense and general corporate expenses.
Adjustments of total assets are for cash, deferred income taxes, investments,
other assets, corporate properties and the intangible pension asset.
At August 31, 2005 and August 31, 2004, the Men's Apparel Group total assets
includes $24.1 million and $23.3 million, respectively, of goodwill related to
acquisitions. At August 31, 2005 and August 31, 2004, Women's Apparel Group
total assets included intangible assets of $34.1 million and $35.9 million,
respectively, related to acquisitions.
Sales and long-lived assets by geographic region are as follows (in millions):
Sales Long-Lived Assets
---------------------------------------------------------------- ----------------------------
Three Months Ended Nine Months Ended
August 31, August 31, August 31,
----------------------------- ----------------------------- ----------------------------
2005 2004 2005 2004 2005 2004
------------ ----------- ------------ ----------- ------------ ------------
USA $ 147.5 $150.9 $426.1 $420.5 $138.1 $134.2
Canada 4.2 4.3 14.6 13.3 3.0 2.6
All Other 0.4 0.6 1.0 1.0 0.1 0.9
------------ ----------- ------------ ----------- ------------ ------------
$ 152.1 $155.8 $441.7 $434.8 $141.2 $137.7
============ =========== ============ =========== ============ ============
Sales by Canadian subsidiaries to customers in the United States are included
in USA sales. Sales to customers in countries other than the USA or Canada are
included in All Other.
Long-lived assets includes intangible pension asset, net properties, goodwill,
intangible assets and other assets.
Note 9
Comprehensive income, which includes all changes in the Company's equity during
the period, except transactions with stockholders, was as follows (000's
omitted):
Nine Months Ended
-------------------------
Aug. 31, Aug. 31,
2005 2004
------------ -----------
Net earnings $16,215 $10,110
Other comprehensive income (loss):
Change in fair value of foreign exchange (132) (147)
contracts, net of tax
Currency translation adjustment, net of tax 23 75
---------- --------
$
Comprehensive earnings $16,106 10,038
========== ==========
The change in Accumulated Other Comprehensive Income (Loss) was as follows
(000's omitted):
Fair Value of Foreign Accumulated
Minimum Foreign Currency Other
Pension Exchange Translation Comprehensive
Liability Contracts Adjustment Income (Loss)
------------- ---------------- ------------- ---------------
Fiscal 2005
--------------------------------
Balance Nov. 30, 2004 $ (3,425) $ 123 $ 1,780 $ (1,522)
Change in fiscal 2005 - (132) 23 (109)
------------- ------------- ------------- ------------
Balance August 31, 2005 $ (3,425) $ (9) $ 1,803 $ (1,631)
============= ============= ============= ============
Fiscal 2004
--------------------------------
Balance Nov. 30, 2003 $ (11,735) $ 249 $ 286 $ (11,200)
Change in fiscal 2004 - (147) 75 (72)
------------- ------------- ------------- ------------
Balance August 31, 2004 $ (11,735) $ 102 $ 361 $ (11,272)
============= ============= ============= ============
The pre-tax amounts, the related income tax (provision) benefit and after-tax
amounts allocated to each component of the change in other comprehensive income
(loss) was as follows (000's omitted):
Nine months ended August 31, 2005 Pre-tax Tax After-Tax
--------------------------------------------------- ---------- ---------- ----------
Fair value of foreign exchange contracts $ (210) $ 78 $ (132)
Foreign currency translation adjustment 23 - 23
---------- ---------- ----------
$ (187) $ 78 $ (109)
========== ========== ==========
Nine months ended August 31, 2004
---------------------------------------------------
Fair value of foreign exchange contracts $ (247) $ 100 $ (147)
Foreign currency translation adjustment (110) 185 75
---------- ---------- ----------
$ (357) $ 285 $ (72)
========== ========== ==========
Note 10
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004) "Share-Based Payment", which requires companies to
recognize in the income statement the grant date fair value of stock options
and other equity-based compensation issued to employees and disallows the use
of the intrinsic value method of accounting for stock options, but expresses no
preference for a type of valuation model. This statement supersedes Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees", but does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in SFAS No. 123 as
originally issued. SFAS No. 123 (revised 2004) is effective for the Company's
fiscal year beginning December 1, 2005. While the Company has not yet
determined the precise impact that this statement will have on its financial
condition and results of operations, assuming future annual stock option awards
are comparable to prior years annual awards and the Black-Scholes method is
used to compute the value of the awards, the annualized impact is expected to
lower diluted earnings per share in the range of $.03 to $.04.
