SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 2, 1995
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 1-6454
KLEINERT'S, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 13-0921860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 West Germantown Pike, Suite 100 Plymouth Meeting, Pennsylvania 19462
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 828-7261
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
----------------
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes__X__ No_____
The aggregate value of the voting stock held by the non-affiliates of the
registrant was $29,232,927 at August 23, 1996.
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date:
Class Outstanding at August 26, 1996
- ------------------------- ------------------------------
Common Stock 3,684,391
Par Value $1.00 per share
I. Part I, Item 1, of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 2, 1995 is hereby amended and restated in its
entirety as follows:
ITEM 1. BUSINESS
Kleinert's, Inc. (together with its subsidiaries, "Kleinert's" or the
"Registrant") is engaged in the design, manufacture and sale of infants' and
children's sleepwear and playwear and children's T-shirts. Kleinert's also
manufactures, distributes and sells certain items of personal apparel. In
February 1993, Kleinert's declared its textile division, Scott Mills, a
discontinued operation, and in July 1993, Kleinert's decided to spin-off the
Scott Mills division to its shareholders. In November 1993, Kleinert's
contributed substantially all of its textile division's assets, subject to
substantially all of its liabilities, to Scott Mills, Inc., a newly formed
corporation for all of the outstanding shares of the corporation and the Board
of Directors of Kleinert's declared a distribution of one share of Scott Mills,
Inc. common stock for every one share of Kleinert's common stock payable to the
shareholders of record of Kleinert's common stock at the close of business on
the record date, November 27, 1993. This tax free distribution occurred on March
15, 1994 and resulted in 100% of the outstanding shares of Scott Mills, Inc.
common stock being distributed to Kleinert's shareholders.
Kleinert's was founded in 1869 under the name of I.B. Kleinert Rubber
Company and was reincorporated in Pennsylvania under its current name in 1970.
Kleinert's principal executive offices are located at 120 West Germantown Pike,
Suite 100, Plymouth Meeting, Pennsylvania 19462 and its telephone number is
(610) 828-7261.
<PAGE>
On December 19, 1995, Kleinert's, through its newly formed wholly-owned
subsidiary, Kleinert's, Inc. of Florida, consummated a transaction (the
"Transaction") pursuant to which Kleinert's acquired substantially all of the
assets of Pixie Playmates, Inc. ("Pixie") and Certified Sewing Services, Inc.
("Certified"), two Florida corporations, and all of the capital stock of
Certified Apparel Services of Honduras, Inc., C.A., a Honduran corporation
("CASH"). Pixie, Certified and CASH, all of which are affiliated entities, are
engaged in the manufacture and sale of children's apparel.
In consideration for the assets of Pixie and Certified and the shares of
CASH, Kleinert's paid an aggregate purchase price of $4,650,000 in cash, of
which $500,000 was retained by Kleinert's until April 1996 upon confirmation of
inventory quantities and completion of an audit of CASH. The purchase price was
financed by Kleinert's through an additional term debt facility under an
existing bank financing agreement.
To more reasonably reflect the seasonality of operations, Kleinert's
fiscal year ends the Saturday nearest November 30. Fiscal year 1995 was a fifty
two week year and fiscal year 1994 was fifty three week year.
Apparel
Children's Apparel. The sleepwear manufactured by Kleinert's consists of
blanket sleepers made of 100% polyester fleece in sizes ranging from newborn to
girls' and boys' size 14 and knit sets made of interlock, jersey, doubleknit or
terrycloth fabric for infants in sizes ranging from newborn to size 24 months.
All of Kleinert's sleepwear is made of 100% polyester and complies with the
requirements of the Consumer Products Safety Commission relating to flammability
standards (see "Marketing"). Sales of sleepwear represented 50% of children's
apparel net sales in fiscal year 1995.
Kleinert's playwear consists primarily of activewear sets and separates
in sizes ranging from newborn through girls' and boys' size 14. Activewear sets
are two-piece jog sets consisting of pants and a top made of polyester cotton
blend, 100% acrylic fleece or interlock fabric. Separates are the same as the
jog sets, except separates consist of either the top or the pant. Kleinert's
also manufactures and sells T-shirts, primarily for children, made of 100%
cotton or polyester cotton blend, and polo shirts, made of cotton blend in sizes
ranging from infant through toddler. Sales of playwear including T-shirts/polo
shirts represented 50% of children's apparel net sales in fiscal year 1995.
Kleinert's has screen print and embroidery equipment which is used in
the apparel manufacturing process. Kleinert's in-house staff of artists creates
designs which are meticulously engineered onto cut parts and then sewn in the
manufacturing process. Typically the screen print equipment is used in the
manufacture of jog sets and the embroidery equipment is used in the manufacture
of Kleinert's sleepwear products.
<PAGE>
Kleinert's apparel products are sold at retail prices generally ranging
from $7.00 to $18.00 for sleepwear, from $6.00 to $14.00 for playwear and from
$5.00 to $9.00 for T-shirts/polo shirts (see "Marketing").
Personal Apparel. Kleinert's manufactures and sells dress and garment
shields and distributes personal apparel and sanitary items. Dress and garment
shields protect clothing from underarm perspiration stains. The retail price of
the personal apparel items sold by Kleinert's generally ranges from $4.25 to
$15.90. Kleinert's distributes adult incontinence products under the names "Safe
'N Dry" and "Feel and Sure." These products are distributed in conjunction with
Hygienics Industries, Inc., in accordance with an exclusive licensing
arrangement. Sales of personal apparel items represented less than 5% of
Kleinert's consolidated net sales during each of the last three fiscal years.
Manufacturing
Production. Kleinert's infants' and children's playwear and sleepwear is
cut, sewn, inspected, packaged and warehoused at Kleinert's 340,000 square foot
Elba, Alabama facility. The Elba facility performs the same functions with
respect to T-shirts and polo shirts, except for the sewing and inspection of
T-shirts, which are currently performed at Kleinert's 22,000 square foot
Greenville, Alabama facility. The 78,000 and 7,000 square foot Kleinert's, Inc.
of Florida facilities near Tampa Bay perform essentially the same functions as
the Elba facility with respect to woven children's wear products and some knit
products. The knit products are cut first at the Elba facility. Kleinert's
Honduras facility is primarily engaged in the sewing, inspection and packaging
of woven and knit products.
The apparel manufacturing process begins with purchased fabric, which is
then cut into specific garment parts such as sleeves, fronts, backs and collars,
and then bundled. The cut parts are sewn in an assembly line format with various
adornments, such as screen printing or embroidery added before the cut parts are
sewn. Fabric is inspected prior to cutting and each garment is inspected at
least twice, once during sewing and once after it is sewn, but before it is
warehoused. Quality control tests are also performed after cut parts are printed
or embroidered. Samples of each lot of sleepwear are tested to ensure compliance
with government flammability standards and samples from all lots of sleepwear,
playwear and T-shirts are wash tested for shrinkage and colorfastness.
In an effort to control more closely its apparel manufacturing process,
Kleinert's during the past five years has installed new equipment and upgraded
existing equipment at a cost of approximately $2,480,000. Kleinert's has
installed a completely integrated screen print system, a "real time"
work-in-process system to better monitor and control the manufacturing process
and additional embroidery machines. During fiscal year 1994, Kleinert's
installed in its Elba, Alabama facility the initial portion of a real-time
computer based data collection and information warehouse processing system which
has enabled
<PAGE>
improved monitoring of the movement of finished goods as they are warehoused and
processed for shipment. This system provides up-to-the minute information both
to management and its retail customers and permits Kleinert's to ship more goods
in the ever shrinking shipping window as a result of implementation of "Quick
Response" via Electronic Data Interchange ("E.D.I."). The installation of the
system was completed during fiscal year 1995, enabling Kleinert's to fully
utilize the system's benefits during the fiscal year 1995 fall shipping season.
