SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 1, 1997
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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
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KLEINERT'S, INC.
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(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
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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 March 31, 1997
------------------------- -----------------------------
Common Stock
Par Value $1.00 per share 3,692,835
<PAGE>
KLEINERT'S, INC.
INDEX
PAGE
----
Part I. Financial information
Item 1. Financial statements
Consolidated statements of operations 3
for the three months ended March 1, 1997
and March 2, 1996
Consolidated balance sheets at 4
March 1, 1997, November 30, 1996
and March 2, 1996
Consolidated statements of cash flows 6
for the three months ended March 1, 1997
and March 2, 1996
Notes to consolidated financial statements 8
Item 2. Management's discussion and analysis of 10
the financial condition and results of
operations
Part II. Other information
Item 6. Exhibits and Reports on Form 8-K 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's Omitted, except per share amounts)
Three Months Ended
--------------------
March 1, March 2,
1997 1996
-------- --------
Net sales $8,624 $11,720
Cost of goods sold 6,570 9,208
------ -------
Gross profit 2,054 2,512
------ -------
Selling, general and administrative expenses 1,528 1,426
Interest expense 376 336
------ -------
1,904 1,762
Income before income taxes 150 750
Provision for income taxes 52 271
------ -------
Net income $ 98 $ 479
====== =======
Earnings per share:
Net income $ .03 $ .13
====== =======
Weighted average shares outstanding 3,881 3,727
====== =======
See accompanying notes
3
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
ASSETS
March 1, November 30, March 2,
1997 1996 1996
------- ------------ -------
Current assets:
Cash $ 332 $ 395 $ 47
Accounts receivable (net of
allowances for doubtful accounts
of $226, $206 and $259, respectively) 11,684 23,552 14,561
Inventories:
Raw materials 7,853 6,451 7,705
Work-in-progress 5,526 4,430 4,617
Finished goods 14,485 7,545 11,948
------- ------- -------
Total inventories 27,864 18,426 24,270
Other current assets 4,225 4,168 1,617
------- ------- -------
Total current assets 44,105 46,541 40,495
------- ------- -------
Property, plant and equipment, at cost 17,990 17,477 13,262
Less: Accumulated depreciation 8,587 8,287 6,269
------- ------- -------
Net property, plant and
equipment 9,403 9,190 6,993
Other assets 7,070 7,101 4,612
------- ------- -------
$60,578 $62,832 $52,100
======= ======= =======
See accompanying notes
4
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 1, November 30, March 2,
1997 1996 1996
------- ------------ -------
<S> <C> <C> <C>
Current liabilities:
Notes payable and current
portion of long-term debt $14,360 $14,768 $11,695
Accounts payable 6,864 6,071 7,211
Accrued expenses 1,027 2,996 813
------- ------- -------
Total current liabilities 22,251 23,835 19,778
Deferred income taxes 410 410 134
Long-term debt 6,534 6,834 7,629
------- ------- -------
Total liabilities 29,195 31,079 27,541
------- ------- -------
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,
4,249,398, 4,249,398 and 3,798,398 shares
issued, respectively 4,249 4,249 3,798
Capital in excess of par value 13,621 13,621 10,626
Retained earnings 17,946 17,848 13,351
------- ------- -------
35,816 35,718 27,775
------- ------- -------
Less:
Treasury stock, at cost, 539,217,
513,467 and 466,967 common shares (4,433) (3,965) (3,216)
------- ------- -------
Total shareholders' equity 31,383 31,753 24,559
------- ------- -------
$60,578 $62,832 $52,100
======= ======= =======
</TABLE>
See accompanying notes
5
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's Omitted)
Three Months Ended
-----------------------
March 1, March 2,
1997 1996
------ -------
Cash flows from operating activities:
Net income 98 479
Adjustment to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 363 223
Provision for losses on accounts receivable (20) (20)
Change in assets and liabilities:
Decrease in accounts receivable 11,853 7,359
(Increase) in inventory (9,438) (7,646)
