<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
X OF THE SECURITIES EXCHANGE ACT OF 1934
-------
For quarterly period ended August 31, 1998
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 Identification Number)
incorporation or organization)
101 North Wacker Drive
Chicago, Illinois 60606
---------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 312/372-6300
------------
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
------ ------
At September 30, 1998, there were 34,771,336 shares of the Company's common
stock outstanding.
<PAGE>
HARTMARX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
------
Part I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statement of Earnings for the
three months and nine months ended August 31, 1998
and August 31, 1997. 3
Consolidated Balance Sheet as of August 31, 1998,
November 30, 1997 and August 31, 1997. 4
Condensed Consolidated Statement of Cash Flows
for the nine months ended August 31, 1998 and
August 31, 1997. 6
Notes to Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
2
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
HARTMARX CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(000's Omitted)
<TABLE>
<CAPTION>
Three Months Ended Aug. 31, Nine Months Ended Aug. 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $195,203 $185,883 $542,019 $532,736
Licensing and other income 640 980 1,464 2,592
-------- -------- -------- --------
195,843 186,863 543,483 535,328
-------- -------- -------- --------
Cost of goods sold 146,448 138,853 406,558 404,291
Selling, general and administrative expenses 36,213 36,948 108,796 108,878
-------- -------- -------- --------
182,661 175,801 515,354 513,169
-------- -------- -------- --------
Earnings before interest and taxes 13,182 11,062 28,129 22,159
Interest expense 4,737 4,437 13,989 12,849
-------- -------- -------- --------
Earnings before taxes 8,445 6,625 14,140 9,310
Tax provision 3,210 2,520 5,375 3,540
-------- -------- -------- --------
Net earnings $ 5,235 $ 4,105 $ 8,765 $ 5,770
======== ======== ======== ========
Earnings per share:
Basic $.15 $.12 $.25 $.17
==== ==== ==== ====
Diluted $.15 $.12 $.25 $.17
==== ==== ==== ====
Dividends per common share $ - $ - $ - $ -
==== ==== ==== ====
Average shares outstanding:
Basic 34,561 33,847 34,385 33,631
====== ====== ====== ======
Diluted 34,940 34,532 34,852 34,111
====== ====== ====== ======
</TABLE>
(See accompanying notes to consolidated financial statements)
3
<PAGE>
HARTMARX CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
(000'S OMITTED)
<TABLE>
<CAPTION>
AUG. 31, NOV. 30, AUG. 31,
1998 1997 1997
--------- --------- ---------
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 3,687 $ 1,626 $ 788
Accounts receivable, less allowance of
$9,163, $9,803 and $9,399 for 160,702 136,854 157,771
doubtful accounts
Inventories 202,984 193,780 183,677
Prepaid expenses 5,136 4,332 7,010
Recoverable and deferred income taxes 20,152 20,152 6,438
--------- --------- ---------
Total current assets 392,661 356,744 355,684
--------- --------- ---------
INVESTMENTS AND OTHER ASSETS 29,188 25,230 22,109
--------- --------- ---------
DEFERRED INCOME TAXES 38,808 42,627 43,285
--------- --------- ---------
PROPERTIES
Land 2,645 2,645 2,628
Buildings and building improvements 49,335 49,003 49,056
Furniture, fixtures and equipment 118,882 110,860 111,678
Leasehold improvements 17,908 16,597 16,613
--------- --------- ---------
188,770 179,105 179,975
Accumulated depreciation and amortization (138,413) (133,323) (134,953)
--------- --------- ---------
Net properties 50,357 45,782 45,022
--------- --------- ---------
TOTAL ASSETS $ 511,014 $ 470,383 $ 466,100
========= ========= =========
</TABLE>
(See accompanying notes to consolidated financial statements)
4
<PAGE>
HARTMARX CORPORATION
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(000'S OMITTED)
<TABLE>
<CAPTION>
AUG. 31, NOV. 30, AUG. 31,
1998 1997 1997
-------- -------- --------
CURRENT LIABILITIES
<S> <C> <C> <C>
Notes payable $ 20,000 $ 20,000 $ 30,000
Current maturities of long-term debt 66 62 61
Accounts payable and accrued expenses 80,890 100,098 89,671
-------- -------- --------
Total current liabilities 100,956 120,160 119,732
-------- -------- --------
LONG-TERM DEBT, less current maturities 205,746 157,939 175,637
-------- -------- --------
SHAREHOLDERS' EQUITY
Preferred shares, $1 par value;
2,500,000 authorized and unissued -- -- --
