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SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM MAY 1, 1999 TO JANUARY 31, 2000
----------- ----------------
COMMISSION FILE NUMBER: 1-7340
KELLWOOD COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 36-2472410
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
600 KELLWOOD PARKWAY, P.O. BOX 14374, ST. LOUIS, MO 63178
(Address, including Zip Code, of registrant's principal executive offices)
(314) 576-3100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
Common Stock, par value $.01 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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. [ ]
At March 13, 2000, Kellwood Company had 24,568,718 shares of Common
Stock, par value $.01, outstanding. While it is difficult to determine
the number of shares owned by nonaffiliates, the Company estimates that
the aggregate market value of the Common Stock on March 13, 2000 (based
upon the closing price of these shares on the New York Stock Exchange)
held by nonaffiliates was approximately $414,597,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
PART I
ITEM 1. BUSINESS
(a) Kellwood Company and its subsidiaries (the "Company") manufacture
and market apparel and related soft goods. Kellwood Company was founded
in 1961 as the successor by merger of fifteen independent suppliers to
Sears.
Beginning in 1985, the Company implemented a business strategy to expand
its branded label products, broaden its customer base, increase its
channels of distribution and further develop its global product sourcing
capability. Since 1985, Kellwood has acquired 17 domestic companies.
Following are those acquired since 1993:
Company Name Date of Acquisition
- ----------------------------------------------- -------------------
* Goodman Knitting Co., Inc. July 1993
* Halmode Apparel, Inc. September 1994
* David Dart, Inc. and Force One, Inc. November 1994
* Fritzi California (excluding real estate) December 1998
* Koret, Inc. April 1999
* Biflex International, Inc. January 2000
The companies are principally marketers of branded apparel except for
American Recreation Products, Inc. and Slumberjack, Inc. which are
manufacturers and marketers of branded camping soft goods and Crowntuft
Manufacturing Corp., which is a vertically integrated manufacturer of
chenille robes.
In addition to its domestic acquisitions, in the early 1980's, the
Company acquired Smart Shirts Limited of Hong Kong, a leading shirt and
blouse manufacturer in the Far East. Smart Shirts, since its
acquisition, continued to diversify its manufacturing capabilities from
its principal base of Hong Kong to the People's Republic of China, Sri
Lanka, Saipan and Costa Rica. During fiscal year 1996, the Company shut
down the facilities in Saipan and Costa Rica.
As a result of the above business strategy, the Company has redirected
its focus from primarily the manufacturing of private label apparel and
home fashions for Sears to a marketing-driven emphasis on branded
apparel and related soft goods. The Company's acquisition strategy has
further diversified its customer base and has broadened its channels of
distribution. As a result of these efforts, sales to Sears declined to
7% of total sales in the "Transition Period," compared to 50% in fiscal
year 1985. References to the "Transition Period" throughout this report
refer to the nine month period ended January 31, 2000.
(b) The information required by this Item is set forth on page 30 of
this Form 10-K under the caption "Industry Segment and Geographic Area
Information."
(c) The Company manufactures and markets apparel and other soft goods
products made from cloth or fabric or knitted from yarn. These products
are manufactured primarily domestically and in the Far East.
(i) The Company's products include diversified lines of men's, women's
and children's clothing, sleeping bags, and other soft goods. Products
are mainly sold to retailers under either the Company's or customer's
brands and labels.
(ii) The Company anticipates no significant change in products or new
industry segments, which would require a material investment. However,
business acquisitions within the apparel and related soft goods industry
are continually being considered, and it is anticipated that external
and internal demands will generate increasing requirements for capital.
(iii) The Company purchases the majority of its raw materials directly
from numerous textile mills and yarn producers and converters. The
Company has not experienced difficulty in obtaining raw materials
essential to its business.
2
(iv) The Company holds patents covering various aspects of its
products. The Company is a licensee of certain trade names. The
expiration, or invalidation, of any of the patents would not, in the
opinion of management, have a material effect upon the continuation of
business.
(v) Although specific styles are seasonal, the Company's various
product lines are manufactured and sold on a year-round basis. Products
are primarily manufactured and sold prior to each of the principal
retail selling seasons including spring, summer, fall and holiday.
(vi) Consistent with the seasonality of specific product offerings, the
Company carries necessary levels of inventory to meet the anticipated
delivery requirements of its customers.
(vii) Approximately $175 million (11%) of the Company's sales in the
Transition Period were to J.C. Penney, Inc. No other customer accounts
for more than 10% of the Company's revenues. Other information relating
to J.C. Penney, Inc. is set forth on page 29 of this Form 10-K under the
caption "Significant Customers" in the Notes to Consolidated Financial
Statements. The Company's management believes that the relationship
with J.C. Penney will continue into the foreseeable future.
(viii) The Company does not believe that backlog is a meaningful
and material indicator of sales that can be expected for any period.
All of the Company's backlog is expected to be filled within 12 months,
but there can be no assurance that the backlog at any point in time will
translate into sales in any particular subsequent period.
(ix) Government contracts or subcontracts with the Company are not
material.
(x) The Company has substantial competition from numerous
manufacturers and marketers, but accurate statistics relative to the
competitive position of the Company are not available.
(xi) The Company has a continuing program for the purpose of improving
its products and production machinery. The Company is not engaged in
any material customer-sponsored research and development programs.
Approximately $821,000, $248,000 and $359,000 were spent on research and
development activities during the Transition Period and fiscal years
1999 and 1998, respectively.
(xii) In the opinion of management, there will be no material effect on
the Company resulting from compliance with any federal, state or local
provisions which have been enacted or adopted regulating the discharge
of materials into the environment or otherwise relating to the
protection of the environment.
(xiii) At the end of the Transition Period, there were approximately
20,100 people employed by the Company. Substantially all of the work
force is non-union, and the Company considers its relations with its
employees to be satisfactory.
(d) Except for its Smart Shirts operations, the Company's foreign
activities including foreign manufacturing operations and customers have
not been material. The Company owns all of the outstanding shares of
Smart Shirts Limited, a Hong Kong corporation engaged in apparel
manufacturing, and other Asian companies under Smart Shirts' management.
The sales, operating profit, and identifiable assets attributable to
each segment are set forth in this Form 10-K at page 30 under the
caption "Industry Segment and Geographic Area Information" in the Notes
to Consolidated Financial Statements. The risk attendant to the
Company's Smart Shirts operations is slightly greater than that of
domestic operations primarily due to quota allocations and political
instability. Utilization of existing quota rights and diversification
of Smart Shirts manufacturing capacity to various countries help to
mitigate these risks.
3
ITEM 2. PROPERTIES
At January 31, 2000, the Company operated 37 production plants and
various distribution facilities. Domestic businesses operated:
* 13 plants in 7 states,
* two plants in the Dominican Republic,
* two plants in Honduras,
* one plant in El Salvador, Mexico, Philippines, Puerto Rico,
and
* three plants in Canada.
As the Company continues to reduce sourcing costs by using its worldwide
network of contractors, the domestic business units now source
approximately 87% of their goods outside of Kellwood operated plants.
Kellwood's domestically managed plants aggregated to approximately 2.1
million square feet. They include the 5 domestic plants scheduled to
close during fiscal 2000 (as discussed in Note 2 to the Consolidated
financial statements on page 21 of this Form 10-K) which aggregate to
approximately 700,000 square feet and are operating at approximately 49%
of capacity at January 31, 2000. The remaining 19 plants aggregate 1.3
million square feet and were operating at an estimated 84% of capacity
at January 31, 2000.