(Increase) decrease in other current assets (105) 763
(Decrease) increase in accounts payable
and accrued expenses (497) 1,669
(Decrease) increase in income taxes payable (633) 30
Increase (decrease) in other assets 6 (10)
------ -------
Total adjustments 1,529 2,368
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Net cash provided by operating
activities 1,627 2,847
------ -------
Cash flows from investing activities:
Purchase of assets - Pixie Acquisition -- (4,150)
Capital expenditures (550) (207)
Proceeds from note receivable 35 30
------ -------
Net cash used in investing
activities (515) $(4,327)
------ -------
See accompanying notes
6
<PAGE>
KLEINERT'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's Omitted)
Three Months Ended
----------------------
March 1, March 2,
1997 1996
------- -------
Cash flows from financing activities:
Net (repayments) borrowing under revolving
line-of-credit agreements $ 94 $(3,200)
Principal payments on debt and capital lease (802) (250)
Payments to acquire Treasury Stock (467) --
Proceeds from long-term debt -- 4,650
------- -------
Net cash (used in) provided by
financing activities (1,175) 1,200
------- -------
Net (Decrease) in cash (63) (280)
Cash at beginning of period 395 327
------- -------
Cash at end of period 332 $ 47
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 472 $ 294
Income taxes $ 663 $ 240
See accompanying notes
7
<PAGE>
KLEINERT'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 1, 1997, and March 2, 1996
(1) Basis of presentation:
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
information furnished reflects all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the results for the
interim periods. Operating results for the three months ended March 1, 1997 are
not necessarily indicative of the results that may be expected for the year
ended November 29, 1997. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures presented are adequate
for a fair presentation of the financial statements. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended November 30, 1996.
(2) Acquisitions
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 "Pixie Acquisition") 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., S.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 Pixie Acquisition, the Company
entered into a three year lease agreement with the principal shareholder of
Pixie for the premises in which Pixie was conducting business.
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. 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.
The acquisition has been accounted for using the purchase method, and
accordingly, the results of operations are included in the Company's results
from the date of acquisition, December 19, 1995.
8
<PAGE>
On September 30, 1996, the Company consummated the merger (the "Merger") of
Scott Mills, Inc. ("Scott Mills"), with and into the Company's wholly-owned
subsidiary, Kleinert's, Inc. of Alabama ("Kleinert's Alabama"), pursuant to an
Agreement and Plan of Merger dated as of June 10, 1996 among the Company, Scott
Mills and Kleinert's Alabama (the "Merger Agreement"). Pursuant to the Merger
Agreement, each share of Scott Mills Common Stock outstanding on September 30,
1996 was converted into the right to receive $.03 in cash and .0152% of a share
of the Company's Common Stock, determined by the division of $.27 for each share
of Scott Mill's stock by $17.75, which represented the average price of the
Company's stock on the five trading days immediately preceding the consummation
of the Merger (as determined pursuant to the Merger Agreement). Cash was paid in
lieu of fractional shares. The Company issued approximately 51,000 shares of its
Common Stock and approximately $101,000 in cash in exchange for all of the
outstanding shares of Common Stock of Scott Mills.
The Merger was consummated upon approval of the Merger Agreement and the
Merger by the Scott Mills shareholders at the Scott Mills Annual Meeting of
Shareholders held on September 27, 1996.
The Company was the largest customer of Scott Mills. The Merger of Scott
Mills with Kleinert's Alabama will permit the Company to maintain its
flexibility in servicing its retail customers in its sleepwear and activewear
products.
