<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
January 19, 1999
KELLWOOD COMPANY
(Exact Name of Registrant as Specified in Charter)
Delaware
(State of Other Jurisdiction of Incorporation)
36-2472410
(Commission File Number) (IRS Employer Identification No.)
600 KELLWOOD PARKWAY
P.O. BOX 14374
CHESTERFIELD, MISSOURI 63017
(Address, including zip code, of
Registrant's Principal Executive Offices)
(314) 576-3100
(Registrant's Telephone Number, including area code)
<PAGE>
ITEM 7. FINANCIAL STATMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
In connection with the proposed acquisition of Koret, Inc. as described in
SEC Form 8-K which the Company filed by Edgar on December 3, 1998, we are
hereby filing a copy of the following Financial Statements as Exhibits to
the Form 8-K:
(a) Financial Statements of Businesses Acquired
Koret, Inc. and Subsidiaries Consolidated Financial Statements for the
years ended November 30, 1997, December 1, 1996, and December 3, 1995,
together with Interim Consolidated Financial Statements Unaudited for
the periods ended August 30, 1998 and August 31, 1997.
(b) Exhibits
Financials referred to in (a) above.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 8-K and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of St. Louis, State of Missouri on January 18, 1999.
KELLWOOD COMPANY
By: /s/ Thomas H. Pollihan
-----------------------------------
Thomas H. Pollihan
Vice President, Secretary and
General Counsel
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1997, December 1, 1996 and December 3, 1995
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Koret, Inc.:
We have audited the accompanying consolidated balance sheets of Koret, Inc.
and subsidiaries as of November 30, 1997 and December 1, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three year period ended November 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Koret,
Inc. and subsidiaries as of November 30, 1997 and December 1, 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended November 30, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
February 11, 1998
1
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30, 1997 and December 1, 1996
(in thousands except share amounts)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 1,916 2,321
Due from factors and trade accounts receivable, net (note
3)......................................................... 3,228 15,669
Inventories (note 4)........................................ 57,712 40,907
Deferred income taxes (note 6).............................. 4,704 2,696
Other current assets........................................ 2,809 2,597
------- ------
Total current assets...................................... 70,369 64,190
Property, plant and equipment, net (note 5)................... 8,805 9,549
Deferred income taxes (note 6)................................ 1,825 2,740
Intangible assets and excess of purchase price over fair value
of assets acquired, less accumulated amortization of $5,958
and $4,818 in 1997 and 1996, respectively.................... 11,397 12,437
Other assets.................................................. 136 187
------- ------
Total assets.............................................. 92,532 89,103
======= ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Bank overdraft.............................................. 5,334 4,371
Current maturities of long-term debt (note 7)............... 3,948 12,960
Accounts payable............................................ 16,074 14,398
Accrued liabilities......................................... 3,252 3,077
Accrued salaries, wages and employee benefits............... 3,798 2,381
Income taxes payable (note 6)............................... 1,401 --
------- ------
Total current liabilities................................. 33,807 37,187
Long-term debt (note 7)....................................... 13,313 9,460
Other non-current liabilities and deferred credits (notes 5, 9
and 13)...................................................... 3,472 2,822
------- ------
Total liabilities......................................... 50,592 49,469
------- ------
Stockholders' equity (notes 9 and 14):
Class A common stock, $.01 par value. Authorized 20,000,000
shares; 4,835,254 and 4,579,416 shares issued and
outstanding in 1997 and 1996, respectively................. 48 46
Class C special common stock, $1.00 par value. Authorized
3,200,000 shares; 3,091,190 shares issued and outstanding.. 3,091 3,091
Additional paid-in capital.................................. 21,042 20,788
Retained earnings........................................... 18,461 16,154
Foreign currency translation adjustment..................... (702) (445)
------- ------
Total stockholders' equity................................ 41,940 39,634
Commitments and contingencies (notes 3, 9, 11, 13 and 14).....
------- ------
Total liabilities and stockholders' equity................ $92,532 89,103
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
November 30, 1997 and December 1, 1996 and December 3, 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net sales......................................... $295,372 259,403 275,576
Cost of sales..................................... 219,898 196,139 206,453
-------- ------- -------
Gross margin.................................. 75,474 63,264 69,123
Selling, general and administrative expenses...... 62,928 58,481 56,762
Amortization of intangible assets and excess of
purchase price over fair value of assets
acquired......................................... 1,385 1,044 712
-------- ------- -------
Operating income.............................. 11,161 3,739 11,649
Interest expense, net............................. (5,895) (5,457) (6,365)
Other expense, net................................ (309) (146) 102
-------- ------- -------
Income (loss) before income taxes............. 4,957 (1,864) 5,386
Provision (benefit) for income taxes (note 6)..... 2,650 (304) 1,741
-------- ------- -------
Net income (loss)............................. $ 2,307 (1,560) 3,645
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended November 30, 1997, December 1, 1996 and December 3, 1995
(in thousands)
<TABLE>
<CAPTION>
Class C
Class A special Foreign
common stock common stock Additional currency Total
------------- ------------- paid-in Retained translation stockholders'
Shares Amount Shares Amount capital earnings adjustment equity
------ ------ ------ ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at November 27,
1994................... 4,507 $45 3,091 $3,091 20,276 14,069 (386) 37,095
Net income.............. -- -- -- -- -- 3,645 -- 3,645
Issuance of common
stock:
Shares issued for
acquisition (note 8).. 59 1 -- -- 499 -- -- 500
Exercise of stock
options (note 14)..... 13 -- -- -- 13 -- -- 13
Translation adjustment.. -- -- -- -- -- -- 144 144
----- --- ----- ------ ------ ------ ---- ------
