SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(AMENDMENT NO. 2)
(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 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 W. Germantown Pike, Plymouth Meeting, PA 19462
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(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, $1.00 par value
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(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 amdendment to
this Form 10-K. [X]
As of August 23, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $202,809.
As of August 26, 1996, 3,367,598 shares of Common Stock, $1.00 par value,
were outstanding.
<PAGE>
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:
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
This discussion takes into account sales to Kleinert's at prices which
approximate cost for the period prior to November 28, 1993 because Scott Mills
was a division of Kleinert's prior to such date. Sales to Kleinert's after
November 27, 1993 are at prices approximating market.
Results Of Operations
Fiscal Year 1995 Compared to Fiscal Year 1994 and Fiscal Year 1993
Net Sales. Fabric sales occur when Scott Mills sells piece goods it
owns and manufactures; therefore, it includes the price of the raw material,
typically greige goods. Commission sales occur when Scott Mills processes raw
material owned by others. Sales to Kleinert's are included in fabric sales.
The following table presents, for the periods indicated, Scott Mills'
net sales by category.
<TABLE>
<CAPTION>
Fiscal Year Ended
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(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
------------ ------------ -------------
<S> <C> <C> <C>
Fabric $12,615 $15,540 $13,711
Commission 2,181 1,815 587
------- ------- -------
$14,796 $17,355 $14,298
======= ======= =======
</TABLE>
Net sales declined 15% or $2,559,000 during fiscal year 1995 compared to
fiscal year 1994, reflecting primarily reduced sales levels caused by aligning
production capabilities with a more realistic sales plan, Scott Mills' decision
to discontinue the dyeing and finishing operations in September 1995 and poor
conditions in the retail apparel market in general. Net sales increased
$3,057,000 or 21% in fiscal year 1994 compared to fiscal year 1993 due to higher
fabric and commission sales. Approximately $1,500,000 of the $1,800,000 increase
in fabric sales was the result of higher sales to Kleinert's. Higher commission
sales in fiscal year 1994 occurred as Scott Mills implemented its strategy of
developing a commission business. As a result of the cessation of the dyeing and
finishing operations, commission sales are expected to decrease during fiscal
year 1996.
Scott Mills has relatively few customers due principally to the
consequences of the delivery and quality problems which occurred when Scott
Mills was engaged in the dyeing and finishing business. However, there continues
to be a market for a good primary and secondary source of acrylic, 100%
polyester and polycotton fabrics in the children's sleepwear and activewear
markets. Scott Mills has engaged a new sales executive and is aggressively
pursuing these markets.
<PAGE>
Gross Profit (Loss). Scott Mills announced on September 12, 1995 that, in
light of poor operating results and as part of its ongoing effort to control
operating costs, it had decided to concentrate its business solely on its
knitting operations and subcontract all of its dyeing and finishing. During the
fiscal year ended December 2, 1995, Scott Mills recorded a charge to earnings of
$2,044,000 to provide for the writedown to estimated net realizable value of
assets and for other costs associated with its decision to cease dyeing and
finishing operations.
As part of the provision for closing the dyeing and finishing operation,
$1,640,000 of the charge represented the writedown of the assets to their net
realizable market value and $404,000 of the charge represented other costs
associated with the cessation of the operations, including accruals for
severance pay and noncancelable lease costs. On November 27, 1995, Scott Mills
sold substantially all of its dyeing and finishing assets, free and clear of all
liabilities, to Dyersburg Fabrics, Inc. ("Dyersburg"), an unaffiliated textile
manufacturer. The Company received $2,750,000 on the sale and used the proceeds
to repay its secured term debt to Congress Talcott Corporation, the Company's
factor, and other lenders including General Electric Capital Corporation and
Deutsche Financial Services.
During the same period, significant reductions in overhead expenses were
implemented as Scott Mills continued to initiate action to aggressively respond
to operating problems previously identified, including those which arose from an
overly aggressive sales plan, operating inefficiencies and quality control
problems. These measures included decreasing production and costs to levels
designed to rebuild customer confidence. Although Scott Mills' measures
negatively impact net sales and operating results in the short-term, Scott Mills
believes that these measures were necessary in an attempt to improve operating
results in the long-term. There can be no assurance, however, that Scott Mills'
objectives will be achieved.
The following table presents, for the periods indicated, Scott Mills'
gross profit (loss) in dollars and gross profit (loss) as a percentage of net
sales.
Fiscal Year Ended
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(000's omitted)
Dec. 2, 1995 Dec. 3, 1994 Nov. 27, 1993
------------ ------------ -------------
Gross Profit (Loss) $(1,191) $(989) $(1,542)
% of Net Sales (8.0%) (5.7%) (10.8%)
The percentage of gross profit (loss) to net sales (gross margin) changed
from (5.7%) in fiscal year 1994 to (8.0%) in fiscal year 1995. The unfavorable
change in the percent of gross loss reflected both the inefficiencies
experienced in operations during the first nine months of 1995 that led to the
decision to close down the dyehouse operations and to insufficient production
pounds in the latter months of the fiscal year to fully absorb fixed overhead
costs.
The percentage of gross profit (loss) to net sales (gross margin) changed
from (10.8%) in fiscal year 1993 to (5.7%) in fiscal year 1994. Scott Mills'
installation and testing of new equipment lasted from November 1993 to July 1994
and resulted in inefficient operations of the plant during that period.