The Company's Smart Shirts subsidiaries operated 13 plants which
aggregated to approximately 954,000 square feet and were operating at an
estimated 90% of capacity. Smart Shirts' subsidiaries manage operations
in Hong Kong, Sri Lanka and China.
As Kellwood's product sourcing continues to shift from products
manufactured in the Company's domestic facilities to foreign-sourced
product, warehousing and distribution facilities assume increasing
importance. The Company's major Warehousing and Distribution facilities
include the following:
* The Kellwood Western Region Distribution Center in the Los
Angeles area. This facility serves as the headquarters for
five divisions in a multi-tiered 630,000 square foot
facility;
* A multi-tiered 880,000 square foot warehouse and distribution
center in Trenton, Tennessee;
* A 294,000 square foot facility in Brockton, Massachusetts;
and
* A 240,000 square foot facility in Roanoke, Virginia.
These facilities are generating new economies of scale in warehousing
and distribution activities while eliminating the redundant costs of
smaller, inefficient facilities.
In management's opinion, current facilities generally are well
maintained and provide adequate production capacity for future
operations. However, management continues to evaluate the need to
reposition the Company's portfolio of businesses and facilities to meet
the needs of the changing markets it serves and reflect the
international business environment.
The Company's operating facilities are primarily leased under long-term
capital leases with renewal options at decreasing rentals. Certain
facilities are leased under operating leases that generally contain
renewal options. The Company also leases its corporate space in St.
Louis County, Missouri and major showrooms in New York City, New York;
Atlanta, Georgia; Dallas, Texas; and Los Angeles, California.
4
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in several routine lawsuits incidental to the
Company's business. Management and general counsel are of the opinion
that the ultimate disposition of the litigation should have no material
adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SEURITY HOLDER MATTERS
Common stock of Kellwood Company is traded on the New York Stock
Exchange, tickler symbol KWD. At March 13, 2000, there were
approximately 1,424 shareowners of record and 2,858 shareowners in the
Dividend Reinvestment Plan. The current annual dividend rate per year
is $.64.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is located on page 32 of this
Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL REVIEW ($ IN MILLIONS EXCEPT PER SHARE DATA)
The following discussion is a summary of the key factors management
considers necessary in reviewing the Company's results of operations,
liquidity, capital resources and operating segment results. This
discussion should be read in conjunction with the Consolidated Financial
Statements and related notes.
RESULTS OF OPERATIONS
- ---------------------
OVERVIEW
- --------
Sales for the nine months ended January 31, 2000 increased 3% to a
record $1,565 from $1,523 in the comparable nine-month period in the
prior year. Net earnings of $41 ($1.48 per diluted share) were up 24%
vs. $33.0 ($1.20 per share) last year. Reported results for all periods
include the sales and earnings of Koret, Inc. which was merged into the
Company in April 1999 in a transaction accounted for as a pooling of
interests.
SEASONALITY: Kellwood's businesses are quite seasonal. The Company
generally sells its products prior to the principal retail selling
seasons: spring, summer, fall, and holiday. Sales and earnings for the
quarter ended April 30 have historically been higher than for the other
quarters of the fiscal year. In recent years the April quarter's
results represented approximately 30% of the year's sales and gross
profit and over 40% of net earnings before unusual items.
5
NET SALES, OPERATING EARNINGS, AND EARNINGS BEFORE UNUSUAL ITEMS
- ----------------------------------------------------------------
TRANSITION PERIOD (NINE MONTHS ENDED JANUARY 31, 2000) VS. PRIOR YEAR
- ---------------------------------------------------------------------
In August 1999, the Company changed its fiscal year-end from April 30 to
January 31 to bring Kellwood more in line with the operating cycle of
our business and the fiscal year-ends of our customers and other apparel
companies. We have decided to identify the twelve-month period ending
January 31, 2001 as "fiscal 2000" in keeping with the custom of many
retail and apparel companies. Summarized comparative financial data for
the nine-month Transition Period ended January 31, 2000 and the nine
months ended January 31, 1999 (including Koret), are as follows
(percentages are calculated based on actual data, but columns may not
add due to rounding):
Nine months ended
January 31 % of Sales
------------------- % change ------------------
2000 1999 99-00 2000 1999
------ -------- -------- ------ ------
Net Sales $1,565 $1,523 2.8% 100.0% 100.0%
Cost of products sold 1,238 1,200 3.1% 79.1% 78.8%
S, G & A 234 227 3.2% 15.0% 14.9%
------ ------ ------ ------ ------
Operating earnings 93 95 -2.2% 6.0% 6.3%
Amortization of intangibles 5 12 -58.2% .3% .8%
Interest expense 23 26 -12.3% 1.4% 1.7%
Interest income & other (3) - n/a -.2% -
Koret merger costs - 1 - - .1%
------ ------ ------ ------ ------
Earnings before tax 69 57 21.0% 4.4% 3.7%
Income Taxes 28 24 16.4% 1.8% 1.6%
------ ------ ------ ------ ------
Net Earnings $ 41 $ 33 24.4% 2.6% 2.2%
====== ====== ====== ====== ======
Income Tax rate 40.2% 41.8%
------ ------
- Unaudited.
SALES increased 3% in the nine-month Transition Period ended January 31,
2000 compared to the comparable period in the prior year. Sales
benefited from:
- Double-digit growth in contemporary/updated brands including
Ivy(R), David Dart(R), Melrose(R), Vintage Blue(TM), Bice(R),
David Meister(TM) and My Michelle(R);
- Strong growth in dresses including Kathie Lee(R), Studio Ease(R),
M.H.M.(R) and Sag Harbor(R) dresses;
- The acquisition of Fritzi and Biflex which added $70 more in sales
during the Transition Period as compared to the prior year;
- Continued growth in the men's shirt business through increased
capacity and expanded private label programs; and
- Growth in the recreation products business as a result of the
introduction of new products and product lines to leverage
brand equity.
These developments were partially offset by a change in fashion
direction away from some of Kellwood's traditional-styled structured
blazers and other garments to more contemporary softer looks. This
shift from heavier weight fabrics and structured garments to less
expensive lighter weight garments also resulted in lower unit selling
prices. Other factors negatively impacting sales in the Transition
Period included continued weak demand for private label outerwear and
basic denim jeans, and delivery problems in the January quarter with a
number of contractors, primarily in Mexico.
COST OF PRODUCTS SOLD as a percent of sales increased to 79.1% in the
Transition Period compared to the prior year level of 78.8%. Improved
sourcing and savings generated from the Vision 2000 supplier management
initiative and improved margins at Smart Shirts worked to lower the cost
of products sold as a percent of sales. These improvements were offset
by the impact of the startup of the new distribution center in Trenton,
Tennessee, the startup of a new plant in Mexico, and the phasing out of
most of our domestic sewing operations which resulted in unabsorbed
burden and labor inefficiency. In addition, late deliveries in the
January quarter resulting from the contractor problems discussed above
caused higher mark downs and freight costs which exerted upward pressure
on cost of products sold as a percent of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (S,G&A) in the Transition
Period increased generally in line with sales. The acquisition of
Fritzi in December 1998 and start-up costs for the Slates(R) line also
added modestly to S,G&A.
6
OPERATING EARNINGS (defined as net sales less cost of products sold and
S,G&A) declined to 6.0% of sales from 6.3% in the prior year as a result
of the changes in cost of products sold margin and S,G&A margin
discussed above.
INTEREST EXPENSE decreased $2.6 in the Transition Period compared to the
comparable period in the prior year. This was due primarily to the
decrease in average debt as a result of better working capital
management. Lower average interest rates on short-term debt
(principally due to the replacement of Koret's factor borrowings with
borrowings at the lower Kellwood rates) also decreased interest expense
by approximately $1.7. These factors were partially offset by the $1.1
of additional interest expense due to the issuance of the 7.875%
debentures in July 1999.