Balances at December 31,
1995................... 4,579 46 3,091 3,091 20,788 17,714 (242) 41,397
Net loss................ -- -- -- -- -- (1,560) -- (1,560)
Translation adjustment.. -- -- -- -- -- -- (203) (203)
----- --- ----- ------ ------ ------ ---- ------
Balances at December 1,
1996................... 4,579 46 3,091 3,091 20,788 16,154 (445) 39,634
Net income.............. -- -- -- -- -- 2,307 -- 2,307
Translation adjustment.. -- -- -- -- -- -- (257) (257)
Exercise of warrants
(note 14).............. 256 2 -- -- 254 -- -- 256
----- --- ----- ------ ------ ------ ---- ------
Balances at November 30,
1997................... 4,835 $48 3,091 $3,091 21,042 18,461 (702) 41,940
===== === ===== ====== ====== ====== ==== ======
</TABLE>
4
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended November 30, 1997, December 1, 1996 and December 3, 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $ 2,307 (1,560) 3,645
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization................... 3,880 3,747 3,093
Amortization of discount on subordinated note... 358 195 195
Net loss (gain) on disposal of equipment........ 20 (42) (4)
Deferred rent................................... (86) (127) (164)
Deferred gain................................... (144) (128) --
Deferred income taxes........................... (1,093) (1,871) (470)
Changes in operating assets and liabilities:
Receivables transferred to factors/trade
accounts receivable, net..................... (32,268) 20,359 (4,897)
Inventories................................... (16,805) 1,850 5,006
Other current assets.......................... (161) 502 (897)
Income taxes refundable....................... -- 261 2,252
Income taxes payable.......................... 1,401 -- --
Accounts payable.............................. 1,676 612 (2,790)
Accrued liabilities........................... 1,592 (990) 1,564
Other liabilities............................. 880 -- --
------- ------- -------
Net cash (used in) provided by operating
activities.................................. (38,443) 22,808 6,533
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and
equipment........................................ 27 3,772 5,886
Capital expenditures.............................. (1,725) (1,769) (1,984)
Purchase of Campaign, net of cash acquired........ -- -- (3,622)
Purchase of Mr. Jax, net of cash acquired......... -- -- (6,634)
Acquisition costs capitalized..................... -- -- (1,078)
------- ------- -------
Net cash (used in) provided by investing
activities.................................. (1,698) 2,003 (7,432)
------- ------- -------
Cash flows from financing activities:
Net advances (repayments) under factoring and line
of credit agreements............................. 44,709 (15,719) 1,753
Principal payments on long-term debt and capital
lease obligations................................ (14,745) (15,415) (13,603)
Borrowings under long-term debt agreement......... 8,830 -- 13,745
Change in bank overdraft.......................... 963 1,185 1,252
Proceeds from exercise of warrants................ 256 -- --
Debt issuance costs............................... (100) -- --
Exercise of stock options for Class A common
stock............................................ -- -- 13
------- ------- -------
Net cash provided by (used in) financing
activities.................................. 39,913 (29,949) 3,160
------- ------- -------
Effect of exchange rate on changes in cash......... (177) (175) 144
------- ------- -------
Net decrease in cash and cash equivalents.... (405) (5,313) 2,405
Cash and cash equivalents at beginning of year..... 2,321 7,634 5,229
------- ------- -------
Cash and cash equivalents at end of year........... $ 1,916 2,321 7,634
======= ======= =======
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest........................................ $ 5,742 5,338 6,139
======= ======= =======
Income taxes.................................... $ 2,609 1,306 636
======= ======= =======
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
In December 1996, a capital lease obligation of $398,000 was incurred when
the Company entered into a lease for new equipment.
In 1995, the Company, in connection with business, acquisitions, issued
58,824 shares of Class A common stock with a fair value of approximately
$500,000, issued promissory notes payable of $8,000,000 and assumed
approximately $6,523,000 of debt obligations (note 8).
See accompanying notes to consolidated financial statements.
5
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 30, 1997, December 1, 1996 and December 3, 1995
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Koret, Inc.
("the Company") and its wholly owned subsidiaries, Koret of California, Inc.;
Counterparts Sportwear, Inc.; New Campaign, Inc. ("Campaign"); MJF Imports;
and West Coast Apparel, Inc. (note 2) (hereinafter collectively referred to as
"Koret"). All materials intercompany transactions and accounts have been
eliminated.
(b) Fiscal Year
Koret's fiscal year is the 52- or 53-week period ending the Sunday nearest
to November 30.
(c) Cash, Cash Equivalents and Bank Overdrafts
Cash equivalents include highly liquid investments with maturities of less
than three months at the time of purchase.
Koret's central cash management system is designed to maintain minimal
balances at the bank. Koret's policy is to classify checks issued but not
presented to the bank as bank overdrafts.
(d) Inventory Valuation
Inventories are recorded at the lower of standard costs (which approximate
average cost) or market (net realizable value). Inventory cost includes raw
materials, direct labor and manufacturing overhead costs.
(e) Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation, including
amortization of capitalized leases, is computed using the straight-line method
over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings................................. 20-25 years
Leasehold improvements and leasehold Shorter of the lease term or
equipment................................ the useful life of the asset
Machinery and equipment................... 3-7 years
</TABLE>
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized.
(f) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
6
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
(g) Foreign Currency Translation Adjustment
The balance sheet accounts of West Coast Apparel, Inc. (formerly Koret of
Canada, Inc. and Mr. Jax Fashions, Inc.) are translated using the exchange
rate in effect at the balance sheet date and using the Canadian dollar as the
functional currency. Results of operations are translated using the average
exchange rate prevailing throughout the period. Unrealized exchange rate gains
and losses resulting from translating foreign currency assets and liabilities
into U.S. dollars are accumulated as a foreign currency translation adjustment
in stockholders' equity.