Kleinert's Elba facility currently operates one eight-hour shift a day
for sewing and two shifts a day (when needed) for cutting, screen print and
embroidery, five days a week. The Greenville and Florida facilities currently
operate one eight-hour shift a day, five days a week. The Honduras facility
operates on five and one-half day weeks.
During fiscal years 1995 and 1994, Kleinert's spent $5,808,000 and
$4,086,000, respectively, for contract sewing of T-shirts, jog sets, basic
separates, polo shirts and prams. Kleinert's will continue to use outside
contractors to manufacture various products in order to meet peak season
deliveries which are in excess of the existing in-house manufacturing capacity
of Kleinert's.
Kleinert's has conducted business with several contract sewers in the
past few years depending upon the type of product to be manufactured. The
principal contractor has been Precision Textiles Inc. (P.T.I.), which has sewn
primarily fleece sets or separates; however, Kleinert's believes that there are
readily available alternate sources for contract sewing. Kleinert's has been the
primary customer of P.T.I. for the past few years.
Raw Materials. During fiscal year 1995, approximately 42% of the fabric
purchased for Kleinert's children's apparel division was purchased from two
vendors, including 14% from Scott Mills and approximately 28% from Dyersburg.
Vendors are selected on the basis of quality, price and service; however,
Kleinert's fabric needs could be met by other vendors at prices that, in most
cases, are competitive. The remaining materials used in the manufacture of
children's apparel were purchased from a variety of sources.
Raw materials for Kleinert's personal apparel products are purchased
from a limited number of sources. Kleinert's believes that alternative sources
are readily available at competitive prices.
Marketing
Kleinert's apparel products are sold primarily by an in-house sales
staff of seven people which is organized on the basis of specific customers. In
addition, there are three independent commissioned sales representatives. The
independent commissioned sales representatives account for less than 20% of
total children's apparel sales. Sales efforts are principally conducted from
Kleinert's New York City showroom.
Kleinert's sells most of its apparel to national chain stores, mass
merchandisers, department stores and specialty stores, such as Target Stores,
J.C. Penney, Wal-Mart, K-Mart, Federated, Nordstrom and Mercantile Stores.
During fiscal year 1995 sales of apparel were made to less than 800 customers.
No single customer accounted for more than 10% of Kleinert's consolidated net
sales for fiscal year 1995 other than Target Stores and
<PAGE>
J.C. Penney, which accounted for approximately 19% and 14%, respectively, of
consolidated net sales during the period.
In recent years Kleinert's has received awards from its customers in
recognition of Kleinert's outstanding quality and service. The awards are
indicative of strategic partnerships which Kleinert's has been successful in
developing over many years of providing quality service and merchandise,
particularly as the number of retailers continues to decrease. The result of
Kleinert's emphasis on quality is demonstrated by Kleinert's returns and
allowances being less than 3% of gross sales in each of the last three fiscal
years. This compares with an industry average exceeding 7% of gross sales.
The apparel division has quick response programs in place with major
customers and communicates with many of its vendors and customers via E.D.I.
This E.D.I. system allows customers and vendors to communicate purchase orders,
invoices, advance shipping notices and available inventory lists electronically.
The real-time, work-in-process and warehouse systems aid Kleinert's in servicing
the customer by enabling Kleinert's to monitor on a "real time" basis goods on
the sewing floor and in the warehouse, thereby permitting Kleinert's to
circumvent production bottlenecks that could cause late deliveries.
Kleinert's markets its personal apparel products exclusively under the
Kleinert's label through chain, variety and drug stores, wholesale distributors,
fabric centers and direct mail order.
Backlog. The backlog of orders for apparel goods was approximately
$4,486,000 at February 2, 1996 compared with $8,270,000 at January 27, 1995. The
amount of unfilled orders at a particular time is affected by a number of
factors including the scheduling of manufacturing and product shipping, which in
many instances is dependent on the desires of the customer. The decrease in open
orders at February 2, 1996 is due in large part to higher shipping production
levels of knitsets and T-shirts when compared to January 27, 1995. Kleinert's
anticipates that all orders will be filled during the current fiscal year.
Competition
The infants' and children's apparel markets are highly competitive and
include many manufacturers from around the world in all product lines, including
some which are larger and have substantially greater market share and resources
than Kleinert's. Kleinert's believes that it competes with other manufacturers
in each of its markets on the basis of price, quality, service and availability
of products.
Foreign competition has been a significant factor in the apparel
industry. Kleinert's believes that it can best compete with foreign competition
by providing superior customer service, responding quickly to changes in
customer demand and providing more timely deliveries. Purchasing from domestic
manufacturers may permit retailers to reduce their
<PAGE>
inventory levels and lower the risk that product availability will not match
consumer demand.
Kleinert's experiences only limited competition in the personal apparel
market.
Employees
As of January 1, 1996, Kleinert's had 1,454 full time employees
including approximately 1,270 in manufacturing (of which 751 are in Elba, 96 in
Greenville, 193 in the Florida plants and 230 in Honduras, 24 in merchandising,
design and sales, 101 in clerical/administration and 59 in general management).
Historically, the number of employees increases during the summer and fall due
to seasonal factors. None of Kleinert's United States employees are party to a
collective bargaining agreement and Kleinert's believes its employee relations
are satisfactory. The employees in Honduras are under a collective bargaining
agreement, as required by Honduras laws. Kleinert's considers its relationship
with its employees to be good.
Governmental and Environmental Regulation
The Company and its operations are subject to federal, state and local
laws, as well as Honduran law in the case of Certified Apparel Services of
Honduras, Inc., including the Consumer Product Safety Act, the Flammable Fabrics
Act, and the rules and regulations promulgated thereunder. The Company believes
it is in substantial compliance with all applicable governmental requirements
under these laws and regulations.
The Company and its operations are subject to federal, state and local
laws and regulations concerning the protection of the environment. The Company
is not currently the subject of any proceedings under these laws and
regulations, and believes it is in substantial compliance with all applicable
governmental requirements under these laws and regulations.
The Company does not anticipate that environmental or Occupational
Safety Health Act (O.S.H.A.) laws and regulations, or compliance with other
federal, state and local laws and regulations, will require substantial
expenditures or materially affect its results of operations or financial
condition during the foreseeable future unless conditions unknown to the Company
are discovered or new or stricter requirements are imposed.
II. Part II, Item 7, of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 2, 1995 is hereby amended and restated in its
entirety as follows:
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results Of Operations
Fiscal Year 1995 Compared to Fiscal Year 1994 and Fiscal Year 1993
Net Sales. The following table presents, for the periods indicated, Kleinert's
net sales by product line and segment. Amounts presented below relate only to
continuing operations.
Fiscal Year Ended
-----------------------------------------
(000's omitted)
Dec. 2, Dec. 3, Nov. 27,
1995 1994 1993
------- ------ --------
Sleepwear $37,015 $34,601 $28,610
Playwear 31,432 29,892 29,004
T-shirts 5,640 3,604 2,634
------- ------- -------
Total Children's Apparel 74,087 68,097 60,248
Personal Apparel 1,034 1,165 1,180
------- ------- -------
TOTAL $75,121 $69,262 $61,428
======= ======= =======
Kleinert's business is highly seasonal. The second half of the fiscal
year (June through November) typically accounts for greater than 70% of
Kleinert's annual sales as retail customers typically build inventory levels
prior to the August-September "back to school" period and continue to re-stock
throughout the fall for the Christmas holiday shopping season. For example, the
fourth quarter typically accounts for greater than 50% of the volume for the
second half of the fiscal year. Sales volume during the third fiscal quarter can
vary depending upon ordering patterns that generally firm up in the July-August
time frame. Although Kleinert's first and second quarter business is generally
significantly lower, the Pixie acquisition, described below, is expected to
enable Kleinert's to leverage its strong presence within the major retail
customers and grow Pixie's line of spring and summer children's wear, resulting
in improved first and second quarter business in the future.