OTHER INCOME for the Transition Period included $2 (pretax; $1.2 after-
tax) of unusual non-recurring financial items including a gain on the
sale of a building.
THE EFFECTIVE TAX RATE declined to 40.2% in the Transition Period
compared to 41.8% during the comparable period in the prior year. This
was due primarily to the reduction of goodwill amortization as a result
of the goodwill impairment charge taken in the fourth quarter of 1999.
1999 VS. 1998
- -------------
Summarized comparative financial data for 1999 and 1998, with historical
results for 1998 revised to include Koret, are as follows (percentages
are calculated based on actual data, but columns may not add due to
rounding):
Year ended
April 30, % of Sales
------------------ % change ------------------
1999 1998 98-99 1999 1998
------ ------ -------- ------ ------
Net Sales $2,151 $2,094 2.7% 100.0% 100.0%
Cost of products sold 1,685 1,655 1.8% 78.3% 79.0%
S, G & A 315 301 4.8% 14.6% 14.4%
------ ------ ----- ------ ------
Operating earnings 151 138 8.9% 7.0% 6.6%
Amortization of intangibles 16 17 -4.3% .7% .8%
Interest, net & other 33 34 -2.5% 1.6% 1.6%
Koret merger costs 7 -
Facilities shut-down 7 -
Goodwill impairment 49 -
------ ------
Earnings before tax 39 88
Income Taxes 37 38
------ ------
Net Earnings $ 2 $ 50
====== ======
Income Tax rate 95% 43%
------ ------
- Earnings before income taxes and Net earnings were $101 and 60,
respectively, excluding the impact of the unusual items (Merger costs,
Facilities shut-down, and Goodwill impairment).
SALES increased 3% in fiscal 1999 after increasing 17% in 1998 vs. the
prior year. Fiscal 1999 sales benefited from:
- The continued growth of the Sag Harbor(R) line including the new
Sag Harbor(R) Sport weekendwear;
- The acquisition of Fritzi which added $48 in sales during the
third and fourth quarters;
- The Studio Ease(R) line of casual dresses sold to department
stores;
- Private label intimate apparel programs with major discounters and
national chains; and
- Continued growth in the men's shirt business through private label
programs.
These developments were partially offset by:
- Decreases of approximately $93 related to exiting certain
businesses, including Counterparts (a division of Koret),
Brittania(R) pants, and a nurse's uniforms and a maternitywear
business;
- Disappointing results from the recently repositioned Cricket
Lane(R) and Melrose(R) brands;
- Sales deferrals due to the timing of customer orders as Koret's
accessory business was repositioned to adopt a market segmentation
strategy; and
- Weak demand for private label outerwear and basic denim jeans.
7
COST OF PRODUCTS SOLD as a percent of sales decreased to 78.3% in fiscal
1999 compared to the fiscal 1998 level of 79.0%. This was primarily due
to improved production efficiencies and sourcing - including cost
reductions as a result of lower material costs and labor costs in Asia,
exiting certain low margin businesses, and savings generated by the
Supplier Management Initiative, one of the Vision 2000 programs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (S,G&A) in fiscal 1999
increased $14 million or 4.8% to $315 (14.6% of sales) as compared to
$301 (14.4%) in fiscal 1998. The increase in S,G&A in fiscal 1999
included the impact of start-up costs for new products and brands, and
increased systems consulting and quota costs at Smart Shirts. These
increases were partially offset by cost reductions resulting from
consolidation of operations in the Better-to-Bridge segment.
OPERATING EARNINGS (defined as net sales less cost of products sold and
S,G&A) increased to 7.0% of sales from 6.6% in fiscal 1998. The 1999
increase was due primarily to improved production efficiencies and
sourcing - including cost reductions as a result of lower material costs
and labor costs in Asia, exiting certain low margin businesses, and
savings from the Supplier Management Initiative.
THE EFFECTIVE TAX RATE for 1999 of 95% was a consequence primarily of
the non-deductible Goodwill impairment charge or $48.9 and non-
deductible Koret merger costs of $2.4.
SEGMENT RESULTS:
- ----------------
Sales and Operating Earnings by Segment for the nine-month Transition
Period ended January 31, 2000 and for the comparable period in the prior
year as well as for the years ended April 30, 1999 and 1998 were as
follows:
Nine months ended year ended % change
January 31, April 30, ---------------------
------------------ ------------------ 9 months 12 months
Net sales 2000 1999 1999 1998 99-2000 98-99
--------- ------ ------ ------ ------ -------- ---------
Popular-to-Moderate $ 993 $ 961 $1,382 $1,296 3.3% 6.6%
Better-to-Bridge 104 123 167 198 (15.6%) (15.5%)
Private Label Apparel 204 197 256 289 3.6% (11.5%)
Smart Shirts 169 154 203 173 9.3% 17.0%
Recreation Products 96 87 144 138 10.0% 4.2%
------ ------ ------ ------ ------ ------
Kellwood total $1,565 $1,523 $2,151 $2,094 2.8% 2.7%
====== ====== ====== ====== ====== ======
Nine months ended year ended % change
January 31, April 30, ---------------------
------------------ ------------------ 9 months 12 months
Operating earnings 2000 1999 1999 1998 99-2000 98-99
------------------ ------ ------ ------ ------ -------- ---------
Popular-to-Moderate $ 70.8 $ 75.7 $123.2 $105.2 (6.5%) 17.1%
Better-to-Bridge (1.4) 2.0 4.5 5.4 nmf (16.7%)
Private Label Apparel 17.6 22.4 28.1 34.2 (21.5%) (17.9%)
Smart Shirts 18.2 12.9 16.6 14.8 41.0% 12.7%
Recreation Products 4.8 4.8 11.5 10.5 (.3%) 9.4%
------ ------ ------ ------ ------ ------
Total segment
operating earnings $110.0 $117.9 $183.9 $170.1 (2.2%) 8.1%
====== ====== ====== ====== ====== ======
POPULAR-TO-MODERATE. Sales of this segment were up 3% for the nine-
month Transition Period as compared to the prior year. The Transition
Period included the benefit of a $67 increase in sales of Fritzi, which
was acquired in December 1998. This increase was partially offset by
the fashion shift away from traditional wool and constructed garments to
lighter weight less constructed and therefore less expensive garments.
Consolidations at retail, the repositioning of certain brands, and
contractor delivery problems in the January quarter (primarily in
Mexico) also exerted downward pressure on sales. Operating earnings
(defined as net sales less cost of products sold and selling, general
and administrative expenses) declined to 7.1% in the Transition Period
from 7.9% in the prior year. Pressure on operating earnings margin came
as a result of the shift to less expensive lighter weight garments as
well as the continuing competitive environment at retail and additional
mark-down expenses required by the contractor delivery problems
discussed above.
The acquisition of Fritzi in the third quarter of fiscal 1999 added $48
to sales for the year ended April 30, 1999 which, along with continued
strength of the Sag Harbor(R) line, contributed the majority of the 7%
increase in the sales of this segment. These increases were partially
offset by discontinued businesses, including Counterparts (a
8
division of Koret), nurses' uniforms and maternitywear. Operating Earnings
margin improved to 8.9% from 8.1% in the prior year largely due to improved
divisional mix (faster growth in businesses and programs with operating
earnings margins higher than the segment average), the discontinuation of
Koret's unprofitable Counterparts business, and improved sourcing of Koret
products.