(h) Amortization of Intangible Assets and Excess of Purchase Price over Fair
Value of Assets Acquired
Amortization is calculated on a straight-line basis over the following
periods:
<TABLE>
<S> <C>
Intangible assets:
Trained work force.................................... 10 years
Trade name............................................ 40 years
Organization costs.................................... 5 to 40 years
Debt issuance costs................................... 5 years
Excess of purchase price over fair value of assets
acquired............................................... 20 and 30 years
</TABLE>
The Company continually evaluates the recoverability of goodwill as well as
other intangible assets by assessing whether the amortization of the balance
over the remaining life can be recovered through expected and undiscounted
future results. As part of this review, the Company takes into consideration
any events and circumstances which might have diminished the fair values.
(i) Postretirement Benefits
The cost of postretirement benefits other than pensions are recognized in
the financial statements. Koret has no ongoing postretirement benefit plan
covering active employees; therefore, the entire accumulated postretirement
benefit obligation relates to retirees.
(j) Foreign Exchange Forward Contracts
Koret enters into foreign exchange forward option contracts to manage
exposure to currency rate fluctuations. At the time of recording, these
exchange agreements qualify for accounting as designated hedges. The realized
and unrealized gains and losses on these contracts are deferred and included
as a component of the related transaction. Koret does not engage in
speculation.
(k) Accounting for Stock Options
Prior to December 2, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded only if the current market
price of the underlying stock exceeded the exercise price on the date of
grant. On December 2, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period for the
fair value of all stock-based awards on the date of the grant, Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income disclosures for employee stock
option grants made in fiscal 1996 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions required by SFAS No. 123.
7
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
(l) Use of Estimates
Koret's management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities, and revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
amounts may ultimately differ from those estimates.
(m) Reclassifications
Certain 1996 and 1995 amounts not affecting net income have been
reclassified to conform to the 1997 consolidated financial statement
presentation.
(2) Origination
The Company, through its subsidiaries, is engaged in the design, manufacture
and wholesale of quality women's apparel and leather accessories.Koret also
operates several retail outlet stores.The Company distributes products
throughout the United States and Canada.
On December 4, 1995, two of the Company's subsidiaries located in Canada
(Mr. Jax Fashions, Inc. and Koret Canada, Inc.) amalgamated into one company,
West Coast Apparel, Inc. An amalgamation, under Canadian law, is similar to a
merger, but results in the formation of a new company. The amalgamated company
retains all the characteristics of the predecessor companies such as ownership
of assets, obligations to creditors and tax bases.
(3) Due from Factors and Trade Accounts Receivable, Net
The Company's subsidiaries have each entered into factoring agreements,
whereby substantially all accounts receivable are transferred to the factor on
a nonrecourse basis, subject to credit approvals from the factor. These
transfers are accounted for as sales as the Company's subsidiaries have
surrendered control of these receivables in exchange for other consideration.
In connection with the debt restructuring (note 7), the factoring commission
charged on the gross receivables assigned to the factor was changed from 0.55%
to 0.50% during 1997. Additionally, the method of applying credit for the
collection of accounts receivable was modified from an average maturity date
method to an actual collection method. The Company is permitted to receive, at
the factors' discretion, advances on the uncollected receivables. Interest is
charged on such advances at the prime rate plus 0.25% per annum on LIBOR plus
1.5% per annum. In order to minimize interest expense, advances are requested
as and when needed to meet immediate working capital requirements.
Due from factors and trade accounts receivable consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Receivables transferred to factors.................... $ 58,437 26,477
Advances from factors................................. (52,710) (8,001)
-------- ------
Due from factors.................................... 5,727 18,476
Trade accounts receivable............................. 914 492
Allowances for discounts, returns and doubtful
accounts............................................. (3,413) (3,299)
-------- ------
$ 3,228 15,669
======== ======
</TABLE>
8
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
(4) Inventories
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Raw materials.............................................. $ 5,332 7,358
Work in process............................................ 12,201 8,733
Finished goods............................................. 40,179 24,816
------- ------
$57,712 40,907
======= ======
</TABLE>
(5) Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land................................................... $ 2,810 2,823
Buildings and leasehold improvements................... 8,657 8,301
Machinery and equipment, including equipment under
capital leases of $1,387 and $988 in 1997 and 1996,
respectively.......................................... 14,284 12,914
------- -------
25,751 24,038
Accumulated depreciation, including accumulated
amortization of property and equipment under capital
leases of $1,080 and $903 in 1997 and 1996,
respectively.......................................... (16,946) (14,489)
------- -------
$ 8,805 9,549
======= =======
</TABLE>
In June 1996, Koret sold its manufacturing facility in Napa, California, for
an amount, net of expenses, totaling approximately $3,659,000 and entered into
an agreement to lease back the facility. The gain of approximately $2,164,000
resulting from this sale was deferred and is being recognized over the 15-year
term of the lease. The remaining unamortized gain at November 30, 1997 and
December 1, 1996 was $1,950,000 and $2,094,000, respectively, which are
included in other non-current liabilities in the accompanying consolidated
balance sheets.
