SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
(Mark One)
X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 1, 1996
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 0-23632
SCOTT MILLS, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2736759
- ------------------------------- -------------------
(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
- -------------------------------------------------------------------------------
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 July 11, 1996
------------------------- ----------------------------
Common Stock 3,367,598
Par Value $1.00 per share
<PAGE>
SCOTT MILLS, INC.
INDEX
PAGE
----
Part I. Financial information
Item 1. Financial statements
Consolidated statements of operations 3
for the three months and six months
ended June 1, 1996 and June 3, 1995
Consolidated balance sheets at 4
June 1, 1996, December 2, 1995 and
June 3, 1995
Consolidated statements of cash flows 6
for the six months ended June 1, 1996
and June 3, 1995
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 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($000's omitted, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -------------------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
------- -------- ------- ---------
<S> <C> <C> <C> <C>
Net Sales - other customers $ 291 $ 3,076 $ 433 $ 5,777
Net Sales - Kleinert's, Inc. 2,164 2,042 3,685 4,108
------ -------- ------ --------
Total 2,455 5,118 4,118 9,885
Cost of goods sold 2,465 5,769 3,994 10,151
------ -------- ------ --------
Gross profit (10) (651) 124 (266)
------ -------- ------ --------
Provision - closing dyeing
and finishing facility 138 - 138 -
Selling, general and
administrative expenses 31 332 28 613
Interest expense 69 183 145 338
------ -------- ------ --------
Loss before income taxes (248) (1,166) (187) (1,217)
------ -------- ------ --------
Provision for income taxes - - - -
------ -------- ------ --------
Net loss $ (248) $ (1,166) $ (187) $ (1,217)
====== ======== ====== ========
Loss per share:
Net loss $ (.07) $ (.35) $ (.06) $ (.36)
====== ======== ====== ========
Weighted average shares
outstanding 3,368 3,368 3,368 3,368
====== ======== ====== ========
</TABLE>
See accompanying notes
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
($000's Omitted)
ASSETS
<TABLE>
<CAPTION>
June 1, Dec. 2, June 3,
1996 1995 1995
------ ------- ------
<S> <C> <C> <C>
Current assets:
Cash $ 45 $ 211 $ 69
Accounts receivable (net) 9 180 295
Due from factor - 17 1,575
Inventories:
Raw materials 234 177 535
Work-in-process 882 587 467
Finished goods 67 45 377
------ ------ ------
Total inventories 1,183 809 1,379
Other current assets 144 104 399
------ ------ ------
Total current assets 1,381 1,321 3,717
------ ------ ------
Property, plant & equipment, at cost 2,390 2,387 9,334
Less: accumulated depreciation
and amortization 1,345 1,350 3,709
------ ------ ------
Net property, plant and
equipment 1,045 1,037 5,625
Other assets 18 22 121
Non-operating dyeing and finishing
assets 325 520 -
------ ------ ------
$2,769 $2,900 $9,463
====== ====== ======
</TABLE>
See accompanying notes
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED BALANCE SHEETS
($000's Omitted)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 1, Dec. 2, June 3,
1996 1995 1995
------ ------ ------
<S> <C> <C> <C>
Current liabilities:
Notes payable and current portion
of long-term debt and capital
lease obligations $ 50 $ 103 $ 1,100
Accounts payable 2,308 2,911 3,331
Due to related party 2,488 1,564 736
Accrued expenses 384 417 400
------- ------- -------
Total current liabilities 5,230 4,995 5,567
------- ------- -------
Deferred income taxes - - -
Long-term debt and capital lease
obligation net of current portion 31 210 2,560
Subordinated term debt 500 500 500
Subordinated convertible term debt 500 500 500
------- ------- -------
Total liabilities 6,261 6,205 9,127
------- ------- -------
Shareholders' equity:
Common stock par value $1.00 per
share, 10,000,000 shares
authorized 3,367,598 shares
issued and outstanding 3,368 3,368 3,368
Capital in excess of par value 873 873 873
Accumulated deficit (7,733) (7,546) (3,905)
------- ------- -------
Total shareholders' equity (3,492) (3,305) 336
------- ------- -------
$(2,769) $ 2,900 $ 9,463
======= ======= =======
</TABLE>