In December 2004, FASB issued SFAS No. 151 "Inventory Costs, an Amendment of
ARB No. 43, Chapter 4". FAS 151 clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs and wasted material and
requires that these items be recognized as current period charges. FAS 151
applies only to inventory costs incurred during periods beginning after the
effective date and also requires that the allocation of fixed production
overhead to conversion costs be based on the normal capacity of the production
facilities. FAS 151 is effective for the Company's fiscal year beginning
December 1, 2005. The Company does not anticipate that implementation of this
statement will have a material impact on its financial condition, results of
operations or cash flows.
In December 2004, FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets, An
Amendment of APB Opinion No. 29". FAS 153 eliminates the exception for exchange
of similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance. FAS 153
is effective for non-monetary assets and exchanges occurring in fiscal periods
beginning after June 15, 2005, the Company's third fiscal quarter. As the
Company does not engage in exchanges of non-monetary assets, the Company does
not anticipate that implementation of this statement will have a material
impact on its financial conditions, results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company operates exclusively in the apparel business. Its operations are
comprised of the Men's Apparel Group ("MAG") and Women's Apparel Group. MAG
designs, manufactures and markets men's tailored clothing, slacks, sportswear
(including golfwear) and dress furnishings (shirts and ties). Products are sold
at luxury, premium and moderate price points under a broad variety of apparel
brands, both owned and under license, to an extensive range of retail channels.
The Women's Apparel Group markets women's career apparel, designer knitwear,
sportswear and accessories to department and specialty stores under owned and
licensed brand names and through a direct to consumer operation offering a wide
range of apparel and accessories to business and professional women through
catalogs and its e-commerce website.
The Company's principal operational challenges have been to address the
following:
> The trend to casual dressing in the workplace has been a major
contributor to the overall market decline for tailored clothing
products over the past decade, especially for tailored suits, the
Company's core product offering.
> The need to diversify the Company's product offerings in non-tailored
product categories in light of the declining demand for tailored
clothing.
> The market share declines experienced by certain department store
retailers, an important distribution channel for the Company.
The Company has continued to expand its non-tailored clothing product offerings
through internally developed programs, new licensing arrangements and
acquisitions. On July 20, 2004, the Company acquired certain assets, properties
and operations of Exclusively Misook, Inc. ("Misook"), a designer and marketer
of upscale women's knit products sold through leading specialty and department
stores. The purchase price for Misook as of the acquisition date was $32.6
million. As described in the Notes to Unaudited Condensed Consolidated
Financial Statements, additional contingent consideration is due if Misook
achieves certain specified financial performance targets. The acquisition of
Misook, which provides for strategic growth opportunities in womenswear and
further diversification of non-tailored product categories, contributed $9.4
million in revenues and approximately $.05 in earnings per diluted share to
third quarter results in 2005 and approximately $25.3 million in revenues and
$.12 in earnings per diluted share for the nine months ended August 31, 2005;
the prior year's third quarter and year-to-date results reflected $4.3 million
of revenues and $.01 of earnings per diluted share attributable to Misook. The
Company acquired the Consolidated Apparel Group ("CAG"), a marketer of moderate
priced men's sportswear, in 2001. These product diversification actions, along
with the introductions of Bobby Jones and Nicklaus golfwear in earlier years,
have opened up or expanded distribution channels for the Company's products,
such as through "green grass" and resort shops for golfwear and warehouse clubs
for moderate-priced sportswear. Although representing only a small percentage
of consolidated revenues, direct-to-consumer marketing is increasing, including
internet-based marketing for certain womenswear and higher end sportswear
products and through a small number of stores marketing the Bobby Jones and
Hickey-Freeman brands.
Sales of non-tailored apparel (men's sportswear, golfwear, slacks and
womenswear) represented 45% of total sales during the first nine months of both
2005 and 2004. For the full year, non-tailored apparel sales represented 47% of
total sales in fiscal 2004 compared to 44% in fiscal 2003. The increase in
pre-tax earnings for the nine months to $26.5 million in 2005 from $16.7
million in 2004 reflected a 1.6% revenue increase to $441.7 million from $434.8
million and improved operating margins. A significant portion of these
improvements was attributable to Misook, as previously noted.