(6) Income Taxes
Koret's operations are conducted in the United States and Canada. The
provision (benefit) for domestic and foreign income taxes attributable to
income (loss) from continuing operations for the years ended November 30,
1997, December 1, 1996 and December 3, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Current:
Federal.......................................... $2,990 1,469 1,935
State............................................ 744 276 352
Foreign.......................................... 9 (178) (76)
------ ------ -----
Current income tax expense..................... 3,743 1,567 2,211
------ ------ -----
Deferred:
Federal.......................................... (795) (1,360) (690)
State............................................ (298) (532) 221
Foreign.......................................... -- 21 (1)
------ ------ -----
Deferred income tax benefit.................... (1,093) (1,871) (470)
------ ------ -----
Provision (benefit) for income taxes............... $2,650 (304) 1,741
====== ====== =====
</TABLE>
9
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
Koret's provision (benefit) for income taxes differs from the expected
provision (benefit), computed by applying the statutory U.S. federal tax rate
to earnings before taxes. This difference is due to the change in the
valuation allowance resulting primarily from losses from a foreign subsidiary;
permanent differences not deductible for tax purposes, but taken into account
for financial statement purposes; and the inclusion of state taxes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts....................... -- 124
Inventory reserves and capitalization................. 2,502 2,378
Other reserves and accruals........................... 1,089 404
Plant and equipment depreciation and basis
differences.......................................... 2,768 2,376
Deferred gain......................................... 786 844
Foreign net operating losses.......................... 2,799 2,236
Other................................................. 87 150
------ ------
Total gross deferred tax assets..................... 10,031 8,512
Less valuation allowance............................ (3,429) (2,936)
------ ------
Net deferred tax assets............................. 6,602 5,576
Other deferred liabilities.............................. (73) (140)
------ ------
Net deferred tax asset.............................. $6,529 5,436
====== ======
</TABLE>
The net change in the total valuation allowance for the years ended November
30, 1997, December 1, 1996 and December 3, 1995 was an increase of
approximately $493,000, and decreases of approximately $1,322,000 and
$219,000, respectively. Management considers it more likely than not that the
results of future operations will generate sufficient taxable income to
realize the net deferred tax assets.
At November 30, 1997, the foreign subsidiaries of the Company had
unrepatriated foreign earnings of approximately $9,400,000 including
$12,300,000 previously taxed under Section 956 of the Internal Revenue Code.
Company management intends to reinvest these remaining untaxed earnings
indefinitely.
In connection with the acquisition of Mr. Jax, the Company has certain net
operating loss carryforwards for tax purposes, the utilization of which is
subject to the restrictions under Canadian tax change of control rules. The
Company had foreign net operating losses during 1995, 1996 and 1997 which
begin expiring in 2002. No benefits for these net operating loss carryforwards
have been recognized in the accompanying consolidated financial statements.
10
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
(7) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(in thousands)
<S> <C> <C>
Term notes, payable in monthly principal installments
of $300,710 through June 1, 2002. Interest is payable
monthly at prime plus 0.75% per annum or LIBOR plus
2.0% per annum. The prime lending rate as of November
30, 1997 was 8.50% per annum. Secured by
substantially all assets............................. $16,239 15,693
Subordinated note, interest at 12% per annum, payable
semi-annually. Unsecured............................. -- 5,000
Obligations under capital leases (note 9)............. 297 910
Notes payable in quarterly installments of $50,000
commencing May 31, 1995 through February 29, 2000,
plus interest at 5.0% per annum. Unsecured........... 450 650
Note payable plus accrued interest in three
installments of $250,000 on June 30, 1997 and
$275,000 in 2002 and $350,000 by August 15, 2002.
Interest accrues at 9.0% per annum. Unsecured........ 275 525
------- -------
17,261 22,778
Less unamortized discount on subordinated note........ -- (358)
------- -------
17,261 22,420
Less current maturities of long-term debt............. (3,948) (12,960)
------- -------
$13,313 9,460
======= =======
</TABLE>
The aggregate maturities of all long-term debt, including capital leases,
are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ending:
1998........................... $ 3,948
1999........................... 3,967
2000........................... 3,659
2001........................... 3,884
2002........................... 1,803
-------
$17,261
=======
</TABLE>
In 1992, the Company issued warrants (note 14) to purchase a number of
shares of the Company's Class B non-voting common stock to the issuers of
$15,000,000 in subordinated notes. As of June 30, 1992, the warrants' fair
market value were determined to be $3,366,606. Accordingly, a discount was
established with an offsetting credit to additional paid in capital. The
discount was being amortized over the term of the subordinated note, using the
effective interest method. Amortization included in interest expense amounted
to approximately $358,000, $195,000 and $195,000 for 1997, 1996 and 1995,
respectively.
During 1997, Koret completed a restructuring of its senior debt. This
restructuring included the repayment of the outstanding balances of Canadian
term notes of approximately $3,671,000 and the subordinated note of $5,000,000
as well as the extension of the debt repayments. Additionally, certain terms
of the associated
11
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
factoring agreement were modified (note 3). The Company recorded debt offering
costs of $100,000 in connection with this restructuring. These costs are being
amortized over the remaining term of the notes payable and are included in
amortization expense. The unamortized original issue discount associated with
the subordinated debt was written off in connection with this restructuring.
The agreement for the term loan contains covenants requiring compliance with
various financial ratios and restriction of dividend payments. Additionally,
Koret has pledged substantially all of its assets as collateral under its
revolving and term loan agreement.
(8) Business Acquisitions
There were no acquisitions during the fiscal years ended November 30, 1997
and December 1, 1996. The following acquisitions were consummated during the
fiscal year ended December 3, 1995.
Mr. Jax Fashion, Inc.--In December 1994, Koret Canada acquired
substantially all the outstanding common stock of Mr. Jax, a Canadian
designer, manufacturer and distributor of high quality women's apparel, in
exchange for CAD $9,240,000 (or approximately USD $6,745,000) which was
financed through a term note (note 8). In addition, the Company assumed
preexisting notes payable of approximately USD $6,523,000 to a bank and
former shareholder. The balance of the notes payable to a bank was
refinanced in January 1995 and repaid in September 1995 in connection with
the sale of Mr. Jax' interest in certain real property. This acquisition
was accounted for as a purchase and, accordingly, the purchase price was
allocated to acquired assets and assumed liabilities and obligations based
on their estimated fair value. No goodwill was recorded in connection with
this transaction. The results of Mr. Jax' operations since December 2, 1994
have been included in the accompanying financial statements.