BETTER-TO-BRIDGE. The Better-to-Bridge Women's Sportswear business
continues to struggle. Sales, which were planned down, declined 16% in
the Transition Period from the prior year. Kellwood's new Perry
Ellis(R) and Burns lines are expected to attract a more contemporary,
younger customer and increase department store penetration for this
segment. Other marketing and merchandising initiatives are underway to
address styling issues and lost market share in our better category
brands in this segment. Additionally, some office, warehousing and
distribution functions have been consolidated to reduce overhead.
Segment sales declined 16% in 1999, and operating earnings margin
remained constant at 2.7% in 1998 and 1999.
PRIVATE LABEL. Private Label sales in the Transition Period were up 4%
vs. the prior year. Sales increased primarily as a result of the
introduction of the new Slates(R) line of woven and knit shirts,
sweaters and outerwear. This improvement was partially offset by
reduced outerwear shipments, lower sales of activewear to the major
footwear companies, and reduced sales of nightwear. Operating earnings
declined due to start-up spending for the launch of the Slates(R) line,
the start-up of a new lingerie facility in Mexico, as well as unabsorbed
burden and lower productivity as certain domestic manufacturing plants
scheduled to be closed are wound-down.
Sales for fiscal 1999 year were down 12% due to weak demand for private
label outerwear and basic denim jeans. Operating earnings margins in the
Private Label segment declined to 11.0% in 1999 from 11.8% in 1998 due
to the impact of the eliminated Brittania business in 1998.
SMART SHIRTS. Smart Shirts sales were up 9.3% due to increased business
with department stores, specialty stores and catalog houses. Smart
Shirts also expanded its knit shirt capability by implementing
contractor and joint venture arrangements in the Philippines and other
countries. Operating earnings margins improved to 10.8% in the
Transition Period from 8.4% in the prior year due to the resolution of
Sri Lankan quota constraints which had caused Smart Shirts to incur
additional air freight and temporary quota expenses in the prior year.
Sales were up 17.0% in 1999 and 13.1% in 1998 vs. the prior year. The
major drivers of this growth were the new knit shirt operation in Sri
Lanka and the Polo Ralph Lauren(R) business. Operating profit margins
at Smart remained stable at 8.2% in 1999 and 8.5% in 1998.
RECREATION PRODUCTS. Recreation Products reported a 10% increase in
sales as a result of strong demand for new products and a new line of
sleeping bags and outerwear as well as a growing international business.
The segment's operating earnings margin declined slightly as compared to
the prior year as a result of higher S,G&A spending related to the
launch of several new products including child carriers, apparel,
camping furniture and travel gear.
Recreation Products sales were up 4% in 1999 vs. the prior year. Due to
the increased volumes and improved worker productivity, as well as Asian
currency fluctuations, operating profit margins in the Recreation
Products segment improved to 8.0% in 1999 from 7.6% in 1998.
UNUSUAL ITEMS
- -------------
THE KORET MERGER. Effective April 30, 1999 the Company completed a
merger with Koret, Inc. (Koret), issuing approximately 5.2 million
shares of Kellwood common stock in exchange for all of the outstanding
shares and options of Koret. The transaction was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial
statements and this Management's Discussion and Analysis give
retroactive effect to the Merger with all periods presented as if the
two companies had always been combined. One-time costs of the Koret
merger ($6.6) decreased 1999 reported earnings per share by $.18.
RESTRUCTURING AND PROVISION FOR GOODWILL IMPAIRMENT. As part of its
Vision 2000 program, Kellwood developed and began implementing a plan to
reorganize and restructure several operating units that were
experiencing operating losses or performing below expectations. Key
components of the plan include the consolidation of similar types of
operating units, relocation and consolidation of distribution facilities
in the northeast, midwest and west coast, and
9
elimination of redundancies between operating units. These activities
are currently in process and will continue through fiscal 2000.
During fiscal 1999, Kellwood closed a number of its domestic
manufacturing facilities as their work was transferred to Kellwood
facilities in Mexico, the Caribbean and Central America and the
Company's network of contractors around the world. These moves, in
concert with certain other planned plant closings scheduled to be
completed in fiscal 2000, will enhance Kellwood's cost competitiveness
and sourcing flexibility in fiscal 2000 and beyond. These plant
closures and the related shift in manufacturing to offshore contractors
relate primarily to the Private Label segment and are not expected to
impact future sales. Cost reductions resulting from these moves will
have a minimal impact on margins, as it is expected to be necessary to
pass much of the savings on to customers in order to retain these
businesses. These activities are currently in process and will continue
through fiscal 2000. In connection with this restructuring, in the
fourth quarter of 1999 the Company recorded a provision for facilities
shut-down of $6.8 (pretax). This provision consisted of termination
benefits of $4, vacant facilities costs of $1.4, other cash costs of
$.3, and non-cash charges of $1.1. The non-cash charges represent
primarily a write-down of obsolete or abandoned fixed assets to their
net realizable value. Of the total non-cash provision of $5.6, $.5 was
paid during fiscal 1999. The total provision of $6.8 reduced 1999 net
earnings and earnings per diluted share by $3.9 and $.14, respectively.
A summary of activity during the Transition Period related to this
provision and the remaining accrual at January 31, 2000 is included in
the financial statements at Note 2.
As a consequence of the changes discussed above and changing market
conditions, Kellwood conducted a review and analysis of the projected
cash flows for certain underperforming operating units and assessed the
reliability of the carrying value of the intangible assets of these
units. During the fourth quarter of fiscal 1999 the Company completed
this review and identified an impairment of $48.9, primarily related to
business units in the Better-to-Bridge segment. The provision for this
impairment reduced 1999 net earnings and earnings per diluted share by
$48.9 and $1.77, respectively for the year.
FINANCIAL CONDITION
- -------------------
Cash flow from operations is the Company's primary source of liquidity.
Kellwood uses financial leverage to minimize the overall cost of capital
and maintain adequate operating and financial flexibility. Management
monitors leverage through its debt-to-capital ratio. Working capital
management is monitored primarily by analysis of the Company's
investment in accounts receivable and inventories.
LEVERAGE. Kellwood's debt-to-capital ratio was 44.8% at January 31,
2000, approximately equal to the 44.9% as of January 31, 1999. This was
in spite of capital spending of $23, the acquisition of Biflex, $30
spent during the Transition Period on the stock buyback program, and a
$58 reduction in equity resulting from the unusual charges taken in the
fourth quarter of fiscal 1999 discussed above. These investments were
financed by better performance in the management of working capital in
addition to operating earnings and other sources of cash flow, allowing
the company to maintain the financial flexibility inherent in a 45%
leverage ratio.
WORKING CAPITAL. The Company's working capital requirement for
inventories and receivables is influenced primarily by sales patterns,
which are highly seasonal. Inventory levels are highly dependent upon
forecasted sales, and receivables are a result of the timing of recent
months' sales and customer payment terms.
The current ratio increased to 3.3 to 1 at January 31, 2000 vs. 2.4 to 1
at April 30, 1999 and at January 31, 1999, largely as a result of the
refinancing of short-term debt by the July 1999 issuance of the 10-year
debentures discussed below.
Accounts receivable increased $47 (17%) vs. January 31, 1999,
significantly ahead of the 3% increase in sales. This increase was due
principally to the inclusion of $29 of Koret receivables in the January
31, 2000 balance sheet (compared to $0 at January 31, 1999) as a result
of Kellwood's debt capacity replacing the factor borrowing previously
used by Koret. The acquisition of Biflex in January 2000 also
contributed modestly to the increase in accounts receivable.