Liquidity and Capital Resources
November 30, 2004 to August 31, 2005
------------------------------------
For the nine months ended August 31, 2005, net cash used in operating
activities was $9.1 million compared to $4.8 million net cash provided by
operating activities for the nine months ended August 31, 2004. The decrease in
cash provided by operating activities during the current period over the prior
period reflected the higher cash earnings offset by higher working capital,
principally inventories. Since November 30, 2004, net accounts receivable
increased $12.8 million or 11% to $131.9 million, reflecting normal seasonal
shipments in the Men's Apparel Group. Inventories of $150.3 million increased
$20.1 million or 15% reflecting in part the earlier receipt of foreign sourced
inventories in advance of anticipated shipments and retailers requests to delay
delivery of goods. Net properties increased $9.4 million to $37.0 million as
capital additions in the current period included approximately $7.7 million
related to the in-process renovation of the Hickey-Freeman manufacturing and
distribution facility, which is included in buildings and building
improvements. This project will be completed during the fourth quarter, at
which time related depreciation and amortization will commence. Total debt,
including current maturities, increased $15.2 million to $117.2 million and was
the most significant component of net cash provided by financing activities;
this increase reflected both higher capital expenditures and seasonal working
capital increases. Total debt represented 32% of total capitalization at both
August 31, 2005 and November 30, 2004. Shareholders' equity increased $22.1
million from the earnings as well as from the favorable impact of stock option
exercises and equity sales to the Company's employee stock purchase plan,
resulting in 906,794 additional shares issued during the first nine months of
2005.
In addition to the information provided below relating to debt, credit
facilities, guarantees, future commitments, liquidity and risk factors, the
reader should also refer to the Company's Annual Report on Form 10-K for the
year ended November 30, 2004.
The Company's borrowing arrangements consist of a senior revolving credit
facility ("Credit Facility"), mortgages and industrial development bonds. The
current $200 million Credit Facility expires in February 2009 with an
additional one year renewal at the Company's option (i.e., until February
2010), and also provides for a $50 million letter of credit sub-facility.
Interest rates under the Credit Facility are based on a spread in excess of
LIBOR or prime as the benchmark rate and on the level of excess availability.
The weighted average interest rate was approximately 5.2% at August 31, 2005,
based on LIBOR and prime rate loans. The facility provides for an unused
commitment fee of .375% per annum, based on the $200 million maximum, less the
outstanding borrowings and letters of credit issued. Eligible receivables and
inventories provide the principal collateral for the borrowings, along with
certain other tangible and intangible assets of the Company. The weighted
average interest rate on all borrowings was approximately 6.2% at August 31,
2005 compared to 5.0% at August 31, 2004.
The Credit Facility includes various events of default and contains certain
restrictions on the operation of the business, including covenants pertaining
to minimum net worth, operating leases, incurrence or existence of additional
indebtedness and liens, and asset sales, as well as other customary covenants,
representations and warranties, and events of default. During fiscal 2005 and
as of August 31, 2005, the Company was in compliance with all covenants under
the Credit Facility and its other borrowing agreements.
There are several factors which can affect the Company's ability to remain in
compliance with the financial covenants currently contained in its Credit
Facility, and to a lesser extent, in its other borrowing arrangements. The
following summarizes certain of the most significant risk factors:
o The apparel environment is cyclical, and the level of consumer spending on
apparel can decline during recessionary periods when disposable income
declines. The tailored clothing market relating to suits has stabilized in
recent periods after experiencing unit declines over the previous several
years. If the tailored clothing market declines further, sales and
profitability would be adversely affected.
o Continuation of widespread casual dressing in the workplace could further
reduce the demand for tailored clothing products, especially for tailored
suits. While the Company markets several sportswear and casual product lines,
consumer receptiveness to these sportswear and casual product offerings may not
offset the declines in the tailored clothing unit sales.
o The Company's customers include major U.S. retailers (certain of which are
under common ownership and control). The ten largest customers represented
approximately 55% of consolidated sales during fiscal 2004 with the largest
customer representing approximately 23% of sales. A decision by the controlling
management of a group of stores or any other significant customer, whether
motivated by competitive conditions, financial difficulties or otherwise, to
decrease the amount of merchandise purchased from the Company, or change their
manner of doing business, could have a material adverse effect on the Company's
financial condition and results of operations.