The proforma unaudited results of operations for the three months ended
March 1, 1997 and March 2, 1996, assuming consummation of the Merger as of
December 2, 1995, are as follows:
Three Months Ended
------------------------
March 1, March 2,
1997 1996
------ -------
Net sales $8,624 $11,862
Net income $ 98 $ 520
Net income per common share $ .03 $ .14
(3) Refinancing of Term Loan
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 at March 1,
1997 was $7,149,000. 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 March 1, 1997, the interest rate swap agreement had a
notional amount of $7,149,000 which decreases by $300,000 quarterly through the
September 2002 termination date. The fair value of this agreement at March 1,
1997 was $78,150.
9
<PAGE>
(4) Stock Repurchase Program
On June 21, 1996, the Company announced the commencement of a common stock
repurchase program. Purchases under the program occurred in the public market
and in negotiated private transactions. The program was terminated on April 4,
1997. Total purchases under the repurchase program did not exceed $5,000,000.
During the three months ended March 1, 1997, the Company repurchased 25,750
shares of common stock for a total purchase price of $467,000.
(5) Related Party Transactions
The Chairman has an employment agreement which provides for an incentive
bonus in 1997 of 5% of pre-tax income if pre-tax income exceeds fiscal year 1989
pre-tax income. The employment agreement is in effect through the end of fiscal
year 1997.
In addition, the Company is funding life insurance contracts on behalf of
the Chairman, whose beneficiaries are designated by the individual.
The Company has a 270 day note receivable of $400,000 with the Chairman due
on November 25, 1997 at market interest rate, which is in accordance with his
employment agreement.
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's apparel business is highly seasonal. Consequently, the sales
and operating results for the three months ended March 1, 1997 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending November 29, 1997.
Three Months Ended
(000's omitted)
--------------------------------------------
Increase
Mar. 1, 1997 Mar. 2, 1996 (Decrease)
------------ ------------ ----------
Net Sales $8,624 $11,720 $(3,096)
Gross Profits $2,054 $ 2,512 $ (458)
Selling, general and
administrative expenses $1,528 $ 1,426 $ 102
Net sales decreased by $3,096,000, or 26%, from $11,720,000 to $8,624,000
for the three months ended March 1, 1997 compared to the three months ended
March 2, 1996. Sales in the three months ended March 1, 1997 include sales of
the Scott Mills textile division of approximately $1,267,000. Scott Mills was
acquired during the fourth quarter of 1996. The overall decrease in the first
quarter of 1997 reflects primarily reduced sales, a decrease of $2,000,000 when
compared to the first quarter of 1996, to the Company's major T-shirt customer
due to concerns regarding this customer's financial stability. On a comparative
basis the lower sales in the three months ended March 1, 1997 compared to the
three months ended March 2, 1996 reflect a major store set for a sleepwear
customer in 1996 compared to automatic replenishment in 1997.
Gross profit decreased by $458,000 as a result of the reduced sales. Gross
profit as a percentage of net sales improved primarily due to increased
production of products manufactured at the Company's production facilities in
Honduras, C.A.
Selling, general and administrative expenses increased $102,000, or 7%
primarily reflecting expenses associated with the Scott Mills textile business
which was acquired during the fourth quarter of fiscal 1996.
Interest expense in the first three months of fiscal 1997 was $376,000
compared to $336,000 in the first three months of fiscal 1996. This increase was
due to an increase in the term loan as a result of the Pixie acquisition offset
by a slightly lower average line of credit balance for the quarter.
11
<PAGE>
Impact of Inflation and Changing Prices on Sales and Income from Operations
Although the Company's costs for raw materials, labor and equipment are
influenced by inflation, management believes that inflation did not have a
material impact on the Company's operations during the three months ended March
1, 1997 and March 2, 1996. The Company has not been able to increase its selling
prices to any great extent during fiscal year 1996 or to date in 1997;
therefore, the Company continues to examine all of its costs in an effort to
maintain its profit margins.