New Campaign, Inc.--On March 31, 1995, Koret, through its newly formed
subsidiary, New Campaign, Inc., acquired the net assets of Campaign, Inc.
and all of the outstanding common stock of Pheasant Incorporated. These
companies, which are located in Virginia, are jointly engaged in the
manufacturing and distribution of high quality leather products and
accessories under the names Polo/Ralph Lauren and Campaign (Polo and Ralph
Lauren are trade names licensed for different products). The estimated fair
value of the combined net assets of the acquired companies amounted to
approximately $3 million. The purchase price consisted of approximately
$3.6 million in cash (including other costs), various notes payable to the
sellers totaling $8 million (note 7), and 58,824 shares with an estimated
fair value of $8.50 per share of Koret, Inc. class A common stock.
This acquisition has been accounted for as a purchase and, accordingly, the
purchase price was allocated to acquired assets and assumed liabilities and
obligations based on their estimated fair value. In connection with this
acquisition, the Company recorded the excess of the purchase price over the
fair value of the net identifiable assets acquired of $9,125,000 as goodwill.
The results of Campaign's operations since February 1, 1995 (the effective
date of the acquisition) have been included in the accompanying consolidated
financial statements.
(9) Commitments and Contingencies
(a) Leases
Koret is obligated under both long-term capital and operating leases for
facilities, office space and equipment.
12
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
At November 30, 1997, obligations under non-cancelable, long-term leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Type of lease
-----------------
Capital Operating
------- ---------
<S> <C> <C>
Fiscal year ending
1998................................................ $150 4,802
1999................................................ 150 3,961
2000................................................ 12 3,070
2001................................................ -- 2,567
2002................................................ -- 2,368
Thereafter.......................................... -- 8,368
---- ------
Total minimum lease payments...................... 312 25,136
======
Amount representing interest.......................... (15)
----
Present value of net minimum capital lease
payments (note 7)................................ $297
====
</TABLE>
Certain leases include renewal options and/or contain rental escalation
clauses tied to the consumer price index.
Koret leases a distribution and warehouse facility in Chico, California. The
lease, which commenced on June 1, 1988 and expires in May 1998, contains three
5-year renewal options. The Company has exercised the first 5-year renewal
option. As of February 15, 1992, Koret entered into a seven-year operating
lease for administrative office space in San Francisco. Under the terms of
each of the leases noted above, no rent payments were required in the first
year. Rent accrued in the first year is amortized over the remaining term of
the lease. Additionally on June 6, 1996, Koret concluded a sale and leaseback
of real property in Napa, California (note 5). This lease expires in May, 2011
and contains a 5-year renewal option. Under the terms of the lease, rent
payments increase every 2.5 years by 7.5%. Total rental expense has been
calculated on a straight-line basis and the difference between cash payments
and the straight-line expense accrued as deferred rent. The unamortized
deferred rent, included as part of other non-current liabilities in the
accompanying consolidated balance sheets, was approximately $242,000 and
$328,000 at November 30, 1997 and December 1, 1996, respectively.
The original lessor of the distribution and warehouse facility provided
financing of $1,200,000 for equipment installed in the facility. Interest,
which accrues at a rate of 9.0% per annum, was paid monthly. Principal was
payable in annual installments of $100,000 from June 1, 1993 through 1996,
with the balance paid June 1, 1997. The outstanding balance was $800,000 at
December 1, 1996 and is included in the accompanying consolidated balance
sheets with obligations under capital leases (note 7).
Rent expense on operating leases amounted to $5,485,000, $5,731,000 and
$5,237,000 for the periods ended November 30, 1997, December 1, 1996 and
December 3, 1995, respectively.
(b) License Agreements
Approximately 98% of the sales of Campaign (or about 11% of Koret's
consolidated net sales) are conducted under license agreements permitting the
sale of designated leather goods using the Polo/Ralph Lauren label. Required
minimum future royalty and design fee payments are as follows:
<TABLE>
<S> <C>
1998.......................... $1,335,600
1999.......................... 1,411,200
----------
$2,746,800
==========
</TABLE>
13
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
The license agreement expires on December 31, 1999.
Campaign is obligated to incur advertising costs based on a percentage of
each year's budgeted net sales.
(c) Employment and Consulting Agreements
In connection with the acquisition of Campaign, the Company entered into
employment and consulting agreements with the sellers. Such agreements were to
extend through 1999 and provide for annual bonuses to be paid based upon
attainment of certain annual and cumulative earnings levels defined in such
agreements. Such bonuses, amounted to approximately $1,027,000, $354,000 and
$1,000,000 for the periods ended November 30, 1997, December 1, 1996 and
December 3, 1995, respectively.
The employment agreement was terminated on December 15, 1997. The conditions
of the termination require the Company to pay the seller two installments of
$500,000 each during fiscal years 1999 and 2000. Such amounts have been
discounted to $880,000 and accrued in the fiscal year 1997 financial
statements. Additionally, the seller has agreed to return the 58,824 shares of
Class A common stock for the same amount as previously issued, which was
$500,000.
(d) Guarantee
Campaign is contingently liable as a guarantor on a mortgage payable to a
local bank for facilities previously leased. The balance outstanding at
November 30, 1997 was approximately $410,000.
Campaign is contingently liable under a letter of credit to guarantee a
$1,959,000 Industrial Development Revenue Bond from the Industrial Development
Authority of the City of Norfolk, as well as an interest reserve of $49,914,
in connection with facilities leased from a related party.
(e) Letters of Credit
Koret was contingently liable for undrawn letters of credit totaling
approximately $16,167,000 at November 30, 1997.