At August 31, 2005, the Company had approximately $23 million of letters of
credit outstanding, relating to either contractual commitments for the purchase
of inventories from unrelated third parties or for such matters as workers'
compensation requirements in lieu of cash deposits. Such letters of credit are
issued pursuant to the Credit Facility and are considered as usage for purposes
of determining borrowing availability. Availability levels on any date are
impacted by the level of outstanding borrowings under the Credit Facility, the
level of eligible receivables and inventory and outstanding letters of credit.
For the trailing twelve months, additional availability levels have ranged from
$43 million to $102 million. At August 31, 2005, additional borrowing
availability under the Credit Facility was approximately $79 million. The
Company has also entered into surety bond arrangements aggregating
approximately $11 million with unrelated parties, primarily for the purposes of
satisfying workers' compensation deposit requirements of various states where
the Company has operations. At August 31, 2005, there were an aggregate of $2.7
million of outstanding foreign exchange contracts primarily attributable to
approximately .9 million Canadian dollars related to anticipated U.S. dollar
collections by the Company's Canadian business in the next three months and
approximately 1.5 million Euros related to anticipated inventory purchases to
be made in the next nine months. Other than the Company's ongoing guarantee of
a $2.5 million industrial development bond included as a component of
consolidated debt, the Company has not committed to and has not provided any
guarantees of other lines of credit, repurchase obligations, etc., with respect
to the obligations for any unconsolidated entity or to any unrelated third
party.
The Company's various borrowing arrangements are either fixed rate or variable
rate borrowing arrangements. None of the arrangements have rating agency
"triggers" which would impact either the borrowing rate or borrowing
commitment.
Off-Balance Sheet Arrangements. The Company has not entered into off balance
sheet financing arrangements, other than operating leases, and has made no
financial commitments or guarantees with any unconsolidated subsidiaries or
special purpose entities. All of the Company's subsidiaries are wholly owned
and included in the accompanying consolidated financial statements. There have
been no related party transactions nor any other transactions which have not
been conducted on an arm's-length basis.
The Company believes its liquidity and expected cash flows are sufficient to
finance its operations after due consideration of its various borrowing
arrangements, other contractual obligations and earnings prospects.
August 31, 2004 to August 31, 2005
----------------------------------
Net accounts receivable of $131.9 million decreased $3.7 million or 3%,
primarily attributable to the lower sales in the last three months; the
allowance for doubtful accounts declined $3.1 million to $5.9 million
reflecting the write off of amounts previously reserved. Inventories of $150.3
million increased $17.2 million or 13%, primarily attributable to the earlier
receipts of foreign sourced inventories in the Men's Apparel Group and
retailers requests to delay delivery of goods. Net properties of $37.0 million
increased $8.8 million, as capital additions, including amounts related to the
renovation of the Hickey-Freeman manufacturing and distribution facility,
exceeded depreciation expense. Total debt represented 32% of total
capitalization at August 31, 2005 compared to 39% at August 31, 2004. Total
debt of $117.2 million decreased $15.3 million compared to the year earlier
level. Debt levels have been favorably impacted by the higher cash earnings,
partially offset by higher working capital. The increase in non-current
liabilities to $25.5 million compared to $21.4 million was principally
attributable to the grant proceeds received or to be received related to the
Hickey-Freeman renovation. These amounts will amortized over the same period of
time the building renovation costs will be depreciated.
Results of Operations
Third Quarter 2005 Compared to Third Quarter 2004
-------------------------------------------------
Third quarter sales were $152.1 million compared to $155.8 million in 2004.
Men's Apparel Group revenues decreased 5.3% to $129.6 million, reflecting
declines in both tailored clothing and moderate priced sportswear product
categories. In general, wholesale selling prices for comparable products were
approximately even in 2005 compared to 2004, although product mix changes
impacted comparability of both unit sales and average wholesale selling prices.