Net sales increased $5,859,000, or 8.4%, in fiscal year 1995 compared to
fiscal year 1994. This increase was primarily due to a 7% increase ($2,414,000)
in sleepwear, a 5% increase ($1,540,000) in playwear and a 56% increase
($2,036,000) in T-shirt sales. The increases represented an increase in market
share since retail selling prices remained relatively constant throughout both
years.
Net sales increased $7,834,000, or 13%, in fiscal year 1994 compared to
fiscal year 1993. This increase was primarily due to a 21% increase ($5,991,000)
in sleepwear and a 37% increase ($970,000) in T-shirt sales. The increase in net
sales represented an increase in market share since retail selling prices
remained relatively constant throughout both years.
A substantial portion of the increased market share during the periods
presented has resulted from the successful implementation of sleepwear and
playwear programs at some of the largest retail chains in the country.
Kleinert's has developed a well earned reputation for quality and on-time
delivery. Having been given increased opportunities to work with the successful
large retailers in an ever consolidating field, Kleinert's has proven its
reputation and received additional business. Kleinert's has supported its
product penetration primarily by expanding its design effort both by increasing
its staff and adding to its state-of-the-art computer assisted design equipment.
The year ended December 3, 1994 contained 53 weeks and the years ended
December 2, 1995 and November 27, 1993 were 52 week years. Sales during the
month of December, during which the last week of the 53 week fiscal year would
have been derived, were $1,700,000, $2,100,000, and $1,200,000 in the fiscal
years 1995, 1994 and 1993, respectively. Consequently, the impact of the
additional week for the year ended December 3, 1994, relative to total sales for
the entire fiscal year, was not significant.
Gross Profit. The following table presents, for the periods indicated,
Kleinert's gross profit dollars (net sales less cost of goods sold) and gross
profit as a percentage of net sales (profit margin) for each of its segments.
Amounts presented below relate only to continuing operations:
<PAGE>
<TABLE>
<CAPTION>
(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
-------------------- --------------------- -----------------------
% of Net Sales % of Net Sales % of Net Sales
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Children's Apparel $13,114 17.7% $12,039 17.7% $10,639 17.7%
Personal Apparel 371 35.9% 437 37.5% 393 33.3%
------- ------- -------
Total $13,485 18.0% $12,476 18.0% $11,032 18.0%
======= ======= =======
</TABLE>
Gross profit increased $1,009,000 in fiscal year 1995 compared to fiscal
year 1994 and the profit margin remained stable at 18.0% when compared to fiscal
year 1994. Gross profit increased $1,444,000 in fiscal year 1994 compared to
fiscal year 1993 while the profit margin remained stable at 18.0% when compared
to fiscal year 1993.
General corporate expenses which are included in cost of goods sold
increased $743,000 to $1,704,000 in fiscal year 1995 compared to $961,000 in
fiscal year 1994. The increase was primarily the result of increased salaries,
legal expenses and reduced reimbursement from Scott Mills to Kleinert's for
certain corporate support services in fiscal year 1995 when compared to fiscal
year 1994.
Total overhead included in cost of goods sold also included a large
fixed cost component related to Kleinert's Alabama's Elba, Alabama manufacturing
facility that has remained relatively constant and has not increased in
proportion to the additional sales volume. This has served to stabilize margins
in spite of extreme competitive pressure on product pricing and the increase in
general corporate expenses noted between fiscal year 1994 and 1995. Kleinert's
intends to continue to maintain margins at current levels by controlling fixed
costs and seeking to lower variable costs through volume purchasing of raw
materials and sourcing of labor as required.
General corporate expenses which are included in cost of goods sold
decreased $563,000 in fiscal year 1994 compared to fiscal year 1993 principally
due to the reimbursement by Scott Mills for management time and other expenses
spent by Kleinert's on its behalf.
Depreciation and amortization expense was $676,000, $674,000 and
$695,000 in the three fiscal years ended December 2, 1995, December 3, 1994 and
November 27, 1993, respectively.
<PAGE>
Selling, General and Administrative Expenses. The following table
presents, for the periods indicated, Kleinert's selling, general and
administrative expenses, including design, merchandising and related expenses,
in dollars and as a percentage of net sales for each of its segments. Amounts
presented below relate only to continuing operations:
<TABLE>
<CAPTION>
(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
-------------------- ------------------- --------------------
% of Net Sales % of Net Sales % of Net Sales
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Children's Apparel $4,971 6.7% $4,967 7.3% $4,322 7.2%
Personal Apparel 180 17.4% 183 15.7% 303 25.7%
------ ------ ------
Total $5,151 6.9% $5,150 7.4% $4,625 7.5%
====== ====== ======
</TABLE>
The percentage of selling, general and administrative expenses to net
sales ("expense ratio") decreased to 6.9% in fiscal year 1995 from 7.4% in
fiscal year 1994. The decrease represented increased sales volume compared to
relatively constant expenses when comparing fiscal year 1995 to fiscal year
1994.
The expense ratio decreased slightly in fiscal year 1994 when compared
to fiscal year 1993 due principally to increased expenses in the children's
apparel division which were offset by lower expenses in the personal apparel
division. The increased expenses in the children's apparel division were
principally due to more designers and higher marketing salaries. The decrease in
expenses in the personal apparel segment was due to lower product development
costs and administrative expenses.
Interest Expense. Interest expense in fiscal year 1995 was $1,651,000, a
$248,000 increase when compared to fiscal year 1994. The increase was
principally due to higher average short-term borrowing levels and higher
short-term interest rates. Interest expense in fiscal year 1994 was $1,403,000,
a $115,000 increase when compared to fiscal year 1993. The increase was due
primarily to higher short-term interest rates partially offset by lower average
short-term borrowing levels.
Discontinued Operations. In February 1993, Kleinert's declared the
textile division, Scott Mills, a discontinued operation. In July 1993,
Kleinert's decided to spin-off the Scott Mills division to its shareholders. In
November 1993, Kleinert's contributed substantially all of its textile
division's assets, subject to substantially all of its liabilities, to Scott
Mills, Inc., a newly formed corporation, for all of the outstanding shares of
the corporation and the Board of Directors declared a distribution of one share
of Scott Mills, Inc. common stock for every one share of Kleinert's Common Stock
payable to the shareholders of record of Kleinert's Common Stock at the close of
business on November 27, 1993. The distribution occurred on
<PAGE>
March 15, 1994 and resulted in 100% of the outstanding shares of Scott Mills
Common Stock being distributed to Kleinert's shareholders.
The textile division was classified in Kleinert's consolidated statement
of operations as a discontinued operation for fiscal year 1993. Textile sales
and losses which were excluded from continuing operations during the period are
set forth below:
Fiscal Year 1993
----------------
(000's omitted)
Textile net sales $ 9,578
=======
Operating loss before income tax benefit $ 2,677
Income tax benefit (922)
-------
Net loss 1,755
Less fiscal year 1992 provision for
additional operating losses through date
of disposal, net of income tax benefit of $249 (492)
-------
Loss from discontinued operations $ 1,263
=======
Income Taxes
The effective tax rates for fiscal years 1995, 1994 and 1993 relating to
continuing operations were 35.2%, 34.6%, and 35.0%, respectively.
Impact of Inflation and Changing Prices on Sales and Income from Operations
Although Kleinert's costs for raw materials, labor and equipment are
influenced by inflation, management believes that inflation has not had a
material impact on the Kleinert's operations prior to fiscal year 1994. In
fiscal year 1994, Kleinert's experienced an increase in raw material prices
which continued into fiscal year 1995. Raw material prices are not expected to
change significantly in 1996. Kleinert's does not expect to be able to increase
its selling prices to any great extent during fiscal year 1996; therefore
Kleinert's continues to examine all of its costs in an effort to maintain its
profit margins.