Inventory levels declined $21 (20%) to $395 at January 31, 2000 compared
to $416 at January 31, 1999 as a result of improved working capital
management. Sales, however, for the next three months are forecast up
5% vs. last
10
year. Overall, the Company now has only 64 days supply in inventory, a
10-day improvement compared to the comparable period in the prior year.
INVESTING ACTIVITIES. Capital spending was $23 for the nine-month
Transition Period, $52 for fiscal 1999 and $22 for 1998. This compares
with capital spending of $13-15 per year before the commencement of the
Vision 2000 program. The additional spending was largely for warehouse
construction and development of the Integrated Business System (IBS).
Capital spending for the coming year is planned to be in the $30 range.
About half of this is to be invested in computer hardware and software
projects (including additional investments in the IBS, and purchase and
modification of a Warehouse Management System), and the other half is to
be invested in new domestic warehousing and distribution facilities, new
in-store shops and selling facilities, and manufacturing facilities in
Asia.
On January 4, 2000 the Company purchased Biflex International, Inc.
(Biflex), including intangible assets of $12.4. The purchase price
included cash of $29.0 and the assumption of certain liabilities
totaling $9.7. The transaction was accounted for as a purchase.
In the third quarter of fiscal 1999 the Company purchased substantially
all of the non-real estate assets of Fritzi. The purchase price included
0.84 million shares of Kellwood common stock valued at $22.3 and the
assumption of certain liabilities totaling $14.5. The transaction was
accounted for as a purchase.
FINANCING ACTIVITIES. Long-term financings are arranged as necessary to
meet the Company's anticipated capital requirements, with the timing,
principal amount and terms depending on the prevailing securities
markets generally and the market for the Company's debt in particular.
In July 1999 the Company completed a 10-year public debt offering
totaling $150. These debentures carry a 7.875% coupon rate. They
received investment grade ratings from Moody's and S&P of Baa3/BBB.
In January 2000 the Company entered into an interest rate swap agreement
with a bank to convert the interest rate on $150 of 7.875% debentures
from fixed to variable. In connection with this transaction, the
Company also entered into an option agreement, which entitles the bank
to effectively cancel this interest rate swap agreement on January 15,
2001. As consideration for these agreements the Company received a
payment of $3.3 which is recorded as a deferred option premium at
January 31, 2000; these agreements are being marked to market and did
not have a material impact on the results of operations of the Company
from the date of execution through January 31, 2000.
* The Company expects the bank to exercise its option to cancel the
swap if fixed swap rates are lower on the cancellation date than
7.32%. If the option is exercised to cancel the swap, Kellwood will
retain the entire $3.3 deferred option premium, and the Company will
continue to pay the fixed coupon rate on the related debt. In this
case, excluding the impact of any acquisitions during the upcoming
year, the Company would have approximately 1% of debt at floating
interest rates at January 31, 2001 as compared to the Company's
objective of approximately 50%.
* If the option is not exercised on January 15, 2001, the interest
rate swap will remain in effect, and the Company will continue to pay
interest on the $150 notional amount of the swap at variable rates
based on LIBOR through July 15, 2009. If the option is not
exercised, the swap would have the effect of converting $150 of
debentures to variable rates at 56 basis points above six-month
LIBOR. In this case, excluding the impact of any acquisitions during
the upcoming year, the Company would have approximately 45% of debt
at floating interest rates at January 31, 2001 as compared to the
Company's objective of approximately 50%.
The Company maintains informal, uncommitted lines of credit with several
banks, which totaled $140 at January 31, 2000. There were no
outstanding borrowings under these uncommitted lines at January 31,
2000.
Kellwood maintains a three-year $350 committed bank credit facility to
ensure the liquidity necessary to support planned internal growth as
well as to provide the capacity for additional acquisitions. Management
believes that the combined operating, cash and equity position of the
Company will continue to provide the capital flexibility necessary to
fund future opportunities and to meet existing obligations.
11
On November 23, 1999 the Board of Directors authorized the Company to
repurchase up to ten percent of the outstanding shares of its Common
Stock (up to approximately 2.8 million shares) in the open market or
through privately negotiated transactions at management's discretion and
depending on market conditions. Pursuant to this authorization, on
December 9, 1999 the Company purchased 1.68 million shares through a
privately negotiated transaction with an institutional holder at $18.00
per share, which was below the market price. Additionally, during
February 2000 the Company purchased 1.11 million shares in open market
transactions at an average price of $16.32 per share, completing the
buyback authorized by this authorization.
On March 2, 2000 the Board of Directors authorized the Company to
repurchase up to ten percent of the outstanding shares of its Common
Stock (up to approximately 2.5 million shares) in the open market or
through privately negotiated transactions at management's discretion and
depending on market conditions. Purchases will be financed out of the
Company's cash resources. As of March 28, 2000 the Company had
purchased 1.17 million shares pursuant to this authorization at an
average cost of $17.07 per share. As discussed in Note 6 to the
financial statements, certain debt covenants may limit purchases under
this authorization.
MARKET RISK SENSITIVITY AND INFLATION RISKS
- -------------------------------------------
FOREIGN CURRENCY RISK. The company does not believe that it has
significant foreign currency transactional exposures. The impact of a
ten percent unfavorable change in the exchange rate of the U.S. dollar
against the prevailing market rates of the foreign currencies in which
the Company does have transactional exposures would be immaterial.
INTEREST RATE RISK. Interest rate risk is managed through the
maintenance of a portfolio of variable- and fixed-rate debt composed of
short-and long-term instruments. The objective is to maintain a cost-
effective mix that management deems appropriate. At January 31, 2000,
the Company's debt portfolio was composed of approximately 43% variable-
rate debt (including the amount of debt subject to the swap and option
discussed above) and 57% fixed-rate debt. Kellwood's strategy regarding
management of its exposure to interest rate fluctuations did not change
significantly during the Transition Period. Except for the outcome of
the option to cancel the interest rate swap discussed above, management
does not expect any significant changes in its exposure to interest rate
fluctuations or in how such exposure is managed the coming year.
Various financial instruments issued by the Company are sensitive to
changes in interest rates. Market interest rate changes would result in
increases or decreases in the market value of the Company's fixed-rate
debt. With respect to the Company's fixed-rate debt outstanding at
January 31, 2000, a 10% increase in interest rates would have resulted
in approximately an $11 decrease in the market value of Kellwood's
fixed-rate debt; a 10% decrease in interest rates would have resulted in
approximately a $20 increase in the market value of Kellwood's fixed-
rate debt. With respect to the Company's variable-rate debt, a 10%
change in interest rates would have had an immaterial impact on the
Company's interest expense for the Transition Period.
COMMODITY PRICE RISK. Kellwood is subject to commodity price risk
arising from price fluctuations in the market prices of sourced garments
or the various raw materials that comprise its manufactured products
(synthetic fabrics, woolens, denim, etc.). The Company is subject to
commodity price risk to the extent that any fluctuations in the market
prices of its purchased garments and raw materials are not reflected by
adjustments in selling prices of its products or if such adjustments
significantly trail changes in these costs. Kellwood does not use
derivative instruments in the management of these risks.
INFLATION RISK. Kellwood's inflation risks are managed by each business
unit through selective price increases when possible, productivity
improvements, and cost-containment measures. Management does not
believe that inflation risk is material to the Company's business or its
consolidated financial position, results of operations or cash flows.
OUTLOOK AS OF APRIL 13, 2000
- ----------------------------
CHANGE IN THE FISCAL YEAR FROM APRIL 30 TO JANUARY 31, 2000. In August
1999, the Company changed its fiscal year-end from April 30 to January
31 to bring Kellwood more in line with the operating cycle of our
business and the fiscal year-ends of our customers and other apparel
companies. We have decided to identify the twelve-month period ending
January 31, 2001 as "fiscal 2000" in keeping with the custom of many
retail and apparel companies.