(f) Financial Instruments
Campaign enters into foreign exchange forward options to manage exposure to
currency fluctuations. These agreements qualify as designated hedges of
obligations payable in foreign currencies. At November 30, 1997, Campaign had
outstanding foreign exchange forward options to purchase or sell the
equivalent of $1,825,000 currency principally denominated in British and
Italian currencies. The contracts generally range from one month to eight
months. Maturities which are consistent with the settlement dates of items
being hedged extend through July 1998.
(g) Litigation
Koret is involved in certain legal matters, both insured and uninsured,
which could have an effect on operations. In the opinion of management, after
consultation with legal counsel, the outcome of these matters will not have a
materially adverse effect on the financial position or the operations of
Koret.
14
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
(10) Major Customer
One customer accounted for 13%, 10% and 9% of the Company's gross sales in
1997, 1996 and 1995, respectively.
(11) Retirement and Savings Plans
Koret has a defined contribution retirement plan containing a
noncontributory profit sharing plan together with a 401(k) plan. Under the
terms of the 401(k) plan, participating employees may make voluntary
contributions of up to 10% of their earnings, not to exceed $9,500 per
employee. On the first 5% of earnings contributed by an employee, Koret makes
an additional contribution of 50% of the amount, with a maximum of $1,500 per
employee. Contributions by the Company to these plans totaled approximately
$747,000, $279,000 and $477,000 for the periods ended November 30, 1997,
December 1, 1996 and December 3, 1995, respectively.
New Campaign, Inc. sponsors a profit-sharing plan covering all employees who
have completed at least six months of service prior to the beginning of the
plan year. Contributions to the plan are determined by the Board of Directors
of New Campaign, Inc. Contributions for the fiscal years ended November 30,
1997, December 1, 1996 and December 3, 1995 amounted to approximately
$135,000, $50,000 and $155,000, respectively.
In accordance with applicable collective bargaining agreements, Koret makes
contributions to jointly administered, multi-employer defined benefit pension
plans on behalf of certain employees. Under the terms of its principal plan,
Koret contributed approximately $757,000, $745,000 and $787,000 during the
periods ended November 30, 1997, December 1, 1996 and December 3, 1995,
respectively. Provisions of the Multi-employers Pension Plan Amendments Act of
1980 require participating employers to assume a proportionate share of multi-
employer plan's unfunded vested benefits in the event of withdrawal from or
termination of the plan. The plan administrator estimates that if Koret were
to withdraw from the plan, its potential liability for unfunded plan benefits
would be approximately $4,260,000 as of December 31, 1995, the date of the
most recent actuarial valuation report.
(12) Related Party Transactions
Certain suppliers of manufacturing services to Koret are controlled by a
director/officer/shareholder of the Company. Management believes all
transactions with these suppliers are carried out at terms similar to those
arranged with other suppliers. During the fiscal years ended November 30,
1997, December 1, 1996 and December 3, 1995, Koret paid these suppliers
approximately $2,054,000, $2,396,000 and $4,223,000, respectively. At November
30, 1997 and December 1, 1996 the balance due from these suppliers totaled $-
0- and $10,000, respectively. Koret leases office and warehouse space from a
related party in Virginia, and expensed approximately $300,000, $300,000 and
$250,000 for rent during 1997, 1996 and 1995, respectively.
(13) Postretirement Benefits
The obligation recognized in connection with postretirement benefits,
included as part of other noncurrent liabilities on the accompanying
consolidated balance sheets, was $400,000 at November 30, 1997 and December 1,
1996.
For measurement purposes, a 6% medical cost trend rate was assumed for the
calculation of accumulated postretirement benefit obligation as of November
30, 1997. The medical cost trend rate has a significant effect
15
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30, 1997, December 1, 1996 and December 3, 1995
on the amounts reported. A discount rate of 7.5% was assumed in the present
value calculation. By increasing the assumed medical cost trend rate by 1
percentage point in each year, the accumulated postretirement benefit
obligation at November 30, 1997 would increase by approximately $34,000.
(14) Stockholders' Equity
(a) Stock Options
During 1988, Koret established a non-qualified stock option plan for certain
officers and employees, which was amended in 1989. Koret has reserved 241,289
shares of Class A common stock for issuance upon exercise of options granted.
As of November 30, 1997, 101,500 options were outstanding and exercisable at
any time through April 30, 1998 for an exercise price of $1.00 per share. In
1992, the remaining 139,789 employee stock options were issued with an
exercise price of $5.00 per share exercisable at any time through April 30,
1998. During 1997, 2,500 of these options were forfeited. No further options
are available for future grant.
During 1992, under a separate stock option agreement, an officer and
director of the Company was granted options to purchase the 100,000 Class A
common shares. The options have an exercise price of $1.00 per share with no
expiration date. No options have been exercised.
The weighted average exercise prices are $2.62 per share at November 30,
1997 and $2.64 per share at December 1, 1996 and December 3, 1995.
(b) Warrants
Common stock purchase warrants for 326,302 shares of Class A common stock
were issued with an exercise price of $1.00 per share on November 26, 1986
which were due to expire on November 30, 1997. At November 30, 1997, 70,464 of
these warrants expired and 255,838 warrants had been exercised.
In connection with a subordinated credit agreement dated June 30, 1992, the
Company issued warrants for the right to purchase, at an aggregate price of
$550,099, a number of shares of the Company's Class B non-voting common stock
(convertible to Class A common stock) to the subordinated lender in
consideration for executing the financing agreement. Under the terms of the
agreement, the warrants are exercisable at any time before June 30, 2000. The
effective exercise price of the warrants at the date of grant was
approximately $1.00 per share and is effectively adjusted downward each year
beginning after June 30, 1994 until June 30, 1997. At November 30, 1997, the
effective exercise price of the warrants was approximately $0.91 per share. No
warrants were exercised as of November 30, 1997. The fair market value of the
warrants at the date of issuance, as determined through an independent
valuation, computed under the non-marketable minority interest basis, was
determined to be $3,366,606. These Warrants contain certain "put" and "call"
provisions whereby the warrantholder can, at any time after June 30, 1999,
require the Company to repurchase all of the underlying warrant stock at the
then fair market value; and the Company can, at any time, require the
warrantholder to sell back to the Company all of the underlying warrant stock
at the then fair market value.