<PAGE>
Liquidity and Capital Resources
At December 2, 1995, Kleinert's had working capital of $18,557,000
compared to $16,511,000 at December 3, 1994. The ratio of current assets to
current liabilities was 1.91 to 1.0 and 2.0 to 1.0 at December 2, 1995 and
December, 3, 1994, respectively. The ratio of liabilities to equity was 1.0 to
1.0 and 1.0 to 1.0 at December 2, 1995 and December 3, 1994, respectively.
During fiscal year 1995, Kleinert's had unsecured lines of credit of $42,000,000
with maximum outstanding borrowings of $23,480,000. At December 2, 1995
$13,000,000 was outstanding under the lines of credit. For fiscal year 1996,
Kleinert's has unsecured lines of credit aggregating $42,000,000 with borrowing
rates at the respective banks' prevailing prime rates or matched funds rates
which are fixed short-term rates below prime rate.
Kleinert's anticipates spending approximately $1,480,000 for capital
expenditures in fiscal year 1996 primarily for building improvements at the Elba
facility, leasehold improvements at the New York office and showrooms and to
replace old equipment which Kleinert's believes will improve its manufacturing
operations. Depreciation expense is expected to approximate $980,000 for fiscal
year 1996.
Kleinert's sold its non-operating property in June 1994 for $500,000
which required Kleinert's to accept a 3 year $350,000 note receivable. The sale
of the property resulted in a small loss. The balance on the note receivable at
December 2, 1995 was $200,000.
In consideration for the assets of Pixie and Certified and the shares of
CASH, the Company paid an aggregate purchase price of $4,650,000 in cash, of
which $500,000 has been retained by the Company pending confirmation of
inventory quantities and completion of an audit of CASH. The purchase price was
financed by the Company through an amendment to its existing bank financing
agreement to provide for an additional term debt facility.
Kleinert's believes that cash flow generated by operations, together
with amounts available under its existing credit arrangements, should be
sufficient to fund Kleinert's working capital needs in fiscal year 1996 and for
the future.
It is expected that the acquisition will enhance Kleinert's earnings
and ultimately its cash flows; however, due to the seasonality of Kleinert's
business additional working capital requirements are anticipated in periods when
production levels exceed sales.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121 Accounting for the
Impairment Of Long-Lived Assets To Be Disposed Of, which requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. Kleinert's expects the impact of adoption in 1997 will be insignificant.
In October 1995, the Financial Accounting Standards Board issued FASB
Statement No. 123, Accounting for Stock-Based Compensation. The new standard
prescribes new accounting and reporting standard which reflect the standards'
"fair value method" to estimate expense associated with stock based
compensations plans. Companies may elect to continue to use existing accounting
rules or adopt the "fair value method" for expense recognition. Companies that
elect to continue to use existing accounting rules will be required to provide
pro-forma disclosures of what net income and earnings per share would have been
had the new "fair value method" been used. Kleinert's will elect to continue to
use existing accounting rules. Both statements are effective for fiscal years
beginning after December 15, 1995 and accordingly will not be required until
fiscal year 1997.
<PAGE>
III. Part II, Item 8, of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 2, 1995 is hereby amended and restated in its
entirety as follows:
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Reports of Independent Auditors .......................................
Consolidated Balance Sheets at December 2, 1995 and December 3, 1994. ..
Consolidated Statements of Operations for the Fiscal Years ended
December 2, 1995, December 3, 1994 and November 27, 1993. ............
Consolidated Statements of Shareholders' Equity for the Fiscal Years
ended December 2, 1995, December 3, 1994 and November 27, 1993. ......
Consolidated Statements of Cash Flows for the Fiscal Years ended
December 2, 1995, December 3, 1994 and November 27, 1993. ............
Notes to Consolidated Financial Statements ............................
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of Kleinert's, Inc.
We have audited the accompanying consolidated balance sheets of
Kleinert's, Inc. as of December 2, 1995 and December 3, 1994 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 2, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Kleinert's, Inc. at December 2, 1995 and December 3, 1994, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 2, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, in 1994 the Company
changed its method of accounting for income taxes.
Ernst & Young LLP
Philadelphia, Pennsylvania
February 9, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of Kleinert's, Inc.
In our opinion, the accompanying consolidated statements of operations,
of shareholders' equity and of cash flows of Kleinert's, Inc. and its
subsidiaries present fairly, in all material respects, the results of their
operations and their cash flows for the year ended November 27, 1993, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
February 14, 1994
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 2, 1995 AND DECEMBER 3, 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
ASSETS 1995 1994
--------- ---------
<S> <C> <C>
Current assets:
Cash .................................................... $ 327 $ 132
Accounts receivable (net of allowances for doubtful
accounts of $259 and $188, respectively) .............. 21,899 18,036
Inventories:
Raw materials ...................................... 4,222 4,077
Work-in-process .................................... 4,321 2,942
Finished goods ..................................... 5,987 5,677
------- -------
Total inventories ............................. 14,530 12,696
------- -------
Other current assets .................................... 2,380 1,613
------- -------
Total current assets ............................... 39,136 32,477
------- -------
Property, plant and equipment, at cost
Building and leasehold improvements ..................... 5,106 4,622
Machinery and equipment ................................. 6,070 5,578
Furniture and fixtures .................................. 368 369
------- -------
11,544 10,569
Less accumulated depreciation ........................... 6,051 5,427
------- -------
Net property, plant and equipment ....................... 5,493 5,142
------- -------
Cash surrender value (net) ................................... 2,402 2,087
Other assets ................................................. 1,191 756
------- -------
$48,222 $40,462
======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
DECEMBER 2, 1995 AND DECEMBER 3, 1994
($000'S OMITTED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
------- -------
<S> <C> <C>
Current liabilities:
Notes payable and current portion of long-term debt ... $14,195 $10,695
Accounts payable ...................................... 5,024 3,585
Accrued expenses ...................................... 1,360 1,686
------- -------
Total current liabilities ........................ 20,579 15,966
Deferred income taxes ...................................... 134 123
Long-term debt ............................................. 3,429 4,624
------- -------
Total liabilities ................................ 24,142 20,713
------- -------
Shareholders' equity
Preferred stock -- par value $1.00 per share, 2,000,000
shares authorized, none issued ...................... -- --
Common stock -- par value $1.00 per share, 10,000,000
shares authorized, 3,798,398 shares issued .......... 3,798 3,798
Capital in excess of par value ........................ 10,626 10,626
Retained earnings ..................................... 12,872 8,541
------- -------
27,296 22,965
Less:
Treasury stock, at cost, 466,967 common shares ........ (3,216) (3,216)
------- -------
Total shareholders' equity ....................... 24,080 19,749
------- -------
$48,222 $40,462
======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
($000'S OMITTED, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net sales ................................................. $75,121 $69,262 $61,428
Cost of goods sold ........................................ 61,636 56,786 50,396
------- ------- -------
Gross profit ......................................... 13,485 12,476 11,032
------- ------- -------
Selling, general and administrative expenses .............. 5,151 5,150 4,625
Interest expense .......................................... 1,651 1,403 1,288
------- ------- -------
6,802 6,553 5,913
------- ------- -------
Income from continuing operations before income taxes
and cumulative effect of change in accounting for
income taxes ....................................... 6,683 5,923 5,119
Provision for income taxes ................................ 2,352 2,051 1,794
------- ------- -------
Income from continuing operations before cumulative
effect of change in accounting for income taxes .... 4,331 3,872 3,325
Discontinued operations:
Loss from operations of discontinued textile business