See accompanying notes
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's Omitted)
Six Months Ended
-------------------------
June 1, June 3,
1996 1995
-------- --------
Cash flows from operating activities:
Net loss $ (187) $(1,217)
Adjustment to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 121 500
Provision for dyehouse closing 138 -
Change in assets and liabilities:
(Increase) decrease in accounts
receivable, net 171 (45)
(Increase) decrease in due from factor 17 (188)
Increase in inventory (374) (426)
(Increase) decrease in other current
assets (40) 12
(Increase) decrease in other assets 4 (38)
Increase (decrease) in accounts
payable, and accrued expenses (886) 408
------- -------
(849) 223
Net cash used in operating activities (1,036) (994)
------- -------
Cash flows from investing activities:
Capital expenditures (3) (395)
Net proceeds from sale of equipment 181 -
------- -------
Net cash used in investing activities $ 178 $ (395)
------- -------
<PAGE>
SCOTT MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's Omitted)
(CONTINUED)
Six Months Ended
-------------------------
June 1, June 3,
1996 1995
------- -------
Cash flows from financing activities:
Proceeds from subordinated note $ - $ 500
Principal payments on long term debt (232) (504)
Increase is due to related party 924 642
Proceeds from term debt and capital lease
obligations - 295
------- ------
Net cash provided by financing
activities 692 933
------- ------
Net decrease in cash (166) (456)
Cash at beginning period 211 525
------- ------
Cash at end of period $ 45 $ 69
======= ======
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 34 $ 294
See accompanying notes
<PAGE>
SCOTT MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 1, 1996 and June 3, 1995
(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 six months ended June 1, 1996 are not
necessarily indicative of the results that may be expected for the year ended
November 30, 1996. 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 latest Annual Report
on Form 10-K.
The cost of products produced include raw materials, direct labor,
operating overhead and corporate general and administrative charges. Selling and
administrative expenses consist primarily of marketing related administrative
costs. The Company did not maintain a marketing department during the first
quarter of 1996 but hired a sales executive during the second quarter of 1996.
Due to the reduced scale of operations in 1996, selling expenses are
significantly reduced in comparison to the comparable periods of 1995.
(2) Related Party Transaction
The Company, a former subsidiary of Kleinert's, Inc. (a children's
apparel manufacturer) was spun off to Kleinert's, Inc. shareholders, and has
operated independently since November 27, 1993. Kleinert's, Inc. continues to be
a significant customer of the Company, contributing $3,685,000 or 89% to the
Company's net sales during the first six months of fiscal year 1996.
On December 5, 1994, the Company borrowed $500,000 from Kleinert's,
Inc. of Delaware in the form of a subordinated three year note. Under the terms
of the promissory note, interest is payable annually at eight and one-half
percent. Principal is due in full on December 4, 1997.
Kleinert's, Inc. provides certain third party services on behalf of the
Company, including data processing, treasury, accounts payable, check processing
and management functions. Funds disbursed on behalf of the Company are
subsequently reimbursed to Kleinert's, Inc. As a consequence, the balance due to
Kleinert's, Inc. fluctuates based on the timing of disbursements on behalf of
the Company and reimbursement by the Company. The balance payable to Kleinert's,
Inc. at June 1, 1996 was $2,488,000 and consisted primarily of the unreimbursed
balance of these disbursements, and management and interest expenses. This
unreimbursed balance due Kleinert's, Inc. is secured by all assets of the
Company. On December 1, 1995 the Company executed a working capital agreement
with Kleinert's, Inc. that confirms Scott Mills' obligations to Kleinert's, Inc.
and provides to Kleinert's, Inc. a first lien and security interest in
substantially all of Scott Mills' assets to secure Scott Mills' obligation to
repay to Kleinert's, Inc. the loan balance due. Advances under this agreement
are made at Kleinert's discretion.