Common shares, $2.50 par value; authorized
75,000,000; issued 34,759,412 in
August 1998; 34,219,401 in November
1997 and 33,809,072 in August 1997. 86,899 85,549 84,523
Capital surplus 81,959 79,934 78,196
Retained earnings 44,476 35,711 16,241
Unearned employee benefits (9,022) (8,910) (8,229)
-------- -------- --------
Total shareholders' equity 204,312 192,284 170,731
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $511,014 $470,383 $466,100
======== ======== ========
</TABLE>
(See accompanying notes to consolidated financial statements)
5
<PAGE>
HARTMARX CORPORATION
CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUG. 31,
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1998 1997
- ------------------------------------------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 8,765 $ 5,770
Reconciling items to adjust net earnings
to net cash used in operating activities:
Depreciation and amortization 6,539 6,595
Changes in:
Receivables, inventories, prepaids and other assets (38,483) (42,222)
Accounts payable and accrued expenses (19,208) (10,074)
Taxes and deferred taxes on earnings 3,819 5,162
-------- --------
Net cash used in operating activities (38,568) (34,769)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,390) (7,296)
-------- --------
Net cash used in investing activities (10,390) (7,296)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 47,800 37,099
Decrease in other long-term debt (44) (85)
Other equity transactions 3,263 2,995
-------- --------
Net cash provided by financing activities 51,019 40,009
-------- --------
Net increase (decrease) in cash and cash equivalents 2,061 (2,056)
Cash and cash equivalents at beginning of period 1,626 2,844
-------- --------
Cash and cash equivalents at end of period $ 3,687 $ 788
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid during period for:
Interest expense $ 16,000 $ 14,000
Income taxes 1,600 -
</TABLE>
(See accompanying notes to consolidated financial statements)
6
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HARTMARX CORPORATION
NOTES TO 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 and
financial position for the applicable period. Results of operations for any
interim period are not necessarily indicative of results for any other periods
or for the full year. These 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, 1997.
NOTE 2
The calculation of basic earnings per share for each period is computed based on
the weighted average number of common shares outstanding and excludes all
dilution. 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.
None of the 2,500,000 authorized preferred shares for Hartmarx Corporation have
been issued.
NOTE 3
Long-term debt comprised the following (000's omitted):
<TABLE>
<CAPTION>
AUG. 31, NOV. 30, AUG. 31,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Notes payable $120,700 $ 72,900 $100,600
10 7/8% Senior Subordinated Notes, net 85,104 84,982 84,964
Industrial development bonds 17,350 17,396 17,402
Other debt 2,658 2,723 2,732
--------- --------- ---------
225,812 178,001 205,698
Less - current 20,066 20,062 30,061
--------- --------- ---------
Long-term debt $205,746 $157,939 $175,637
========= ======== ========
</TABLE>
During fiscal 1994, the Company issued $100 million principal amount of 10 7/8%
Senior Subordinated Notes due January 15, 2002 ("Notes") in a public offering,
and also entered into a then three year financing agreement ("Credit Facility")
with a group of lenders providing for maximum borrowings of $175 million
(including a $25 million letter of credit facility) secured by eligible
inventories, accounts receivable and the intangibles of the Company and its
subsidiaries. Credit Facility amendments in July 1995, November 1995, January
1996, and October 1997, among other things, resulted in a reduction in the fees,
administrative charges and effective borrowing rates, adjustment or elimination
of certain covenants and the extension of the term
7
<PAGE>
from March 1997 to July 2000. The Notes and Credit Facility contain various
restrictive covenants covering ratios related to maximum funded debt to EBITDA
and minimum fixed charge coverages, additional debt occurrence, capital
expenditure, asset sales, operating leases, as well as other customary
covenants, representations and warranties, funding conditions and events of
default. The Company was in compliance with the above noted covenants.