net of applicable income tax benefit ............... -- -- (1,263)
------- ------- -------
Income before cumulative effect of change in accounting
for income taxes ................................... 4,331 3,872 2,062
------- ------- -------
Cumulative effect of change in accounting for income taxes . -- 210 --
------- ------- -------
Net income ................................................ $ 4,331 $ 4,082 $ 2,062
======= ======= =======
Earnings per share:
Income from continuing operations before change in
accounting for income taxes ........................ $ 1.15 $ 1.04 $ .93
Discontinued operations .............................. -- -- (.35)
Cumulative effect of change in accounting for
income taxes ....................................... -- .06 --
------- ------- -------
Net income ........................................... $ 1.15 $ 1.10 $ .58
======= ======= =======
Weighted average shares outstanding ....................... 3,750 3,702 3,569
======= ======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
($000'S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Number of Capial in Total
Shares Common Excess of Retained Treasury Shareholders'
Outstanding Stock Par Value Earnings Stock Equity
------------- --------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 28, 1992 ............. 3,255,098 $3,653 $ 9,788 $ 6,398 $(2,383) $17,456
Exercise of non-statutory stock options . 137,500 137 725 862
Repurchase of common stock ............. (25,000) (289) (289)
Dividend payable ....................... (4,001) (4,001)
Net income ............................. -- -- -- 2,062 -- 2,062
--------- ------ ------- ------- ------- -------
Balance, November 27, 1993 ............. 3,367,598 3,790 10,513 4,459 (2,672) 16,090
Exercise of incentive stock options .... 8,333 8 61 69
Repurchase of common stock ............. (44,500) (544) (544)
Tax benefit of exercise of stock options . 52 52
Net income ............................. -- -- -- 4,082 -- 4,082
--------- ------ ------- ------- ------- -------
Balance, December 3, 1994 .............. 3,331,431 3,798 10,626 8,541 (3,216) 19,749
========= ====== ======= ======= ======= =======
Net income ............................. -- -- -- 4,331 -- 4,331
--------- ------ ------- ------- ------- -------
Balance, December 2, 1995 .............. 3,331,431 $3,798 $10,626 $12,872 $(3,216) $24,080
========= ====== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
($000'S OMITTED)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operations:
Net income .................................................... $ 4,331 $ 4,082 $ 2,062
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization ................................. 676 674 1,361
Cumulative effect of change in accounting principle ........... -- (210) --
Provision for estimated operating losses on discontinued operations -- -- (492)
Loss on disposal of fixed assets .............................. -- 29 2
Provision for losses on accounts receivable ................... 71 80 39
Change in assets and liabilities:
Increase in accounts receivable .......................... (3,915) (318) (1,613)
(Increase) decrease in inventory ......................... (1,834) (943) 1,736
(Increase) decrease in other current assets .............. (767) (450) 652
Increase (decrease) in accounts payable and accrued expenses 1,186 (1,529) 1,998
Increase (decrease) in income taxes payable .............. (73) -- (20)
Increase in deferred income taxes ........................ 11 89 36
------- ------- -------
Total adjustments ................................... (4,645) (2,578) 3,699
------- ------- -------
Net cash (used in) provided by operating activities . (314) 1,504 5,761
------- ------- -------
Cash flows from investing activities:
Capital expenditures .......................................... (1,012) (618) (704)
Note receivable related party ................................. (500) -- --
Proceeds from sale of non-operating property .................. -- 185 --
Decrease in restricted cash ................................... -- -- 237
Additions to other assets ..................................... (384) (457) (570)
Proceeds from note receivable ................................. 100 -- --
------- ------- -------
Net cash used in investing activities ............... (1,796) (890) (1,037)
------- ------- -------
Cash flows from financing activities:
Net borrowings and (repayments) under revolving line-of-credit
agreement ................................................... 3,500 1,389 (3,229)
Proceeds from long-term debt .................................. -- 544 289
Dividends paid ................................................ -- (1,300) --
Principal payments on debt .................................... (1,195) (1,389) (1,445)
Principal payments on capital leases .......................... -- (18) (604)
Proceeds from exercise of stock options ....................... -- 69 862
Payments to acquire treasury stock ............................ -- (544) (289)
------- ------- -------
Net cash provided by (used in) financing activities . 2,305 (1,249) (4,416)
------- ------- -------
Net increase (decrease) in cash .................................... 195 (635) 308
Cash at beginning of period ........................................ 132 767 459
------- ------- -------
Cash at end of period .............................................. $ 327 $ 132 $ 767
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................... $ 1,730 $ 1,150 $ 1,650
Income taxes .................................................. $ 2,046 $ 2,289 $ 1,010
Equipment purchased under capital leases ........................... -- -- $ 140
Accrued dividends payable .......................................... -- -- $ 4,001
Tax benefit of exercise of stock options ........................... -- $ 52 --
Note receivable on sale of non-operating property .................. -- $ 350 --
</TABLE>
The Consolidated Statements of Cash Flows include activity related to the
Discontinued Operations for fiscal year 1993.
See notes to consolidated financial statements
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 2, 1995,
DECEMBER 3, 1994 AND NOVEMBER 27, 1993
1. BUSINESS OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business of the Company -- The Company manufactures and sells infants'
and children's sleepwear and activewear and personal apparel, including such
items as dress and garment shields. The Company's principal customers are
national chain stores, mass merchandisers, department stores and specialty
stores. See Note 10 for information on business segments. The Company treated
its textile division (Scott Mills) as a discontinued operation during fiscal
year 1993. Scott Mills was spun-off in a tax-free distribution on November 27,
1993.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Kleinert's, Inc. (Kleinert's) and its wholly-owned
subsidiaries, Kleinert's, Inc. of Alabama, Kleinert's, Inc. of Delaware and
Kleinert's, Inc. of New York. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Fiscal Year -- The Company utilizes a 52-53 week fiscal year ending on
the Saturday nearest November 30. Fiscal years 1995 and 1993 are fifty two week
years. Fiscal year 1994 was a fifty three week year.
Inventories -- Inventories are stated at the lower of cost or market.
Cost is determined on a first-in, first-out basis. Aggregate corporate general
and administrative charges were $1,704,000, $961,000 and $1,524,000 for fiscal
years 1995, 1994 and 1993, respectively. Such costs remaining in inventory at
December 3, 1995 and November 27, 1994 were approximately $390,000 and $211,000,
respectively.
Revenue Recognition -- The Company's sale of product is made net of
returns, allowances and discounts.
Property, Plant and Equipment -- The Company depreciates property, plant
and equipment over their estimated useful lives, principally on a straight-line
basis.
Useful Lives
---------------
Buildings .................. 30 -- 40 years
Leasehold improvements ..... Term of lease
Machinery and equipment .... 3 -- 10 years
Furniture and fixtures ..... 3 -- 5 years
Earnings Per Share -- Earnings per share has been computed based on the
weighted average number of common shares outstanding and common stock equivalent
shares deemed outstanding during each period presented.
Goodwill -- Goodwill, included in other assets, represents the excess of
the cost over the fair value of the net assets at the date of acquisition and is
being amortized using the straight-line method over 40 years.
Income Taxes -- Effective November 28, 1993, the Company accounts for
income taxes under the provisions of Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (FAS #109). This statement requires
recognition of deferred tax assets and liabilities for all timing differences
resulting from reporting certain income and expense items differently for income
tax and financial accounting purposes. In prior fiscal years income taxes were
accounted for under APB Opinion No. 11. The impact of the adoption of the change
in accounting for income taxes during fiscal year 1994 was $210,000.
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
1. Business of the Company and Summary of Significant Accounting Policies -
(Continued)
Financial Statement Reclassification -- Certain prior years' amounts in
the consolidated financial statements have been reclassified to conform to the
fiscal year 1995 presentation.