General corporate expenses (which represented an allocation of expenses
by Kleinert's of corporate costs primarily for management, legal and financial
services rendered on behalf of Scott Mills) (See "Certain Relationships and
Related Transactions") which were included in cost of goods sold amounted to
$208,000 and $300,000 in 1994 and 1993, respectively. A similar allocation for
cost of sales was not made in fiscal year 1995.
<PAGE>
Depreciation expense was $980,000, $860,000 and $615,000 in fiscal years
1995, 1994 and 1993, respectively. The majority of the increased depreciation
expense during the period from 1993 through 1995 was the result of the purchase
or capital lease of dyeing and finishing equipment.
Selling, General and Administrative Expenses. In fiscal year 1995, the
percentage of selling, general and administrative expenses ($919,000) to net
sales (the "expense ratio") was 6.2%, a decrease compared to fiscal year 1994,
primarily reflecting reductions associated with the closing of dyehouse
operations.
In fiscal year 1994, the expense ratio was 8% (on the basis of selling,
general and administrative expenses of $1,338,000), which is similar to the
fiscal year 1993 expense ratio (net of royalty expense) of 7.7%.
In fiscal year 1993, the expense ratio was 9.1%. Of selling, general and
administrative expenses of $1,297,000, $198,000 was a royalty expense payable to
Kleinert's based on Scott Mills' net sales for the use of the "Scott Mills"
trademark. Commencing in fiscal year 1994 Scott Mills had the right to use its
trademark without the payment of any royalties, because the trademark was
distributed to Scott Mills as part of the spin-off.
Interest Expense. Interest expense in fiscal year 1995 was $704,000
compared to $397,000 in fiscal year 1994 and $186,000 in fiscal year 1993. The
increase was due primarily to higher levels of subordinated term debt, higher
loan advances against factored accounts receivable and a full year of interest
from term debt related to equipment installed during fiscal year 1994. Interest
expense has decreased following the sale of the dyehouse assets and the
repayment of the equipment loan.
Taxes. Scott Mills has a federal income tax loss carryfoward (NOL) of
$6,453,000 available for future years as a result of losses incurred in fiscal
year 1994 and 1995. These NOLs expire through 2010. There was no income tax
benefit recognized in fiscal year 1993, since there was no state or federal loss
carryback available. The tax loss related to fiscal year 1993 was not carried
forward into fiscal year 1994 and fiscal year 1995 since these losses were fully
utilized in the Kleinert's 1993 consolidated return.
<PAGE>
Impact of Inflation
Scott Mills' raw material costs experienced increases in the first half
of 1995; however, costs trended downward by the end of fiscal year 1995 to below
the levels at the beginning of 1995 before any price increases. Prior to 1994,
management believed only utility costs (i.e. water, sewer, natural gas and
electric) had an inflationary impact on the Registrant's operations in the last
five years, none of which are material.
Liquidity and Capital Revenues
The Company incurred net losses of $4,858,000 (including the $2,044,000
provision for closing the dyeing and finishing operations) in fiscal year 1995
and net losses of $2,688,000 in fiscal year 1994. The net loss for the year
ended December 2, 1995 of $4,858,000 as adjusted for non cash charges,
(depreciation of $980,000 and dyehouse closing of $2,044,000) was $1,834,000.
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.
The Company's cash from operations and its factoring facility were
insufficient to meet the Company's working capital requirements. Consequently,
supplemental funds were provided primarily by the proceeds of a subordinated
note payable to Kleinert's of $500,000, decreases in inventory of $144,000,
increases in due to Kleinert's of $1,470,000 and decreases in accounts
receivable/factor of $1,441,000. Additionally, the Company canceled its
factoring agreement and paid off its secured term debt to its factor and others
with a portion of the $2,760,000 of proceeds from the sale of dyehouse assets.
The Company recorded a slight gain on the sale of these assets.
Adequate cash flow to satisfy the other obligations of the Company
currently does not exist. However, the Company has taken a number of steps
designed to control operating costs, including reductions in personnel,
adjusting production levels to more accurate sales forecasts and, most
significantly, subcontracting its dyeing and finishing. The Company executed a
working capital agreement with Kleinert's, Inc. of Alabama secured by all of its
assets. The agreement provides for Kleinert's, Inc. of Alabama at its
discretion to provide short term borrowings to the Company. The Company also is
negotiating with its vendors to defer payment of amounts it currently owes until
the Company has the cash resources with which to satisfy its obligations in an
orderly fashion. The Company believes that 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 financing from external
sources, including those of the type upon which the Company previously has
relied, to meet its obligations as they become due. There can be no assurance,
however, that sufficient liquidity will exist to enable the Company 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.
<PAGE>
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 December
2, 1995, $1,564,000 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 December 2, 1995, 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 December 2, 1995, Scott Mills also had capital lease obligations
aggregating $313,400.
<PAGE>
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. The Company 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 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. Both statements are effective for fiscal years
beginning after December 15, 1995 and accordingly will not be required until
fiscal year 1997.
<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.
SCOTT MILLS, INC.
By: /s/ Edwin Gowan
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Edwin Gowan, Treasurer,
Chief Financial Officer
Dated: August 26, 1996