12
As we address the outlook for fiscal 2000, management will change the
way the company's results are reported and analyzed. In the past the
Company was managed, and results were reported, by the five business
segments: Popular-to-moderately-priced women's sportswear, Better-to-bridge
priced women's sportswear, Private Label apparel, Smart Shirts, and
Recreation products. Going forward, the Company will be focusing on three
business segments:
* Women's Sportswear;
* Men's Sportswear; and
* Other soft goods (which will include the intimate apparel and
recreation products business units).
Management expects Kellwood's sales in the first half of fiscal 2000 to
be up approximately 5%, with growth picking up in the second half as a
result of the introduction of new product lines and brands; sales for
the year are expected to be up approximately 6-7%. Operating earnings
margins for fiscal 2000 are expected to be approximately 7% for the
year, and the income tax rate is expected to be approximately 40%.
CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS
- -----------------------------------------------------------------
This Annual Report contains statements which, to the extent they are not
statements of historical or present fact, constitute "forward-looking
statements" within the meaning of the Securities Act of 1933, the
Securities Exchange Act of 1934, and the Private Securities Litigation
Reform Act of 1995. These forward-looking statements represent the
Company's expectations or beliefs concerning future events and are based
on various assumptions and subject to a wide variety of risks and
uncertainties. Although the Company believes that its expectations
reflected in the forward-looking statements are reasonable, it cannot
and does not give any assurance that such expectations will prove to be
correct.
The Company's forward-looking statements are based on certain
assumptions, and the Company's operations are subject to various risks
and uncertainties. Any one of these factors or any combination of these
factors could materially affect the results of the Company's operations
and cause actual results to differ materially from the Company's
expectations. These factors include but are not limited to:
* changes in trends in the market segments in which the Company
competes;
* the performance of the Company's products within the prevailing
retail environment;
* customer acceptance of both new designs and newly introduced
product lines;
* actions of competitors that may impact the Company's business;
* financial difficulties encountered by customers;
* the impact of economic changes such as:
* the overall level of consumer spending for apparel,
* national and regional economic conditions,
* inflation or deflation,
* currency exchange fluctuations, and
* changes in interest rates and other capital market conditions;
13
* the timing and magnitude of spending on and savings realized from
our Vision 2000 initiative;
* stable governments and business conditions in the nations where
the Company's products are manufactured;
* the scope, nature or impact of acquisition activity; and
* changes in the Company's plans, strategies, objectives,
expectations and intentions that may happen at any time at the
discretion of the Company.
The reader is also directed to the Company's periodic filings with the
Securities and Exchange Commission for additional factors that may
impact the Company's results of operations and financial condition.
The words "believe", "expect", "will", "estimate", "project",
"forecast", "should", "anticipate" and similar expressions may identify
forward-looking statements. Additionally, all statements other than
statements of historical facts included in this Form 10-K including
without limitation, the statements under "Financial Review" and
"Outlook", are also forward-looking statements.
Forward-looking statements are not guarantees, as actual results could
differ materially from those expressed or implied in forward-looking
statements. The Company specifically disclaims any obligation to
publicly update, modify, retract or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. All forward-looking statements contained herein, the entire
contents of the Company's website, and all subsequent written and oral
forward-looking statements attributable to the Company or persons acting
on its behalf, are expressly qualified in their entirety by this
cautionary statement.
YEAR 2000 ISSUE
- ---------------
In July 1996 the Company outsourced its Information Systems function to
Electronic Data Systems Corporation (EDS). Together, EDS and Kellwood
employees completed an assessment and implemented plans to make key
operational and financial systems year 2000 compliant and to ensure
uninterrupted functionality through the year 2000. The Company also
completed its assessment of its year 2000 risks related to key trading
partners such as customers, suppliers, banks, and shipping companies.
The Company is monitoring the situation and believes its year 2000 plans
were successfully implemented. As a result, there were no significant
year 2000-related problems, and the Company does not anticipate that any
significant year 2000-related problems will occur in the future.
Kellwood's cost of remediation and replacement of non-year 2000
compliant systems was approximately $3. The Company utilized cash flow
from operations to fund year 2000 expenditures.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS
REPORT OF MANAGEMENT
- --------------------
The management of Kellwood Company is responsible for the fair
presentation of the financial statements and other financial information
included in this report. The financial statements have been prepared in
conformity with generally accepted accounting principles applying
estimates and management's best judgments as required to present fairly
Kellwood Company's financial position, results of operations and cash
flows.
The accounting systems and internal accounting controls of Kellwood are
designed to provide reasonable assurance that the financial records are
reliable for preparing financial statements and maintaining accountability
for assets and that, in all material respects, assets are safeguarded
against loss from unauthorized use or disposition. Qualified personnel
throughout the organization maintain and monitor these internal accounting
controls on an ongoing basis, and internal auditors systematically review
the adequacy and effectiveness of the controls. PricewaterhouseCoopers LLP
also studies and evaluates internal controls for the purpose of establishing
a basis for reliance thereon relative to the scope of their audits of the
financial statements. It is management's opinion that the Company has an
effective system of internal accounting controls.
The Board of Directors, through its Audit Committee consisting solely of
non-management directors, meets periodically with management, the
internal auditors and PricewaterhouseCoopers LLP to discuss audit and
financial reporting matters. Both the internal auditors and
PricewaterhouseCoopers LLP have direct access to the Audit Committee.
Hal J. Upbin
Chairman, President and Chief Executive Officer
Gerald M. Chaney
Chief Financial Officer
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings, of cash flows and of
shareowners' equity present fairly, in all material respects, the
financial position of Kellwood Company and its subsidiaries at January
31, 2000 and at April 30, 1999, and the results of their operations and
their cash flows for the nine months ended January 31, 2000 and for each
of the two years in the period ended April 30, 1999, in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of Kellwood'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 auditing standards generally accepted in
the United States 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.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 1, 2000
15
KELLWOOD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in thousands except per share data)
- -----------------------------------------------------------------------------------------------
NINE MONTHS Year ended April 30,
ENDED -------------------------
JANUARY 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Net Sales $1,565,261 $2,151,147 $2,094,389
Costs and Expenses:
Cost of products sold 1,237,683 1,685,281 1,655,370
Selling, general and administrative expenses 234,346 315,139 300,601
Amortization of intangible assets 4,865 15,855 16,562
Interest expense 22,654 33,883 35,142
Interest income and other, net (2,887) (502) (920)
Costs of Koret merger - 6,600 -
Provision for facilities shut-down - 6,793 -
Provision for Goodwill impairment - 48,945 -
---------- ---------- ----------
Earnings Before Income Taxes 68,600 39,153 87,634
Income Taxes 27,600 37,200 37,500
---------- ---------- ----------
Net Earnings $ 41,000 $ 1,953 $ 50,134
========== ========== ==========
Earnings Per Share:
Basic $ 1.49 $ .07 $ 1.92
========== ========== ==========
Diluted $ 1.48 $ .07 $ 1.85
========== ========== ==========
See notes to consolidated financial statements.