Note 4
Inventories at each date consisted of (000's omitted):
<TABLE>
<CAPTION>
AUG. 31, NOV. 30, AUG. 31,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Raw materials $ 49,447 $ 54,741 $ 56,564
Work-in-process 30,031 35,959 28,397
Finished goods 123,506 103,080 98,716
-------- -------- --------
$202,984 $193,780 $183,677
======== ======== ========
</TABLE>
Inventories are stated at the lower of cost or market. At August 31, 1998,
November 30, 1997 and August 31, 1997, approximately 37%, 40% and 35% of the
Company's total inventories, respectively, are valued using the last-in, first-
out (LIFO) method representing certain work-in-process and finished goods. The
first-in, first-out (FIFO) method is used for substantially all raw materials
and the remaining inventories.
Note 5
The provisions of Statement of Financial Accounting Standards No. 130 --
"Reporting Comprehensive Income" ("FAS 130"), Statement of Financial Accounting
Standards No. 131 -- "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"), Statement of Financial Accounting Standards No. 132 --
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS
132") are each effective for the Company's 1999 fiscal year commencing December
1, 1998.
FAS 130 requires disclosure of transactions from non-owner sources which affect
shareholders' equity in a separate financial statement for the period in which
they are recognized. FAS 131 establishes new standards for reporting information
about operating segments in the footnotes of both interim and annual financial
statements. FAS 132 requires additional disclosures concerning pensions and
other postretirement benefits.
Statement of Financial Accounting Standards No. 133 - "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") is required to be adopted by the
Company for its fiscal fourth quarter beginning September 1, 1999. FAS 133
requires disclosures of the objectives for holding or issuing derivative
instruments, the context to understand the objectives and the strategies for
achieving the objectives, as well as disclosures related to the impact of
derivatives as reflected in the statement of comprehensive income.
The adoption of these statements is not expected to have a significant effect on
the Company's reported financial position or results of operations. Management
is currently evaluating the effect of these pronouncements on its financial
statement disclosures.
8
<PAGE>
HARTMARX CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
November 30, 1997 to August 31, 1998
- ------------------------------------
Since November 30, 1997, net accounts receivable increased $23.8 million or
17.4% to $160.7 million reflecting the normal seasonal fluctuations in the Men's
Apparel Group. Inventories of $203.0 million increased $9.2 million or 4.7% in
anticipation of higher sales as well as longer cycle times associated with
additional off-shore sourcing and earlier production scheduling. Net properties
of $50.4 million increased $4.6 million as capital additions of $10.4 million
exceeded depreciation expense of $5.9 million. Accounts payable and accrued
expenses declined $19.2 million from the seasonal payments in the Men's Apparel
Group. Total debt of $225.8 million was $47.8 million higher and represented
52.5% of total capitalization compared to 48.1% at November 30, 1997. The
Company's normal seasonality results in a higher debt capitalization at August
31 compared to November 30, when borrowings are lower.
August 31, 1997 to August 31, 1998
- ----------------------------------
Net accounts receivable of $160.7 million increased $2.9 million from last
year's $157.8 million, primarily attributable to the higher sales, offset by
improved collections. Inventories of $203.0 million increased $19.3 million,
principally due to longer cycle times associated with additional off-shore
sourcing, earlier production scheduling and amounts necessary to support
expanded in-stock programs. Net properties of $50.4 million increased $5.3
million, primarily reflecting capital additions exceeding depreciation expense.