Stock Based Compensation -- The Company accounts for stock options
according to the provisions of Accounting Principles Board Opinion 25 (APB 25),
Accounting for Stock Issued to Employees. In October 1995, the Financial
Accounting Standards Board issued FASB Statement No. 123, Accounting for
Stock-Based Compensation. The new standard prescribes new accounting and
reporting standards which reflect the standards' "fair value method" to estimate
expense associated with stock based compensations plans. Companies may elect to
continue to use existing accounting rules or adopt the "fair value method" for
expense recognition. Companies that elect to continue to use existing accounting
rules will be required to provide pro-forma disclosures of what net income and
earnings per share would have been had the new "fair value method" been used.
The Company will elect to continue to use existing accounting rules. The new
statement is effective for fiscal years beginning after December 15, 1995.
Accordingly, the new standards pro-forma disclosure provisions will be required
for the Company for its fiscal year ending November 29, 1997.
Accounting for the Impairment of Long-Lived Assets -- In March 1995, the
FASB issued Statement No. 121 Accounting for the Impairment of Long-Lived Assets
to Be disposed Of, which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The statement is
effective for fiscal years beginning after December 15, 1995 and accordingly
will not be required until fiscal year 1997. The Company expects the impact of
adoption in 1997 will be insignificant.
2. FINANCING ARRANGEMENTS
Financing arrangements consist of the following:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
Current Long-Term Current Long-Term
--------- ----------- --------- -----------
($000's omitted)
<S> <C> <C> <C> <C>
Term loans ......................... $ 1,000 $2,649 $ 1,000 $3,649
Short-term borrowings, reclassified . -- -- -- --
Revolving line of credit ........... 13,000 -- 9,500 --
Revenue bond ....................... 195 780 195 975
Capital leases ..................... -- -- -- --
------- ------ ------- ------
$14,195 $3,429 $10,695 $4,624
======= ====== ======= ======
</TABLE>
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
2. Financing Arrangements - (Continued)
The following information relates to the Company's short-term revolving
lines of credit:
Weighted
Weighted Maximum Amount Average Amount
Average Outstanding At Outstanding
Interest Any Fiscal Month-End During The
Rate (1) During the Period Period (2)
---------- -------------------- --------------
($000's omitted)
1995 ......... 7.0% $23,480 $13,521
1994 ......... 6.3% $20,540 $11,388
1993 ......... 5.6% $19,475 $12,866
- ------
(1) The weighted average interest rate for each period was computed by dividing
interest expense by the weighted average amount outstanding.
(2) The weighted average amount outstanding for each period was computed by
averaging the daily balances during the year.
The Company's agreement with its banks provided for a $42,000,000
unsecured line of credit for use in fiscal year 1995 bearing interest between
6.40% and the prime rate (8.75% as of December 2, 1995) and required
compensating balances. For fiscal year 1996, the Company has available
$42,000,000 in unsecured lines of credit. On December 2, 1995 the unused portion
of the lines of credit was $29,000,000. The Company's unsecured term loan is
payable in quarterly installments of $250,000 through September 1999 and bears
interest at the prime rate plus one-quarter percent. The prime rate was 8.75% at
December 2, 1995 and 8.5% at December 3, 1994. On November 10, 1994 the Company
amended the term loan to borrow an additional $544,000.
The banking agreements require the Company to maintain financial
statement covenants, including requirements on pre-tax income, working capital,
tangible net worth, debt and capital expenditures. In addition, no cash
dividends may be paid on the common stock unless the Company's net worth exceeds
$15,000,000 after the payment of dividends. With the exception of this net worth
covenant, retained earnings are free of restrictions and the Company had
$9,080,000 of retained earnings available for dividends at December 2, 1995.
The Company holds an industrial revenue bond from the Industrial
Development Board of the City of Elba, Alabama collateralized by a first
mortgage on the Elba, Alabama facility. This loan is payable in annual
installments of $195,000 with the final payment due in October 2000. Interest is
payable quarterly at a variable rate of 85% of the bank's prime rate. Prime rate
was 8.75% at December 2, 1995 and 8.5% at December 3, 1994.
Aggregate maturities of long-term debt after December 2, 1995, are as
follows: 1996 -- $1,195,000; 1997 -- $1,195,000; 1998 -- $1,195,000; 1999 --
$844,000; 2000 -- $195,000; thereafter -- 0.
Borrowings against the cash surrender value of officers' life insurance
policies amounted to $3,450,000 and $3,030,000 as of December 2, 1995 and
December 3, 1994, respectively. These borrowings are recorded as a reduction in
the related assets and bear interest ranging from 7.11% to 7.20% in fiscal year
1995.
3. DISCONTINUED OPERATIONS
On February 11, 1993, the Board of Directors approved a plan to dispose
of the Company's textile division, known as Scott Mills. In August 1993, the
Company organized Scott Mills, Inc., and its wholly-owned subsidiary, Scott
Mills, Inc. of North Carolina, to operate the Scott Mills Division independently
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
3. Discontinued Operations - (Continued)
of the Company effective after November 27, 1993. On November 16, 1993, the
Board of Directors declared a distribution of one share of Scott Mills, Inc.
common stock for every one share of Kleinert's, Inc. common stock payable to the
holders of record of Kleinert's, Inc. common stock, par value $1.00 per share,
at the close of business on the record date, November 27, 1993.
The distribution, which occurred on March 15, 1994, resulted in the
separation of the Company into two publicly-owned companies with each company
continuing to engage in the business in which it had previously engaged. Certain
directors of Scott Mills, Inc. including its Chief Executive Officer, also serve
as officers, or directors of the Company.
In connection with the transfer of assets to Scott Mills, the Company
contributed $1,300,000 in cash to Scott Mills and retained the accounts
receivable and accounts payable at November 27, 1993. The assets distributed to
Scott Mills included cash, leasehold improvements, machinery and equipment,
furniture and fixtures, deposits on machinery and other assets including prepaid
expenses and cash surrender value of life insurance policy.
In April 1994 the Internal Revenue Service granted the Company's
previously filed Private Letter Ruling request for tax free treatment of the
transfer of Scott Mills ownership to the Company's shareholders.
The accompanying consolidated financial statements reflect the textile
division as a discontinued operation for fiscal year 1993; accordingly, the
operating results of the textile division are excluded from continuing
operations for that year.