16
KELLWOOD COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands except per share data)
- -----------------------------------------------------------------------------------------------
AS OF
- -----------------------------------------------------------------------------------------------
JANUARY 31, 2000 April 30, 1999
- -----------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash, including time deposits of $41,067 ($19,216 in 1999) $ 54,501 $ 25,482
Receivables, net 326,868 392,628
Inventories 394,988 340,778
Prepaid taxes and expenses 47,921 38,392
---------- ----------
Total Current Assets 824,278 797,280
Property, Plant and Equipment 253,524 252,286
Less accumulated depreciation and amortization (149,850) (149,988)
---------- ----------
Property, Plant and Equipment, net 103,674 102,298
Intangible Assets, net 68,220 60,207
Other Assets 101,681 94,427
---------- ----------
Total Assets $1,097,853 $1,054,212
========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 10,992 $ 16,504
Notes payable 4,083 93,963
Accounts payable 151,637 117,014
Accrued expenses 81,446 104,264
---------- ----------
Total Current Liabilities 248,158 331,745
Long-Term Debt 346,479 227,659
Deferred Income Taxes and Other 57,346 48,620
Shareowners' Equity:
Common stock, par value $.01 per share, authorized
50,000,000 shares; issued and outstanding 26,173,218
shares (27,737,032 in 1999) 166,312 163,097
Retained earnings 361,000 333,340
Accumulated other comprehensive income (9,378) (9,330)
---------- ----------
517,934 487,107
Less treasury stock, at cost (72,064) (40,919)
---------- ----------
Total shareowners' equity 445,870 446,188
---------- ----------
Total Liabilities and Shareowners' Equity $1,097,853 $1,054,212
========== ==========
See notes to consolidated financial statements.
17
KELLWOOD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------
NINE MONTHS Year ended April 30,
ENDED -----------------------
JANUARY 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net earnings $ 41,000 $ 1,953 $ 50,134
Add (deduct) items not affecting operating cash flows:
Depreciation and amortization 19,106 33,358 33,727
Increase in prepaid pension costs (4,326) (4,780) (7,860)
Deferred income taxes 10,330 (4,790) (2,031)
Non-cash portion of facilities shut-down provision - 1,146 -
Provision for goodwill impairment - 48,945 -
Other (3,584) 2,307 3,903
Changes in working capital components:
Receivables, net 72,475 (49,224) (54,378)
Inventories (36,139) 101,553 (78,066)
Prepaid expenses (9,188) 3,397 (6,134)
Accounts payable and accrued expenses 6,527 (2,397) (7,202)
-------- -------- --------
Net cash provided by (used for) operating activities 96,201 131,468 (67,907)
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (22,819) (51,472) (21,640)
Investment in subsidiaries (84) (4,892) (6,810)
Acquisitions (28,983) - -
Dispositions of fixed assets 7,225 - -
Other investing activities (31) 7,667 417
-------- -------- --------
Net cash (used for) investing activities (44,692) (48,697) (28,033)
-------- -------- --------
FINANCING ACTIVITIES:
Net proceeds from (reduction of) notes payable (94,255) (50,680) (17,393)
Proceeds from issuance of long-term debt 149,207 - 148,327
Reduction of long-term debt (35,899) (28,278) (20,333)
Stock transactions under incentive plans 1,971 5,928 7,609
Purchase of treasury stock (30,174) - -
Dividends paid (13,340) (13,970) (13,698)
-------- -------- --------
Net cash provided by (used for) financing activities (22,490) (87,000) 104,512
-------- -------- --------
Net increase (decrease) in cash and time deposits 29,019 (4,229) 8,572
Cash and time deposits - beginning of year 25,482 29,711 21,139
-------- -------- --------
Cash and time deposits - end of year $ 54,501 $ 25,482 $ 29,711
======== ======== ========
Supplemental cash flow information:
Interest paid $ 20,422 $ 34,361 $ 35,360
Income taxes paid 37,108 42,708 41,275
Significant non-cash investing and financing activities:
Issuance of stock for the acquisition of Fritzi - $ 22,340 -
======== ======== ========
See notes to consolidated financial statements.
18
KELLWOOD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
(Dollars in thousands except per share data)
- ------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Common Stock Treasury Other Compre-
---------------------- Stock Retained Comprehensive hensive
Shares Amount Amount Earnings Income Income
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1997 25,743,327 $123,002 $(36,969) $308,921 $(8,737)
Net earnings 50,134 $50,134
Currency translation adjustment (870) (870)
-------
Comprehensive income $49,264
=======
Cash dividends declared, $.64 per share (13,698)
Shares issued under stock plans 658,469 10,740 261
Treasury stock acquired in conjunction
with incentive plans (98,329) (3,277)
Debentures converted 24,151 153
---------- -------- -------- -------- -------
BALANCE, APRIL 30, 1998 26,327,618 $133,895 $(39,985) $345,357 $(9,607)
Net earnings 1,953 $1,953
Currency translation adjustment 277 277
-------
Comprehensive income $2,230
=======
Cash dividends declared, $.64 per share (13,970)
Shares issued under stock plans 231,857 6,284 239
Treasury stock acquired in conjunction
with incentive plans (34,857) (1,173)
Debentures converted 4,414 28
Purchase of Fritzi 844,000 22,340
Warrants exercised 364,000 550
---------- -------- -------- -------- -------
BALANCE, APRIL 30, 1999 27,737,032 $163,097 $(40,919) $333,340 $(9,330)
Net earnings 41,000 $41,000
Currency translation adjustment (48) (48)
-------
Comprehensive income $40,952
=======
Cash dividends declared, $.48 per share (13,340)
Shares issued under stock plans 121,933 2,942 197
Treasury stock acquired in conjunction
with incentive plans (52,696) (1,168)
Purchase of treasury stock (1,676,307) (30,174)
Debentures converted 43,256 273
---------- -------- -------- -------- -------
BALANCE, JANUARY 31, 2000 26,173,218 $166,312 $(72,064) $361,000 $(9,378)
========== ======== ======== ======== =======
See notes to consolidated financial statements.
19
KELLWOOD COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and all majority-owned subsidiaries.
Substantially all foreign subsidiaries are consolidated based upon a
fiscal year ending December 31. All significant intercompany accounts
and transactions have been eliminated.
CHANGE IN YEAR END: In August 1999 the company changed its fiscal year-
end from April 30 to January 31. This change resulted in a short fiscal
year covering the nine month transition period from May 1, 1999 to
January 31, 2000. References to the Transition Period and to fiscal
1999 and 1998 throughout these consolidated financial statements refer
to the nine months ended January 31, 2000 and the years ended April 30,
1999 and 1998, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires that management
make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results may differ
from those estimates and assumptions.
INVENTORIES AND REVENUE RECOGNITION: Inventories are stated at the
lower of cost or market. The first-in, first-out (FIFO) method is used
to determine the value of 65% of domestic inventories, primarily
inventories purchased from the Kellwood worldwide network of
contractors. The last-in, first-out (LIFO) method is used to value the
inventories of domestic manufacturing operations. Inventories of
foreign subsidiaries are valued using the specific identification
method. Sales are recognized when goods are shipped.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated
at cost. A significant portion of domestic manufacturing facilities and
some machinery and equipment are leased under long-term capital leases
which are recorded at the beginning of the lease term at the present
value of the minimum lease payments.
Depreciation is computed generally on the declining balance method over
estimated useful lives of 15 to 40 years for buildings and of 3 to 10
years for machinery and equipment. Leasehold improvements are amortized
principally on the straight-line basis over the shorter of their
estimated useful lives or the remaining lease term.
INTANGIBLE ASSETS: The excess costs over net tangible assets of
businesses acquired are recorded as intangible assets. These
intangibles are amortized using the straight-line method over their
estimated useful lives, which range from 1 to 20 years.
IMPAIRMENT OF ASSETS: The Company reviews long-lived assets, goodwill
and other intangibles to assess recoverability from future operations
using expected undiscounted future cash flows whenever events and
circumstances indicate that the carrying values may not be recoverable.