Total debt of $225.8 million increased $20.1 million, reflecting higher working
capital requirements, partially offset by the trailing year earnings; debt
represented 52.5% of total capitalization at August 31, 1998 compared to 54.6%
at August 31, 1997.
RESULTS OF OPERATIONS
Third Quarter 1998 Compared to Third Quarter 1997
- -------------------------------------------------
Consolidated sales of $195.2 million increased 5.0% compared to $185.9 million
for the year earlier period. Men's Apparel Group revenues increased 5.2%,
primarily attributable to the tailored clothing product lines. Sales of
casualwear, which includes golfwear, were slightly lower and represented 16% of
sales compared to 17% last year. Sales in the women's businesses increased 2%
and represented approximately 8% of consolidated sales in each period.
The consolidated gross margin percentage to sales declined to 25.0% from 25.3%
last year, primarily attributable to ongoing competitive pressures in the
moderately priced product lines within the Men's Apparel Group. Gross margins in
the Women's Apparel Group increased slightly compared to the year earlier
period. Consolidated selling, general and administrative expenses declined to
$36.2 million from $36.9 million last year and represented 18.6% of sales in the
current year compared to 19.9% in the year earlier period.
9
<PAGE>
Licensing income, which has been adversely affected by economic conditions in
the Far East, declined $.3 million.
Earnings before interest and taxes ("EBIT") increased $2.1 million to $13.2
million. Interest expense of $4.7 million increased $.3 million from the higher
average borrowings and included amortization of financing fees of $.2 million
this year and $.3 million last year. Consolidated pre-tax earnings improved to
$8.4 million in 1998 compared to $6.6 million in 1997. After reflecting the
applicable tax provision, consolidated earnings were $5.2 million compared to
$4.1 million in 1997. Basic and diluted earnings per share were $.15 in the
current period and $.12 in the prior period.
Nine Months 1998 Compared to Nine Months 1997
- ---------------------------------------------
Consolidated sales were $542.0 million this year compared to last year's $532.7
million. Men's Apparel Group sales increased 1.7% from the prior year. Revenues
from newer programs including Hickey-Freeman furnishings, Hart Schaffner & Marx
sportswear, Kenneth Cole tailored clothing and Desert Classic golfwear in effect
replaced certain private label and other branded product lines which are being
deemphasized. Women's Apparel Group revenues, which represented 8% of
consolidated sales in each year, increased approximately 2%.
The consolidated gross margin percentage to sales improved to 25.0% of sales
from 24.1% last year, attributable to the Men's Apparel Group; gross margins in
the Women's Apparel Group remained strong, although lower than the prior year.
Consolidated selling, general and administrative expenses were $108.8 million
compared to $108.9 million in 1997 and represented 20.1% and 20.4% of sales in
1998 and 1997, respectively. Licensing income, which is largely derived from
foreign sources, declined $1.1 million for the nine months to $1.5 million,
principally reflecting the economic conditions in the Far East.
EBIT increased to $28.1 million in 1998 compared to $22.2 million last year and
represented 5.2% of sales in 1998 compared to 4.2% of sales in 1997. The
earnings improvement was attributable to the higher sales and improved gross
margin and selling, general and administrative expenses ratios to sales.
Interest expense increased to $14.0 million from $12.8 million last year from
the higher average borrowings and included amortization of financing fees of $.7
million in 1998 and $.8 million in 1997. Consolidated pre-tax earnings increased
$4.8 million to $14.1 million from $9.3 million last year. After reflecting the
applicable tax provision, consolidated earnings were $8.8 million compared to
$5.8 million in the year earlier period. Basic and diluted earnings per share
were $.25 in 1998 and $.17 in 1997.