The Company and Kleinert's, Inc. have announced the signing of a
definitive merger agreement which is discussed more fully at Note 4, Subsequent
Events.
<PAGE>
(3) Going Concern
The Company generated a net loss of $187,000 in the first six months of
1996 compared to a loss of $1,217,000 in the first six months of 1995.
The Company has experienced severe financial difficulty and has
incurred significant operating losses of $4,858,000 (including a $2,044,000
provision for closing the dyeing and finishing operation) in fiscal year 1995
and net losses of $2,688,000 in fiscal year 1994. Additionally, the Company's
cash from operations was insufficient to meet the Company's working capital
requirements. As a result of these recurring losses, and insufficient cash
flows, in September 1995 the Company closed its dyeing and finishing facility.
Funds were provided during the year primarily by the proceeds of a subordinated
note payable to Kleinert's of $500,000, working capital provided by Kleinert's
of $1,470,000 and the sale of certain dyehouse assets for $2,760,000. These
funds were primarily used to repay debt and purchase certain capital equipment
during the year. In late 1995, the Company attempted to control operating costs
by reducing personnel, and adjusting production levels. In addition, the Company
also is negotiating with its vendors to pay amounts it currently owes in an
orderly fashion. The Company believes that all of these efforts will result in
increased operating efficiencies and assist the Company in meeting its future
financial obligations as they become due. In the event these efforts prove
unsuccessful, the Company will be required to seek additional external financing
to meet its obligations. There can be no assurance, however, that the Company
will be successful in its efforts to satisfy its obligations as they become due,
thereby enabling the Company to continue as a going concern.
The Company and Kleinert's, Inc. have announced the signing of a
definitive merger agreement which is discussed more fully at Note 4, Subsequent
Events.
(4) Subsequent Events
Disposition
On June 11, 1996, the Company and Kleinert's Inc. announced the signing
of a definitive merger agreement under which Kleinert's will acquire Scott
Mills, Inc. and will pay Scott Mills shareholders $.30 per share with $.03 paid
in cash and $.27 paid in Kleinert's common stock. The number of shares of
Kleinert's stock will be determined by using the average closing price of
Kleinert's common stock for the five consecutive trading days immediately
preceding the closing. Scott Mills has approximately 3,368,000 shares
outstanding and, upon completion of the acquisition, Kleinert's will issue,
based on the current closing price of Kleinert's stock, approximately 56,000
shares of its common stock or less than 2% of its outstanding shares.
The transaction is subject to the approval of the Company's
shareholders at its annual meeting to be held this summer.
Kleinert's is the Company's largest customer. Scott Mills' sales for
the six months ended June 1, 1996 were $4,118,000 of which $3,685,000 were sales
to Kleinert's. The acquisition will permit Kleinert's to maintain its
flexibility in servicing its retail customers in its sleepwear and activewear
products.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales
Fabric sales occur when the Company sells piece goods it manufactures
and owns; therefore, it includes the price of raw material, typically yarn or
greige goods. Commission sales occur when the Company processes yarn or piece
goods owned by others which typically requires less working capital.
The following table presents, for the periods indicated, the Company's
net sales by category.
Three Months Ended Six Months Ended
--------------------- --------------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
------- ------- ----- -----
($000's) ($000's)
Fabric $ 2,428 $ 4,407 $4,076 $8,259
Commission 27 711 42 1,626
------- -------- ------ ------
$ 2,455 $ 5,118 $4,118 $9,885
======= ======= ====== ======
Net sales decreased 58% or $5,767,000 in the first six months of fiscal
year 1996 compared to the first six months of fiscal year 1995. The Company
significantly decreased its fabric and commission sales as a result of closing
its dyehouse in September 1995. Kleinert's, Inc. accounted for 89% of the net
sales in the first six months of 1996. The Company believes Kleinert's will
continue as a major customer although the Company has hired a sales executive to
market the Company's products to other children's apparel customers.