(c) Class C Special Common Stock
On July 1, 1994, the Company issued 3,091,190 shares of Class C special
common stock in a private placement for an aggregate price of $20 million. The
Company used the proceeds from the private placement to repay both secured and
subordinated debt.
16
<PAGE>
KORET, INC. AND SUBSIDIARIES
Interim Consolidated Financial Statements
Unaudited
August 30, 1998 and August 31, 1997
17
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 30, 1998 and August 31, 1997
Unaudited
(in thousands except share amounts)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................... $ 1,733 969
Due from factors, net....................................... 3,911 --
Inventories................................................. 54,984 58,953
Deferred income taxes....................................... 4,704 2,696
Other current assets........................................ 3,234 1,685
------- ------
Total current assets...................................... 68,566 64,303
Property, plant and equipment, net............................ 8,525 8,862
Deferred income taxes......................................... 1,825 2,740
Intangible assets and excess of purchase price over fair value
of assets acquired, less accumulated amortization of $6,543
and $5,760 in 1998 and 1997, respectively.................... 10,811 11,594
Other assets.................................................. 508 180
------- ------
Total assets.............................................. $90,235 87,679
======= ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Bank overdraft.............................................. 4,291 3,883
Due to factors, net......................................... -- 3,063
Current maturities of long-term debt........................ 4,162 3,947
Accounts payable............................................ 14,118 12,641
Accrued expenses............................................ 3,757 2,307
Accrued salaries, wages and employee benefits............... 3,980 2,762
Income taxes payable........................................ 20 590
------- ------
Total current liabilities................................. 30,328 29,193
Long-term debt................................................ 7,651 14,300
Other non-current liabilities and deferred credits............ 2,957 2,649
------- ------
Total liabilities......................................... 40,936 46,142
Stockholders' equity:
Class A common stock, $.01 par value. Authorized 20,000,000
shares; 4,903,719 and 4,579,416 shares issued and
outstanding in 1998 and 1997, respectively................. 49 46
Class C special common stock, $1.00 par value. Authorized
3,200,000 shares; 3,091,190 shares issued and outstanding
in 1998 and 1997........................................... 3,091 3,091
Additional paid-in capital.................................. 20,830 20,788
Retained earnings........................................... 26,395 18,133
Foreign currency translation adjustment..................... (1,066) (521)
------- ------
Total stockholders' equity................................ 49,299 41,537
Commitments and contingencies
Total liabilities and stockholders' equity................ $90,235 87,679
======= ======
</TABLE>
Unaudited--See accompanying notes to consolidated financial statements.
18
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended August 30, 1998 and August 31, 1997
Unaudited
(in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Net sales.................................................... $217,417 208,243
Cost of sales................................................ 151,112 154,611
-------- -------
Gross margin............................................. 66,305 53,632
Selling, general and administrative expenses................. 47,406 43,867
Amortization of intangible assets............................ 561 1,195
-------- -------
Operating income......................................... 18,338 8,570
Interest expense............................................. (3,971) (4,241)
Other expense, net........................................... (580) (44)
-------- -------
Income before income taxes............................... 13,787 4,285
Provision for income taxes................................... 5,853 2,306
-------- -------
Net income............................................... $ 7,934 1,979
======== =======
</TABLE>
Unaudited--See accompanying notes to consolidated financial statements.
19
<PAGE>
KORET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended August 30, 1998 and August 31, 1997
Unaudited
(in thousands)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 7,934 1,979
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 2,552 3,017
Amortization of discount on subordinated note............ -- 358
Net loss on disposal of equipment........................ 72 23
Deferred rent............................................ (47) (65)
Deferred gain............................................ (73) (108)
Changes in operating assets and liabilities:
Receivables transferred to factors / trade accounts
receivable, net....................................... (1,875) (37,629)
Inventories............................................ 2,728 (18,046)
Other current assets................................... (1,889) 921
Income taxes payable................................... (1,381) 596
Accounts payable....................................... (1,956) (1,757)
Accrued expenses....................................... (608) (389)
------- -------
Net cash (used in) provided by operating activities... 5,457 (51,100)
------- -------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment........ 412 --
Proceeds from sale of Counterparts......................... 2,400 --
Capital expenditures....................................... (1,890) (1,045)
------- -------
Net cash provided by (used in) investing activities... 922 (1,045)
------- -------
Cash flows from financing activities:
Net advances under factoring and line of credit
agreements................................................ $ 1,192 56,361
Principal payments on long-term debt and capital lease
obligations............................................... (6,072) (13,759)
Borrowings under long-term debt agreement.................. -- 8,830
Change in bank overdraft................................... (1,043) (488)
Exercise of stock options for Class A common stock......... 96 --
Debt issuance costs........................................ -- (100)
Redemption of common stock in connection with settlement... (500) --
------- -------
Net cash provided by (used in) financing activities... (6,327) 50,844
Effect of exchange rate on changes in cash.................. (235) (51)
------- -------
Net decrease in cash and cash equivalents............. (183) (1,352)
Cash and cash equivalents at beginning of period............ 1,916 2,321
------- -------
Cash and cash equivalents at end of period.................. $ 1,733 969
======= =======
Supplemental disclosures of cash flow information:
Net cash paid during period for:
Interest................................................. $ 3,971 4,088
======= =======
Income taxes............................................. $ 7,234 1,710
======= =======
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
In December 1996, a capital lease obligation of $398 thousand was incurred
when the Company entered into a lease for new equipment.