The loss from discontinued operations included in the Consolidated
Statement of Operations is as follows:
1993
--------------
($000's omitted)
Operating loss before income tax benefit .............. $2,677
Income tax benefit .................................... (922)
------
Net loss .............................................. 1,755
Less fiscal year 1993 provision for additional operating
losses through date of disposal, net of income tax
benefit of $249 ...................................... (492)
------
Loss from discontinued operations ..................... $1,263
======
4. INCOME TAXES
Income tax expense (benefit) is included in the financial statements as
follows:
Liability Method Deferred Method
--------------------------- ---------------
1995 1994 1993
---------- ---------- ----------
Continuing operations .. $2,352,000 $2,051,000 $1,794,000
Discontinued operations . -- -- (673,000)
---------- ---------- ----------
$2,352,000 $2,051,000 $1,121,000
========== ========== ==========
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
4. Income Taxes - (Continued)
The provision for income taxes consists of the following:
Liability Method Deferred Method
------------------------------- ---------------
1995 1994 1993
---------- ---------- ----------
Current:
Federal ...... $2,245,000 $1,838,000 $1,201,000
State ........ 135,000 43,000 --
---------- ---------- ----------
2,380,000 1,881,000 1,201,000
---------- ---------- ----------
Deferred:
Federal ...... (30,000) 176,000 (80,000)
State ........ 2,000 (6,000) --
---------- ---------- ----------
(28,000) 170,000 (80,000)
---------- ---------- ----------
$2,352,000 $2,051,000 $1,121,000
========== ========== ==========
The components of the deferred tax provision, including the related tax
effects of timing differences, are as follows:
Deferred Method
---------------
1993
--------
Depreciation ............ $ 22,000
Inventory reserves ...... (58,000)
Benefit plans ........... (32,000)
Bad debt expense ........ (13,000)
Charitable contributions . 21,000
Capital leases .......... (13,000)
Vacation ................ (7,000)
---------
$(80,000)
=========
Income tax expense differs from the amount computed by applying the
federal tax rate to income before income taxes are as follows:
<TABLE>
<CAPTION>
Liability Method Deferred Method
------------------------- ---------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate applied to income from continuing
operations before income taxes .................... $2,272,000 $2,014,000 $1,740,000
State taxes, net of federal benefit ................ 90,000 28,000 41,000
Other .............................................. (10,000) 9,000 13,000
---------- ---------- ----------
2,352,000 2,051,000 1,794,000
---------- ---------- ----------
Income tax benefit of discontinued operations ...... -- -- (673,000)
---------- ---------- ----------
$2,352,000 $2,051,000 $1,121,000
========== ========== ==========
</TABLE>
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
4. Income Taxes - (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets, as of December
2, 1995 and December 3, 1994 are as follows:
1995 1994
-------- --------
Deferred Tax Assets:
Benefit plans ............ $156,000 $121,000
Inventory reserves ....... 75,000 88,000
Bad debt expense ......... 92,000 68,000
Vacation ................. 15,000 27,000
-------- --------
Total deferred tax
assets ............ $338,000 $304,000
-------- --------
Deferred Tax Liabilities:
Depreciation ............. $290,000 $244,000
Charitable contributions . -- 40,000
-------- --------
Total deferred tax
liabilities ....... 290,000 284,000
-------- --------
Net deferred tax
asset ........ $ 48,000 $ 20,000
======== ========
5. RETIREMENT PLANS
The Company has a defined benefit pension plan (the Plan) covering
substantially all of its employees subject to certain age and service
requirements. Scott Mills' employee participation in the pension plan terminated
on December 31, 1993, resulting in a $23,000 gain. Normal costs and past service
costs are amortized over thirty years. The Company contributions to the Plan are
made in accordance with applicable E.R.I.S.A. and tax regulations. Assets of the
Plan are invested in equity, corporate and government bonds and short-term
instruments. Pension costs for fiscal years 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Benefits earned during the period .............. $ 289,688 $ 271,405 $ 275,657
Interest cost on benefits earned in prior years . 231,054 209,540 182,751
Net investment (income) loss ................... (475,375) 88,677 (213,693)
Net amortization and deferral .................. 207,339 (317,020) 10,696
--------- --------- ---------
$ 252,706 $ 252,602 $ 255,411
========= ========= =========
</TABLE>
The projected benefit obligation below is based on the following
assumptions:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Discount rate ..................................... 7.0 % 7.75% 7.25%
Weighted average expected long-term rate of return . 8.75% 7.75% 7.25%
Annual rate of increased compensation ............. 4.0 % 5.0 % 5.0 %
</TABLE>
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
5. Retirement Plans - (Continued)
The following is a reconciliation of the Plan's assets and liabilities
to amounts recorded in the Company's financial statements:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Present value of future benefit payments based on service to date
and present pay levels:
Vested ........................................................ $3,295,523 $2,506,847
Non-vested .................................................... 88,664 56,531
---------- ----------
Accumulated benefit obligation ........................... 3,384,187 2,563,378
Projected pay increases ....................................... 472,967 389,001
---------- ----------
Projected benefit obligation (PBO) ....................... 3,857,154 2,952,379
Fair value of plan assets available for benefits ................... 3,494,944 2,916,825
---------- ----------
Assets (Liabilities) in excess of PBO .............................. (362,210) (35,554)
Items not yet recognized in the Company's balance sheet:
Unamortized transition asset .................................. (130,646) (149,309)
Unamortized prior service cost ................................ 27,707 38,318
Unrecognized net actuarial and investment losses .............. 560,099 247,952
---------- ----------
Prepaid pension cost .......................................... $ 94,950 $ 101,407
========== ==========
</TABLE>
Participants' benefits are fully vested after five years, and future
benefit accruals are 0.8% of each year's compensation.
The Company has supplemental retirement agreements with certain key
employees. The cost of these benefits, which are funded with life insurance
contracts, are expensed over the employees' service lives and amounted to
$104,000, $58,000, and $94,000 in fiscal years 1995, 1994, and 1993,
respectively.
6. PROPERTY, PLANT AND EQUIPMENT AND LEASE COMMITMENTS
Property, plant and equipment at December 2, 1995 and December 3, 1994
includes equipment under capital leases with a cost of $988,000 and a net book
value of $341,000 and $440,000 respectively. There are no future minimum lease
payments remaining to be paid at December 2, 1995.
Depreciation expense was $661,000, $659,000 and $680,000 for fiscal
years 1995, 1994 and 1993 respectively.
Rent expense under operating leases was $1,350,000, $1,094,000 and
$1,207,000 in fiscal years 1995, 1994 and 1993, respectively. Minimum rentals
for operating leases (principally office space, machinery and equipment) that
have initial or remaining noncancelable lease terms in excess of one year as of
December 2, 1995 are as follows:
Fiscal Year Amount
----------- ----------
1996 -- $ 853,000
1997 -- 722,000
1998 -- 597,000
1999 -- 535,000
2000 -- 434,000
----------
Total $3,141,000
==========
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
6. Property, Plant and Equipment and Lease Commitments - (Continued)
The Company sold its non-operating property in June 1994 for $500,000
and accepted a 3 year, $350,000 note receivable. The sale of the property
resulted in a small loss.
7. SHAREHOLDERS' EQUITY
Pursuant to the Company's plan to spin-off its Scott Mills Division, the
Board of Directors unanimously voted on November 16, 1993 to distribute one
share of common stock of Scott Mills, Inc., a Pennsylvania corporation, for each
share of the Company's common stock, held by shareholders of record at November
27, 1993. Accordingly, a dividend payable for the net assets of the discontinued
operation plus $1,300,000 was accrued at November 27, 1993. On March 15, 1994
the Company distributed the Scott Mills, Inc. common stock.
The Company's stock option plan (The Plan) authorizes the issuance of
500,000 shares of common stock to officers, directors and key employees.
The information with respect to these incentive stock option plans is as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
12/2/95 12/3/94 11/27/93
--------- --------- ----------
<S> <C> <C> <C>
Options outstanding beginning of period . 190,000 215,000 175,000
Granted under New Plan (1) ............. 10,000 -- 40,000
Exercised .............................. -- (8,333) --
Canceled ............................... -- (16,667) --
--------- --------- ----------
Options outstanding end of period ...... 200,000 190,000 215,000
--------- --------- ----------
Exercise price per share ............... $6.90-$18.00 $6.90-$12.50 $6.90-$12.50
Options exercisable end of period ...... 193,333 185,000 129,997
</TABLE>
- ------
(1) Options granted during fiscal year 1995 were granted at $18.00. Options
granted during fiscal year 1993 were granted at prices ranging from $8.25 to
$12.50 per share.
On June 23, 1992 the Board of Directors granted three outside directors
non-statutory stock options to purchase 25,000 shares each of common stock at
$8.50 per share. In November 1993, one of the options to purchase 25,000 shares
was exercised. The remaining options expire in June 1997.
In May 1991, the Board of Directors granted the Company's Chairman and
Chief Executive Officer (the Chairman) a non-statutory stock option to purchase
375,000 shares of the Company's common stock at $4.60 per share. This option
expires in May 1996.