<PAGE>
Gross Profit (Loss)
The following table presents for the periods indicated, the Company's
gross profit (loss) in dollars and as a percentage of net sales.
Three Months Ended Six Months Ended
-------------------- -------------------
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
-------- ------- ----- ------
($000's) ($000's)
Gross Profit (Loss) $ (10) $ (651) $ 124 $ (266)
% of Net Sales (0.4%) (12.7%) 3.0% (2.7%)
Gross margins were a positive 3.0% versus a negative 2.7% in the first
six months of 1996 when compared to the same period in 1995. The manufacturing
operation in the first six months of 1996 contained only the knitting department
as compared to knitting, dyeing and finishing in 1995. The Company has
dramatically reduced its operating costs due to subcontracting its dyeing and
finishing. This has permitted the Company to produce less pounds yet still
generate a gross profit. The Company experienced a negative gross margin of
$10,000 during the second quarter of 1996 primarily as a result of unanticipated
price increases for outside dyeing and finishing. The Company was able to place
some of this business at competing dyeing and finishing subcontractors at more
favorable prices and intends to place substantially more business at the same
vendors in the third quarter of 1996, thus bringing costs more in line with
profit margins attained in the first quarter of 1996.
Provision -- Closing Dyeing and Finishing Facility
The Company provided an additional $138,000 to reflect anticipated
additional losses on the sale of dyehouse assets at lower amounts than
originally estimated and to reflect additional equipment moving costs.
Selling, General and Administrative Expenses
The Company incurred no selling or administrative expenses in the first
quarter of 1996. In the second quarter of 1996 selling and administrative
expenses reflect expenses related to a new sales executive hired during the
quarter and bonus accruals. The addition of this position is expected to help
the Company to increase non affiliated sales to the children's apparel market.
All corporate expenses are included in cost of goods sold.
<PAGE>
Interest Expense
Interest expense decreased 57% to $145,000 in the first six months of
1996 when compared to the first six months of 1995 due to the Company selling
its dyehouse assets and significantly reducing its capital lease obligations and
paying off its term debt in November 1995.
Taxes
No income tax benefit is reflected in the first six months of 1996 and
the first six months of 1995 since the realization of such benefit could not be
reasonably assured.
Liquidity and Capital Resources
The Company is negotiating with all of its creditors to pay off its
liabilities in an orderly fashion. The Company will continue to require the
working capital loan provided by Kleinert's, Inc. in the foreseeable future. The
Company is pursuing all avenues of financing in order to ensure it can meet its
financial obligations; however, there can be no assurance that sufficient
liquidity will exist to enable the Company to continue as a going concern.
The Company and Kleinert's, Inc. have announced the signing of a
definitive merger agreement which is discussed more fully at Note 4 to the
financial statements' Subsequent Events.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<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.
SCOTT MILLS, INC.
Date: July 16, 1996 By: /s/ Edwin Gowan
--------------- -----------------------------------
Edwin Gowan
Chief Operating Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> JUN-01-1996
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 9<F1>
<ALLOWANCES> 0
<INVENTORY> 1,183
<CURRENT-ASSETS> 1,381
<PP&E> 2,390
<DEPRECIATION> 1,345
<TOTAL-ASSETS> 2,769
<CURRENT-LIABILITIES> 5,230
<BONDS> 0
0
0
<COMMON> 3,368
<OTHER-SE> (6,860)<F2>
<TOTAL-LIABILITY-AND-EQUITY> (2,769)
<SALES> 4,118
<TOTAL-REVENUES> 4,118
<CGS> 3,994
<TOTAL-COSTS> 3,994
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0<F3>
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> (187)
<INCOME-TAX> 0
<INCOME-CONTINUING> (187)<F4>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (187)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
<FN>
<F1>1. Accounts receivable (net)
<F2>2. Capital in excess of par value
Retained earnings
Treasury stock, at cost
<F3>3. Not disclosed separately in interim reports
<F4>4. Net income
</FN>
</TABLE>