Tailored clothing average wholesale selling prices were about the same as the
prior year. Suit unit sales decreased approximately 7% and sport coat unit
sales decreased approximately 1%, each reflecting the non-renewal of an
expiring tailored clothing license, partially offset by the effect of new
programs. Slack product categories increased approximately 16% reflecting new
moderate price slack programs. Slack average wholesale selling prices decreased
approximately 14% reflecting the more moderate priced pants. While unit sales
of sportswear products decreased approximately 30%, attributable to declines in
moderate priced sportswear, average wholesale selling prices were 15% higher
than 2004, reflecting product mix changes to higher priced products, such as
Bobby Jones, with higher gross margins. Women's Apparel Group revenues, which
represented approximately 15% of consolidated sales in 2005 and 12% in 2004,
increased $3.6 million. The current period included $5.1 million of incremental
revenue attributable to Misook; the prior period included $2.2 million related
to the one year private label program completed in June 2004. Excluding the
effect of this program, unit sales of women's apparel increased approximately
17% and average selling prices increased approximately 18%, primarily
attributable to Misook. Aggregate sportswear and other non-tailored clothing
product categories, including women's, represented approximately 44% of total
third quarter revenues this year compared to 43% in last year's third quarter.
The consolidated gross margin percentage to sales improved to 33.1% from 30.5%
last year. The higher gross margin rate compared to last year's third quarter
reflected changes in product mix, improved manufacturing utilization in owned
facilities, and continuing cost effective utilization of off-shore contractors
for moderate priced tailored clothing. Approximately $5.0 million in 2005 and
$4.6 million in 2004 of costs related to warehousing, picking and packing of
finished products are included as a component in Selling, General and
Administrative Expenses; accordingly, gross margin may not be comparable to
those other entities that include all of the costs related to their
distribution network in arriving at gross margin. Consolidated selling, general
and administrative expenses of $38.7 million were the same as in 2004, as
higher selling and occupancy costs and $.5 million incremental expenses
attributable to Misook were offset by $1.3 million lower professional fees
related to the documentation and testing of internal controls as required by
the Sarbanes-Oxley Act; the ratio to sales was 25.4% in 2005 compared to 24.9%
in 2004.
Consolidated operating earnings increased to $12.4 million in 2005 compared to
$9.8 million last year and represented 8.2% of net sales in 2005 and 6.3% of
net sales in 2004; the improvement was attributable to the higher gross margin
ratio compared to the prior year. Men's Apparel Group operating earnings were
$13.3 million in 2005 compared to $12.4 million in 2004, attributable to
improved gross margins with tailored clothing products representing the most
significant contributor to earnings and cash flow in each year. Women's Apparel
Group operating earnings were $2.7 million in 2005 and $1.2 million in 2004,
primarily from the higher sales and operating margins from Misook being
included in operating results for the entire quarter in 2005.
Interest expense increased to $1.8 million this period compared to $1.5 million
last year, principally due to higher rates. Consolidated pre-tax earnings were
$10.6 million compared to $8.3 million last year. After reflecting the
applicable tax provision, consolidated net earnings were $6.6 million this
period compared to $5.0 million last year. Diluted earnings per share were $.18
compared to $.14 per share in 2004.
Nine Months 2005 Compared to Nine Months 2004
---------------------------------------------
Consolidated sales were $441.7 million compared to $434.8 million in 2004.
Men's Apparel Group revenues of $377.3 million in the current year were about
even with the year earlier period of $377.7 million, as increases in the
tailored clothing product categories were about offset by declines in moderate
priced sportswear. In general, wholesale selling prices for comparable products
were approximately even in 2005 compared to 2004, although product mix changes
impacted comparability of both unit sales and average wholesale selling prices.
Tailored clothing average wholesale selling prices decreased approximately 3%
from 2004, reflecting a shift in product mix in 2005 compared to the prior
year. Suit unit sales decreased approximately 3% reflecting the effect of new
programs offset by the non-renewal of an expiring tailored clothing license;
sport coat units increased approximately 13% and slack product units increased
approximately 29%, each benefitting from the shipments of two new separates
programs during 2005. Slack average wholesale selling prices decreased
approximately 17%, reflecting a shift in product mix weighted towards casual
pants. While unit sales of sportswear products decreased approximately 24%,
attributable to declines in moderate priced sportswear, average wholesale
selling prices were 16% higher than 2004, reflecting product mix changes to
higher priced products such as Bobby Jones. Women's Apparel Group revenues,
which represented approximately 15% of consolidated sales in 2005 and 13% in
2004, increased $7.4 million. The current period reflected $20.9 million of
incremental revenues attributable to Misook. The prior period included $12.9
million related to the one year private label program completed in June 2004.