In December 1997, a capital lease obligation of $624 thousand was incurred
when the Companyentered into a lease for new equipment.
Unaudited--See accompanying notes to consolidated financial statements.
20
<PAGE>
KORET AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended August 30, 1998
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Class A Class C special Foreign
common stock common stock Additional currency Total
-------------- ----------------- paid-in Retained translation stockholders'
Shares Amount Shares Amount capital earnings adjustment equity
------ ------ ------- -------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at November 30,
1997................... 4,835 $48 3,091 $3,091 21,042 18,461 (702) 41,940
Net income.............. -- -- -- -- -- 7,934 -- 7,934
Issuance of common
stock:
Exercise of stock
options............... 128 1 -- -- 288 -- -- 289
Redemption of common
stock in connection
with settlement....... (59) -- -- -- (500) -- -- (500)
Translation adjustment.. -- -- -- -- -- -- (364) (364)
----- --- ------- -------- ------ ------ ------ ------
Balances at August 30,
1998................... 4,904 49 3,091 3,091 20,830 26,395 (1,066) 49,299
===== === ======= ======== ====== ====== ====== ======
</TABLE>
Unaudited--See accompanying notes to financial statements
21
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
August 30, 1998 and August 31, 1997
It is the opinion of management that all adjustments necessary for a fair
presentation of results for the interim periods have been reflected in the
statements presented. Such adjustments were normal and recurring in nature.
The consolidated financial statements include the accounts of Koret, Inc.
("the Company") and its wholly-owned subsidiaries, Koret of California, Inc.,
Counterparts Sportswear, Inc. ("Counterparts") , New Campaign, Inc.
("Campaign"), MJF Imports, West Coast Apparel, Inc. and West Coast Woollen
Mills, Ltd., (hereinafter collectively referred to as "Koret"). All material
inter-company transactions and accounts have been eliminated.
Accounting policies have been continued without change and are described in
the Summary of Significant Accounting Policies contained in the Company's 1997
financial statements. For additional information regarding the Company's
financial condition, refer to the note accompanying the annual financial
statements. Details in those notes have not changed significantly except as a
result of normal transactions in the interim.
(a) Due from Factors, net
Due from factors and trade accounts receivable consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Receivables transferred to factors.................... $59,604 $63,999
Advances from factors................................. (53,902) (64,362)
------- -------
Gross balance due from factors.................... 5,702 (363)
Trade accounts receivable............................. 396 445
Allowance for discounts, returns and doubtful
accounts............................................. (2,187) (3,145)
------- -------
$ 3,911 $(3,063)
======= =======
</TABLE>
(b) Inventories
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................ $ 3,240 $ 5,910
Work-in-process.......................................... 9,935 12,653
Finished goods........................................... 41,809 40,390
------- -------
$54,984 $58,953
======= =======
</TABLE>
(c) Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land.................................................. $ 2,500 $ 2,819
Buildings and leasehold improvements.................. 8,925 8,570
Machinery and equipment, including equipment under
capital leases....................................... 14,703 13,814
Construction in progress.............................. 257 59
------- -------
26,385 25,262
Accumulated depreciation, including equipment under
capital leases....................................... (17,860) (16,400)
------- -------
$ 8,525 $ 8,862
======= =======
</TABLE>
22
<PAGE>
KORET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
(d) Sale of Counterparts
As of March 13, 1998, Koret entered into an Agreement to sell all
trademarks, trade names, designs, copyrights and other intellectual property
of its wholly-owned subsidiary, Counterparts Sportswear, Inc. The Agreement,
which was consummated on March 16, 1998, provides for the immediate transfer
of all intellectual property, as well as the transfer of inventories as such
inventories are shipped to customers during the transition period. In
consideration, Koret received $2.4 million, as well as periodic payments
during the transition period to cover the cost of the inventory shipped on
behalf of the Purchaser and services performed on behalf of the Purchaser.
Koret retains risk of ownership of existing inventory until it is shipped to
the customer. During the transition period Koret continued to provide
operational support to the Purchaser for a fee.
Included in Other Current Assets as of August 30, 1998 is a receivable in
the amount of approximately $3.4 million for goods and services provided by
Koret during the transition period, which the Purchaser has failed to pay. On
December 11, 1998 the Purchaser filed for relief under Chapter 11 in the
United States Bankruptcy Court, Central District of California, Los Angeles
Division. As of August 30, 1998, Koret has provided an allowance of
approximately $1.8 million for the above $3.4 million. Koret is in the process
of commencing legal action against several of the Purchaser's principals,
however, at this time it is premature to predict what portion, if any, of the
above $3.4 million will be recovered either in the bankruptcy, from the
Purchaser's principals or from any other potential sources.
Counterparts' net sales during the fiscal years ended November 30, 1997 and
December 1, 1996 amounted to approximately $51.9 million and $57.1 million,
respectively. Net sales for the nine months ended August 30, 1998 and August
31, 1997 of approximately $6.5 million and $35.6 million respectively, are
included in the consolidated net sales shown on the accompanying consolidated
statements of operations.
(e) Rescission of Stock Option Plan
In June, 1998, Koret's Board of Directors adopted a new non-qualified stock
option plan. On July 1, 1998, options allowing the purchase of 430,000 shares
were granted pursuant to the plan. On November 23, 1998, Koret's Board of
Directors cancelled and rescinded the 1998 Stock Option Plan retroactively to
the date of its adoption. Also, on November 23, 1998, the holders of all
options issued under the 1998 Stock Option Plan consented to the cancellation
of the options issued to them.
23