Year 2000 Disclosures
- ---------------------
The Company is addressing Year 2000 issues for its computer systems, operations
systems, microprocessors and other significant computer-based devices and
applications. Its plan encompasses both a comprehensive upgrade of its principal
management information systems ("Project") as well as a review of non-Project
systems and compatibility with various third party applications on which the
Company relies. The plan is being implemented under the direction of senior
management and includes periodic updates to management and outside parties.
During 1997, the Company commenced the Project, which encompasses significant
enhancements to the Company's existing hardware configurations and software
applications related to its sales, manufacturing,
10
<PAGE>
distribution and accounting operations. The Project is being phased in over a
three year period. Among other things, the enhancements are expected to result
in the Company's information systems being Year 2000 compliant. A significant
portion of the new systems enhancements will emanate from purchased software for
which written representation has been received from the application vendors that
such software is Year 2000 compliant. The total three year Project cost is
currently not expected to exceed $25 million of which a negligible amount is
attributable to Year 2000 compliance. Through August 31, 1998, the Company has
incurred approximately $15 million related to the Project of which approximately
$14 million has been capitalized. In accordance with the Company's accounting
policy, capitalized costs will be amortized over five years when the new systems
are operational. The Company has been testing the software during 1998 as an
integral part of the phased implementation of the new applications. To date, the
Company has commenced its systems upgrade at two operating units and no Year
2000 defects have been noted. The Company anticipates the Project will be
completed in 1999. The Company will be closely monitoring its implementation
schedule by operating unit. If necessary, the Company would expect to undertake
and complete the Year 2000 compliance work on current applications.
The Company is also currently evaluating and prioritizing Year 2000 issues
applicable to other software applications and systems not included in the
Project. The extent of remaining compliance risks with regard to these systems
is expected to be determined by the end of the fourth quarter, at which time
remediation scheduling and contingency plans for implementing the required
changes to make these systems Year 2000 compliant will be completed. The Company
has also initiated formal communications with its significant suppliers and
customers to determine the extent to which their systems will be Year 2000
compliant and compatible with the Company's systems. The Company estimates that
the cost of remediation in these areas will not be significant to the Company's
financial position or results of operations. The majority of these costs will be
expended in the fourth quarter of 1998 and the first half of 1999. Management
anticipates that the systems not included in the Project will be Year 2000
complaint by July 1, 1999.
Year 2000 issues could have an adverse impact on the Company's ability to
operate efficiently if the Project systems are not converted on a timely basis
and if the remediation of the non-Project systems and operations are not
completed on a timely basis. Accordingly, there can be no assurance that the
Year 2000 problem will not have a material adverse effect on the Company's
results of operations or financial condition.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedules
(b) No reports on Form 8-K were filed in the third quarter of 1998.
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 14, 1998 By: /s/GLENN R. MORGAN
------------------
Glenn R. Morgan
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
October 14, 1998 By: /s/ANDREW A. ZAHR
-----------------
Andrew A. Zahr
Vice President and Controller
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Statement of Earnings and the Consolidated Balance Sheet and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 3,687
<SECURITIES> 0
<RECEIVABLES> 160,702
<ALLOWANCES> (9,163)
<INVENTORY> 202,984
<CURRENT-ASSETS> 392,661
<PP&E> 188,770
<DEPRECIATION> (138,413)
<TOTAL-ASSETS> 511,014
<CURRENT-LIABILITIES> 100,956
<BONDS> 205,746
0
0
<COMMON> 86,899
<OTHER-SE> 117,413
<TOTAL-LIABILITY-AND-EQUITY> 511,014
<SALES> 542,019
<TOTAL-REVENUES> 543,483
<CGS> 406,558
<TOTAL-COSTS> 406,558
<OTHER-EXPENSES> 108,796
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,989
<INCOME-PRETAX> 14,140
<INCOME-TAX> 5,375
<INCOME-CONTINUING> 8,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,765
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