Excluding the effect of this program, unit sales of women's apparel increased
approximately 22% and average selling prices increased approximately 22%, each
attributable principally to Misook. Aggregate sportswear and other non-tailored
clothing product categories, including women's, represented approximately 45%
of nine month revenues in both fiscal 2005 and fiscal 2004.
The consolidated gross margin percentage to sales increased to 33.8% compared
to 30.6% last year. The higher gross margin rate compared to last year's nine
months reflected changes in product mix, improved manufacturing utilization in
owned facilities, fewer dispositions of off-price tailored clothing units, and
continuing cost effective utilization of off-shore contractors for moderate
priced tailored clothing. Gross margins may not be comparable to those of other
entities since some entities include all of the costs related to their
distribution network in arriving at gross margin, whereas the Company included
$14.9 million in 2005 and $14.2 million in 2004 of costs related to
warehousing, picking and packing of finished products as a component in
Selling, General and Administrative Expenses. Consolidated selling, general and
administrative expenses were $119.2 million in 2005 compared to $113.4 million
in 2004; the ratio to sales was 27.0% in 2005 compared to 26.1% in 2004. The
increase relative to sales reflected, in part, changes in revenue mix among the
various product lines. The dollar increase reflected higher selling and
occupancy costs, $3.5 million of incremental expenses related to Misook, and
$.2 million of incremental professional fees related to the documentation and
testing of internal controls as required by the Sarbanes-Oxley Act.
Operating earnings improved to $31.6 million in 2005 from $21.3 million in 2004
and represented 7.2% of consolidated sales in 2005 and 4.9% of sales in 2004.
Men's Apparel Group operating earnings were $36.2 million in 2005 compared to
$27.8 million in 2004, attributable to the improved gross margins; tailored
clothing products represented the most significant contributor to earnings and
cash flow in each year. Women's Apparel Group operating earnings were $7.4
million in 2005 compared to $5.0 million in 2004, as the incremental earnings
attributable to Misook were partially offset by declines in other lines,
including the impact of the private label program which was substantially
completed in the second quarter of 2004.
Interest expense was $5.1 million in 2005 compared to $4.6 million in 2004, as
the increase was attributable to both higher average borrowings and higher
rates. Consolidated pre-tax earnings were $26.5 million in 2005 compared to
$16.7 million in 2004. After reflecting the applicable tax provision,
consolidated net earnings were $16.2 million in 2005 compared to $10.1 million
in 2004. Diluted earnings per share were $.44 in 2005 compared to $.28 per
share in 2004.
There are indications that retailers' near term expectations are being impacted
unfavorably by the high gas prices, lower consumer confidence and uncertainty
of the aftermath of the hurricanes. Certain sales delayed in the third quarter
are expected to be shipped during the Company's fourth quarter. Based on
current conditions, the Company anticipates a consolidated sales increase for
the year ending November 30, 2005 at the low end of previous guidance of a low
to mid single digit increase. In the Men's Apparel Group, tailored clothing
revenues should increase slightly with the introduction of new licensing
programs, partially offset by the non-renewal of a license which generated
approximately $14 million of revenues during 2004. Sportswear product lines are
anticipated to increase at the higher price points but decline overall due to
lower moderate priced sportswear sales from reduced business with the warehouse
club channel. Women's Apparel Group revenues, which represented approximately
14% of total sales in 2004, are anticipated to increase from the incremental
impact of the Misook acquisition for the full year, largely offset by the one
year private label program completed in June 2004.
Operating margins are expected to improve compared to the prior year on the
higher sales due to improved gross margins generally and from product mix. The
January 2005 extension of the Company's $200 million senior credit facility to
February 2009, with an option to February 2010, provides flexibility for the
Company to implement its operating strategies, including acquisitions similar
in size to Misook. Net earnings are anticipated to increase in the 30% to 40%
range for the full year over 2004's $15.9 million or $.44 per diluted share,
in line with guidance provided at the beginning of the Company's fiscal year,
but more cautious than the most recent mid-year guidance of a 40% to 45% full
year improvement.
