SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(AMENDMENT NO. 1)
(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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2736759
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 West Germantown Pike, Suite 100
Plymouth Meeting, Pennsylvania 19462
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(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 August 26, 1996
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Common Stock 3,367,598
Par Value $1.00 per share
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Part I, Item 2 of the Registrant's Quarterly Report on Form-Q for the
fiscal quarter ended June 1, 1996 is hereby amended and restated in its entirety
as follows:
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Six Months ended June 1, 1996 Compared to the Six Months ended June 3, 1995
The following table presents, for the periods indicated, the Company's
net sales by category.
Six Months Ended
June 1, June 3,
1996 1995
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($000's)
Fabric $4,076 $8,259
Commission 42 1,626
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$4,118 $9,885
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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 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.
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.
Six Months Ended
June 1, June 3,
1996 1995
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($000's)
Gross Profit (Loss) $ 124 $(266)
% of Net Sales 3.0% (2.7%)
Gross margins were a positive 3.0% in the first six months of 1996
compared to a negative 2.7% in the first six months in 1995. The manufacturing
operation in the first six months of 1996 contained only the knitting operations
as compared to knitting, dyeing and finishing operations in 1995. The Company
has dramatically reduced its operating costs due to subcontracting its dyeing
and finishing business. This has permitted the Company to produce 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 and bonus accruals 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.
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Interest Expense. Interest expense decreased 57% to $147,000 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.
Impact of Inflation
Scott Mills' raw material costs experienced increases in the first half
of 1996; however, costs trended downward by the end of fiscal year 1996 to below
the levels at the beginning of fiscal year 1995 before any price increases.
Management believes that, prior to 1994, only utility costs (i.e. water, sewer,
natural gas and electric) had an inflationary impact on Scott Mills' operations
in the last five years, none of which were material.
Liquidity and Capital Resources
Steps designed to control operating costs include reductions in
personnel, adjusting production levels to more accurate sales forecasts and, as
previously described, subcontracting its dyeing and finishing operations.
Scott Mills is subcontracting its dyeing and finishing business with
several unaffiliated vendors, including Dyersburg. The terms of each commission
dyer and finisher is on an order-to-order basis.
Scott Mills also is negotiating with its vendors to defer payment of
amounts it currently owes until Scott Mills has the cash resources with which to
satisfy its obligations in an orderly fashion. Scott Mills believes that these
efforts will result in increased operating efficiencies and assist Scott Mills
in meeting its future financial obligations as they become due. In the event
these efforts prove unsuccessful and the Merger
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is not consummated, Scott Mills will be required to seek financing from external
sources, including those of the type upon which Scott Mills previously has
relied, to meet its obligations as they become due. There can be no assurance,
however, that sufficient liquidity will exist to enable Scott Mills to continue
as a going concern.
Expected depreciation in fiscal year 1996 is approximately $230,000. This
compares with depreciation expense of $980,000 in fiscal year 1995, $860,000 in
fiscal year 1994 and $615,000 in fiscal year 1993. The reduction in anticipated
depreciation relates primarily to the closing of the dyehouse and the sale or
disposal of dyeing and finishing equipment.
Scott Mills' indebtedness consists principally of borrowings from
Kleinert's and from certain directors and shareholders of Kleinert's and Scott
Mills, and certain capital lease obligations, all of which will be assumed by
Kleinert's in the Merger.
Scott Mills executed a working capital agreement with Kleinert's Alabama
during fiscal year 1995 pursuant to which Kleinert's Alabama may, at Scott
Mills' request, provide short-term borrowings. The borrowings, which are payable
upon demand by Kleinert's Alabama, are secured by a lien on all of Scott Mills'
assets. Repayments to Kleinert's are made by deductions against invoice billings
to Kleinert's by Scott Mills for textiles purchased by Kleinert's. At June 1,
1996, $2,488,000 was outstanding and due Kleinert's Alabama under this
agreement.
On December 4, 1994, Scott Mills borrowed $500,000 from Kleinert's, Inc.,
of Delaware, a wholly-owned subsidiary of Kleinert's, on a subordinated basis.
The loan bears interest at 8.5% per annum, which is paid annually, and is due on
December 4, 1999. The loan will be eliminated in consolidation after the
consummation of the Merger. Also on December 4, 1994, certain directors and
officers of Scott Mills, together with certain other persons affiliated with
Scott Mills and Kleinert's, none of whom beneficially owns in excess of 5.0% of
the issued and outstanding shares of Kleinert's Common Stock or Scott Mills
Common Stock, advanced loans to Scott Mills aggregating $500,000. These loans
were evidenced by subordinated five year term notes bearing interest at 8.5% per
annum. The notes are convertible into shares of Scott Mills Common Stock at a
price of $.50 per share. At June 1, 1996, the entire $500,000 principal balance
remained outstanding. Although there is no existing agreement among Scott Mills
and these lenders regarding conversion of the notes in connection with the
Merger, Scott Mills does not anticipate that any of the notes will be converted
into Scott Mills Common Stock prior to the Effective Time.
In December 1993, Scott Mills entered into a factoring agreement with a
lender which agreed to make cash advances of up to 85% of Scott Mills' eligible
accounts receivable. In connection therewith, Kleinert's agreed to indemnify the
lender against any liability from certain claims resulting from the transfer of
assets from the Scott Mills division of Kleinert's to Scott Mills pursuant to
the Spin-Off. In November 1995, Scott Mills terminated its factoring arrangement
using the proceeds from the sale of the dyeing and finishing assets to
Dyersburg.
At June 1, 1996, Scott Mills also had capital lease obligations
aggregating $81,000.
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' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. Scott Mills 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. Scott Mills 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.
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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 thereunder duly authorized.
SCOTT MILLS, INC.
Date: August 26, 1996 By: /s/ Edwin Gowan
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Edwin Gowan
Chief Financial Officer