8. COMMITMENTS
The Chairman has an employment agreement which provides for an incentive
bonus if pre-tax income exceeds fiscal year 1989 pre-tax income. Bonuses of
$153,000, $124,000 and $110,000 were earned for fiscal years 1995, 1994 and
1993, respectively. The employment agreement with the Chairman extends through
the end of fiscal year 1997 and provides for an annual incentive bonus of 3.1%
of pre-tax income in excess of fiscal year 1989 pre-tax income.
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
8. Commitments - (Continued)
In addition the Company is funding life insurance contracts on behalf of
the Chairman, whose beneficiaries are designated by the individual. The funded
amounts will be repaid to the Company upon receipt of insurance proceeds,
against which the Company holds collateral assignments. The Company has included
at December 2, 1995, as a non-current asset, $1,265,000 which is equal to the
cash surrender value of the policies.
The Company is party to an agreement with Precision Textile, Inc.
(P.T.I.), a related party, whereby P.T.I. provides low cost contract sewing
labor for the Company's children's apparel division. This agreement offers the
Company the exclusive use of P.T.I.'s low cost sewing labor in exchange for a
guarantee by the Company to purchase 100% of P.T.I.'s capital stock (for no more
than $400,000) if certain production levels are not maintained. Purchases from
P.T.I. included in cost of goods sold were approximately $2,525,000, $2,539,000
and $2,377,000 in fiscal years 1995, 1994 and 1993, respectively. Amounts
payable to P.T.I. were $64,000 and $30,000 at December 2, 1995 and December 3,
1994, respectively. The Company is presently renewing the existing agreement
with P.T.I. on a year-to-year basis.
Kleinert's entered into a two year supply agreement with a major vendor
starting in December 1996. This supply agreement requires among other things for
the Company to purchase its requirements for various fabrics from this vendor at
negotiated prices and requires the same vendor to commission dye and finish
fabric formerly finished by Scott Mills. Additionally, the Company and its
vendor have agreed to commission dye and finish a minimum of 2,500,000 pounds
during the term of the two year agreement.
9. MAJOR CUSTOMERS
In 1995 two apparel customers individually accounted for 19% and 14%
each of the Company's consolidated net sales while the same two apparel
customers individually accounted for 21% and 15% in 1994 and 20% each of the
Company's consolidated net sales in 1993.
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
10. SEGMENT INFORMATION
The Company's products are principally grouped into two industry
segments: children's apparel and other. Corporate assets include cash, pension
assets, cash surrender value of life insurance, non-trade receivables, general
corporate assets and goodwill.
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
12/2/95 12/3/94 11/27/93
------- ------- -------
($000's omitted)
<S> <C> <C> <C>
Net sales to unaffiliated customers:
Children's apparel ....................... $74,087 $68,097 $60,248
Other .................................... 1,034 1,165 1,180
Operating profit:
Children's apparel ....................... $ 9,847 $ 8,033 $ 7,841
Other .................................... 191 254 90
------- ------- -------
10,038 8,287 7,931
General corporate expenses ............... (1,704) (961) (1,524)
Interest expense ......................... (1,651) (1,403) (1,288)
------- ------- -------
Income from continuing operations before
taxes.................................... $ 6,683 $ 5,923 $ 5,119
======= ======= =======
Identifiable assets*:
Children's apparel ....................... $43,082 $35,995 $35,360
Other** .................................. 5,140 4,467 3,846
Capital expenditures:
Children's apparel ....................... $ 989 $ 603 $ 627
Other .................................... 23 15 12
Depreciation and amortization:
Children's apparel ....................... $ 635 $ 619 $ 652
Other .................................... 41 55 43
</TABLE>
- ------
* Does not include net assets from discontinued operations of $2,701 at
November 27, 1993.
** Includes goodwill of $310, $325, and $340, respectively.
11. STOCK REPURCHASE PROGRAM
In June 1993 the Board of Directors unanimously approved a plan to
repurchase up to $3,000,000 of the Company's stock. As of December 2, 1995,
under the stock repurchase program, the Company has repurchased 69,500 shares of
its common stock at prices ranging from $11.25 to $12.38 per share.
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Fiscal Years Ended December 2, 1995,
December 3, 1994 and November 27, 1993
12. RELATED PARTY TRANSACTIONS
On December 5, 1994 the Company loaned Scott Mills, Inc. ("Scott Mills")
$500,000. Scott Mills, formerly an indirect wholly-owned subsidiary of the
Company, is the successor in interest to the Company's textile division, the
assets of which were transferred to Scott Mills on November 27, 1993. The loan
bears interest, payable annually, at 8 1/2% per annum and the principal is due
in full on December 4, 1997. Scott Mills, which has operated independently of
the Company since November 27, 1993, continues to be a principal supplier of
fabric to the Company. Total fabric purchases from Scott Mills were $6,840,900,
$6,185,000 and $4,720,000 for fiscal years 1995, 1994 and 1993, respectively.
The Company provides certain third party services on behalf of Scott
Mills including data processing and account payable check processing functions
and business management services. As a consequence, the balance due to
Kleinert's, Inc. fluctuates based on the timing of Scott Mills repayments to
Kleinert's for disbursements made on behalf of Scott Mills. The net receivable
due to the Company at December 2, 1995 was $1,561,000 and consisted primarily of
the unreimbursed balance of disbursements made on behalf of Scott Mills.
Kleinert's charged Scott Mills management and service fees of $86,000, $293,000
and $415,000 in the fiscal years ended 1995, 1994 and 1993, respectively. On
December 1, 1995 the Company executed a working capital agreement with Scott
Mills that confirms Scott Mills' obligations and provides to the Company a first
lien and security interest in substantially all of Scott Mills' assets to secure
Scott Mills obligation to repay to the Company the loan balance due.
In March 1995, the Company subleased knitting machines to Scott Mills
for a forty-five month term to be used to produce certain fabrics on behalf of
the Company.
13. SUBSEQUENT EVENT
On December 19, 1995, Kleinert's, Inc., through its newly formed,
wholly-owned subsidiary, Kleinert's, Inc. of Florida, ("together, the Company"),
consummated a transaction (the "Transaction") pursuant to which the Company
acquired substantially all of the assets of Pixie Playmates, Inc. ("Pixie") and
Certified Sewing Services, Inc. ("Certified") two Florida corporations, and all
of the capital stock of Certified Apparel Services of Honduras, Inc., C.A., a
Honduran corporation ("CASH"). Pixie, Certified and CASH, all of which were
affiliated entities, are engaged in the manufacture and sale of children's
apparel. Concurrent with the Transaction, the Company entered into a three year
lease agreement with the principal shareholder of Pixie for the premises in
which Pixie was conducting business. The Company intends to continue
manufacturing operations as was conducted by Pixie, Certified and CASH prior to
the Transaction.
14. EVENTS SUBSEQUENT TO THE DATE OF THE ACCOUNTANTS REPORT (UNAUDITED)
On February 28, 1996 the Company refinanced its existing term loan and
provided for an additional term debt facility of $4,650,000 to finance the
Pixie Acquisition. The term loan is in the form of an amended and restated
term loan note with the same bank as the original term loan. Total borrowing
on February 28, 1996 was $8,049,000. The interest rate is indexed by LIBOR
rates plus a spread of 1.12%.
Simultaneously, the Company entered into an interest rate swap to convert
its floating-rate to a fixed-rate of 5.88% which effectively fixes the rate at
7.0%. This reduces the Company's risk of incurring higher interest costs due to
rising interest rates. At February 28, 1996, the interest rate swap agreement
had a notional amount of $8,049,000 which decreases by $300,000 quarterly
through the September 2002 termination date. The fair value of this agreement at
February 28, 1996 was $0.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned thereunto duly authorized.
KLEINERT'S, INC.
By: /s/ Gerald E. Monigle
----------------------------------------
Gerald E. Monigle
Vice President -- Finance
(Principal Accounting Officer)
Dated: August 26, 1996