The Company's longer term objectives are to increase revenues and continue
pre-tax margin improvements, with growth realized from a combination of both
internal revenue growth and from acquisitions. The Company continues to
evaluate acquisition opportunities which can produce positive cash flows, are
accretive to earnings in the near to mid-term, and which do not create
excessive debt leverage.
This quarterly report on Form 10-Q contains forward-looking statements made in
reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The statements could be significantly impacted by such
factors as the level of consumer spending for men's and women's apparel, the
prevailing retail environment, the Company's relationships with its suppliers,
customers, lenders, licensors and licensees, actions of competitors that may
impact the Company's business and the impact of unforeseen economic changes,
such as interest rates, or in other external economic and political factors
over which the Company has no control. The reader is also directed to the
Company's 2004 Annual Report on Form 10-K for additional factors that may
impact the Company's results of operations and financial condition.
Forward-looking statements are not guarantees as actual results could differ
materially from those expressed or implied in forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
---------------------------------------------------------------------
The Company does not hold financial instruments for trading purposes or engage
in currency speculation. The Company enters into foreign exchange forward
contracts from time to time to limit the currency risks primarily associated
with purchase obligations denominated in foreign currencies. Foreign exchange
contracts are generally for amounts not to exceed forecasted purchase
obligations or receipts and require the Company to exchange U.S. dollars for
foreign currencies at rates agreed to at the inception of the contracts. These
contracts are typically settled by actual delivery of goods or receipt of
funds. The effects of movements in currency exchange rates on these
instruments, which have not been significant, are recognized in earnings in the
period in which the purchase obligations are satisfied or funds are received.
As of August 31, 2005, the Company had entered into foreign exchange contracts,
aggregating approximately $2.7 million principally attributable to
approximately .9 million Canadian dollars related to anticipated U.S. dollar
collections by the Company's Canadian business in the next three months and
approximately 1.5 million Euros primarily related to inventory purchases in the
next nine months.
The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of the variable rate borrowings under
its Credit Facility. Rates may fluctuate over time based on economic
conditions, and the Company could be subject to increased interest payments if
market interest rates rise. A 1% change in the effective interest rate on the
Company's anticipated borrowings under its Credit Facility would impact annual
interest expense by approximately $.8 million based on borrowings under the
Credit Facility at August 31, 2005. In the last three years, the Company has
not used derivative financial instruments to manage interest rate risk.
The Company's customers include major U.S. retailers (certain of which are
under common ownership and control), several of whom reported declines in sales
during various monthly periods in 2003 and 2004. The ten largest customers
represented approximately 55% of consolidated sales during fiscal 2004 with the
largest customer representing approximately 23% of sales. A decision by the
controlling management of a group of stores or any other significant customer,
whether motivated by competitive conditions, financial difficulties or
otherwise, to decrease the amount of merchandise purchased from the Company, or
change their manner of doing business, could have a material adverse effect on
the Company's financial conditions and results of operations.
Item 4 - Controls and Procedures
--------------------------------
(A) Evaluation of Disclosure Controls and Procedures. The Company's
management, under the supervision of and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures, as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of the end of the period
covered by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures were effective and
were reasonably designed to ensure that all material information relating to
the Company required to be included in the Company's reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and
Exchange Commission.
(B) Changes in Internal Control Over Financial Reporting. There have
not been any changes in the Company's internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act during the Company's fiscal quarter ended August 31, 2005 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Limitations on the Effectiveness of Controls. The Company's
management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's disclosure controls or the Company's
internal controls will prevent all errors and all fraud.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Further, the design of disclosure controls and procedures and internal control
over financial reporting must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected.
Part II -- OTHER INFORMATION
Item 6. Exhibits
------- --------
31.1 Certification of Chairman, President and Chief Executive Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Executive Vice President and Chief Financial Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman, President and Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Executive Vice President and Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTMARX CORPORATION
October 6, 2005 By /s/ GLENN R. MORGAN
-------------------
Name: Glenn R. Morgan
Title: Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
October 6, 2005 By /s/ ANDREW A. ZAHR
------------------
Name: Andrew A. Zahr
Title: Vice President and Controller
(Principal Accounting Officer)