Liquidity and Capital Resources
At March 1, 1997, Kleinert's had working capital of $21,854,000 compared to
$20,717,000 at March 2, 1996. Net cash provided by operating activities
decreased $1,220,000 from $2,847,000 in the first three months of fiscal year
1996 to $1,627,000 in the first three months of fiscal year 1997. Net cash
provided by operations during the fiscal quarter on a comparative basis was
negatively impacted by increases in inventory of approximately $1,800,000 (1997
quarter increase of $9,438,000 compared to 1996 increase of $7,646,000) and a
decrease in accounts payable of $497,000 in 1997 compared to increases in
accounts payable of $1,669,000 in 1996. These uses of cash were offset by higher
decreases in accounts receivable of $11,853,000 in the first quarter of 1997
versus $7,359,000 during the comparable period of 1996.
Cash used in investing activities decreased $3,812,000 to ($515,000) in the
first three months of 1997 from ($4,327,000) in the same period of 1996. The
decrease was primarily the result of the acquisition of the assets of Pixie and
Certified and the capital stock of CASH for an aggregate cash purchase price of
$4,650,000 during 1996.
Net cash used in financing activities was ($1,175,000) in the three months
ended March 1, 1997 compared to $1,200,000 provided by financing activities for
the comparable period in 1996, a change of $2,375,000. On a comparable basis the
decrease primarily reflected first quarter 1996 proceeds from refinancing of
existing term debt, and the addition of a $4,650,000 term debt facility to
finance the Pixie Acquisition.
12
<PAGE>
The Company used its short-term borrowings to finance operations during the
quarter.
The Company believes that cash flow generated by operations, together with
amounts available under its existing credit arrangements, should be sufficient
to fund its working capital needs for the remainder of fiscal year 1997 and for
the foreseeable future.
The Company has unsecured lines of credit aggregating $42,500,000 of which
$12,965,000 was outstanding at March 1, 1997 bearing interest at rates ranging
from 6.15% to 6.75%.
The Company expects to fund its capital expenditures primarily from cash
flow generated by operations over the next twelve months. Since the Company uses
its short-term lines of credit to fund working capital needs, any additional
financing related to capital needs is generally provided either by lease
financing or other long-term sources. Currently, the Company has no material
capital commitments.
Income Taxes
The provision for income taxes is based upon the effective tax rates
expected to be recognized for the full fiscal year 1997. The rate for the first
three months of 1997 was 34.7%, compared to the rate for the first three months
of fiscal year 1996 of 36.2%. This decrease is due to the impact of foreign
income generated by the Company's Honduras subsidiary which has a tax holiday.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued FASB
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 that are expected to be disposed. The Company expects the impact of
adoption will not be significant.
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. The Company will elect to continue to
use existing accounting rules.
Both statements are effective for fiscal years beginning after December 15,
1995 and, accordingly, will be adopted during the current year.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Material Contracts
None
(b) Reports on Form 8-K
No Reports on Form 8K were filed during the quarter
covered by this report.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KLEINERT'S, INC.
Date: April 11, 1997 By: /s/Gerald E. Monigle
-------------- -------------------------------
Gerald E. Monigle
Vice President--Finance
(Principal Accounting Officer)
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-29-1997
<PERIOD-END> MAR-01-1997
<EXCHANGE-RATE> 1.000
<CASH> 332
<SECURITIES> 0
<RECEIVABLES> 11,910
<ALLOWANCES> (226)
<INVENTORY> 27,864
<CURRENT-ASSETS> 44,105
<PP&E> 17,990
<DEPRECIATION> 8,587
<TOTAL-ASSETS> 60,578
<CURRENT-LIABILITIES> 22,251
<BONDS> 0
4,249
0
<COMMON> 0
<OTHER-SE> 31,567
<TOTAL-LIABILITY-AND-EQUITY> 60,578
<SALES> 8,624
<TOTAL-REVENUES> 8,624
<CGS> 6,570
<TOTAL-COSTS> 6,570
<OTHER-EXPENSES> 1,904
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 376
<INCOME-PRETAX> 150
<INCOME-TAX> 52
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 98
<EPS-PRIMARY> .03
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</TABLE>