Impairment losses are recognized in operating results when expected
undiscounted future cash flows are less than the carrying value of the
asset.
INCOME TAXES: Income taxes are based upon income for financial
reporting purposes. Deferred income taxes are recognized for the effect
of temporary differences between financial and tax reporting in
accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 109.
FOREIGN CURRENCY TRANSLATION: Foreign currency financial statements are
translated into United States dollars using period-end rates of exchange
for assets and liabilities and monthly average rates of exchange for
income and expenses. Adjustments resulting from translation are
accumulated in the Cumulative Translation Adjustment component of
Shareowners' Equity. Gains or losses from foreign currency transactions
are included in income in the period in which they occur. The net
foreign currency gains and losses recognized in the Transition Period,
1999 and 1998 were not significant.
STOCK-BASED COMPENSATION: Kellwood Company uses the intrinsic value
method for measuring stock-based compensation cost. Under this method,
compensation cost is the excess, if any, of the quoted market price of
Kellwood's common stock at the grant date over the amount the employee
must pay for the stock. Kellwood's policy is to grant stock options at
fair market value at the date of grant.
CASH FLOWS: For purposes of the Consolidated Statement of Cash Flows,
all highly liquid short-term time deposits maintained under cash
management activities are considered cash equivalents. The effect of
foreign currency exchange rate fluctuations on cash and time deposits
was not significant for the nine months ended January 31, 2000 or for
the years ended April 30, 1999 and 1998.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS: The Company's financial
instruments consist of cash, investments, short-term receivables and
payables, and debt. Based on quoted market prices obtained through
independent
20
pricing sources for the same or similar types of borrowing arrangements,
the Company believes the major components of its long-term debt have a
market value of approximately $342,000 which compares to their book
value of $355,000. Management believes that the current carrying
amounts for the company's other financial instruments approximate fair
market value.
NEW ACCOUNTING STANDARDS: In 1998 SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, was issued. This standard
establishes new accounting and reporting standards for derivative
financial instruments. The Company will adopt SFAS 133 on February 1,
2001, and the Company does not expect it to have a material impact on
consolidated financial position, results of operations or cash flows.
NOTE 2. BUSINESS IMPROVEMENT AND OTHER PROGRAMS:
As part of its Vision 2000 program, Kellwood developed and began
implementing a plan to reorganize and restructure several operating
units that were experiencing operating losses or performing below
expectations. Key components of the plan include the consolidation of
similar types of operating units, relocation and consolidation of
distribution facilities in the northeast, midwest and west coast, and
elimination of redundancies between operating units.
Restructuring actions taken and planned include closing 5 domestic
production facilities. This action relates to current and future shifts
in the Company's business to foreign sourced product and resulted from
the uncompetitive cost structures of the plants being closed. These
plant closures and the related shift in manufacturing to offshore
contractors are not expected to impact future sales. These activities
are currently in process and will continue through the fiscal year
ending January 31, 2001.
FACILITY CONSOLIDATIONS: In connection with the restructuring described
above, in the fourth quarter of 1999, the Company recorded, as a
separate line item in the consolidated statement of operations, a
provision for facilities shut-down of $6.8 million (pretax). This
provision reduced net earnings and earnings per diluted share by $3.9
million and $.14, respectively. On a pre-tax basis, charges for
restructuring consisted of termination benefits of $3,969, vacant
facilities costs of $1,418, other cash costs of $260, and non-cash
charges of $1,146. The non-cash charges represent primarily a write-
down of obsolete or abandoned fixed assets to their net realizable
value.
Details of this provision and the accrual balances remaining are as
follows:
- -----------------------------------------------------------------------------------------------------------
Amounts utilized during
4th Quarter ----------------------- Amount to
1999 4th Quarter Transition be Utilized
Provision 1999 Period in 2000
- -----------------------------------------------------------------------------------------------------------
Employee severance $3,969 $ 374 $297 $3,298
Vacant facilities / lease termination 1,418 85 166 1,167
Other cash restructuring costs 260 0 71 189
------ ------ ---- ------
Total restructuring, excluding non-cash 5,647 $ 459 534 $4,654
Asset impairments 1,146 1,146 0 0
------ ------ ---- ------
Total provision $6,793 $1,605 534 4,654
====== ====== ==== ======
These charges provide for a reduction of domestic employment by
approximately 1,500, primarily in production and production-support
capacities; during 1999 approximately 100 employees were terminated or
retired in connection with this charge. Facility consolidations
represented by the remaining accrual balance are expected to be
substantially completed in fiscal 2000.
PROVISION FOR GOODWILL IMPAIRMENT: During the fourth quarter of 1999,
the Company completed a review of the intangible assets related to
certain underperforming business units to determine if the intangible
assets were impaired. Based on a comparison of the expected future cash
flows to the carrying value of the intangibles, it was determined that
certain of the intangibles, primarily goodwill, were impaired. Once
impairment was identified, the Company utilized discounted cash flows
for each operating unit to determine the amount of the impairment. The
impairment charge, which is presented as a separate line item in the
consolidated statement of operations, totaled $48.9 million and reduced
1999 net earnings and earnings per diluted share by $48.9 million and
$1.77, respectively.
NOTE 3. BUSINESS COMBINATIONS:
On January 4, 2000 the Company purchased Biflex International, Inc.
(Biflex), including goodwill and other intangible assets of $12.4
million. The purchase price included cash of $29.0 million and the
assumption of certain liabilities totaling $9.7 million. The
transaction was accounted for as a purchase. Accordingly, the results
of operations of Biflex are included in the consolidated financial
statements from the acquisition date. This acquisition was not
significant to the results of operations or the financial position
of the Company.
21
Effective April 30, 1999 the Company completed a merger with Koret, Inc.
(Koret), issuing approximately 5.2 million shares of Kellwood common
stock in exchange for all of the outstanding shares and options of
Koret. The transaction was accounted for as a pooling-of-interests for
financial reporting purposes. Accordingly, the consolidated financial
statements give retroactive effect to the merger with all periods
presented as if the two companies had always been combined. Fees and
expenses related to the Koret transaction aggregating $6.6 million were
incurred in 1999. These costs reduced Kellwood's 1999 Consolidated Net
Earnings by $4,840.
On December 11, 1998 the Company purchased substantially all of the non-
real estate assets of Fritzi California (Fritzi), including intangible
assets of $5.2 million. The purchase price included 0.84 million shares
of Kellwood common stock valued at $22.3 million and the assumption of
certain liabilities totaling $14.5 million. The transaction was
accounted for as a purchase. Accordingly, the results of operations of
Fritzi are included in the consolidated financial statements from the
acquisition date. This acquisition was not significant to the results
of operations or the financial position of the Company.
NOTE 4. SUPPLEMENTAL BALANCE SHEET INFORMATION:
- ------------------------------------------------------------------
Year-end amounts, 2000 1999
- ------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 12,142 $ 11,281
INVENTORIES:
- ------------
Finished goods $ 221,765 $ 196,214
Work in process 96,086 77,992
Raw materials 77,137 66,572
--------- ---------
Total inventories $ 394,988 $ 340,778
========= =========
Includes inventories valued under LIFO of $ 120,171 $ 128,003
Value of LIFO inventories at current costs 122,153 133,299
PROPERTY, PLANT & EQUIPMENT:
- ----------------------------
Land $ 1,907 $ 3,460
Buildings and improvements 96,738 95,002
Machinery and equipment 134,245 142,471
Capitalized software 20,634 11,353
--------- ---------
253,524 252,286
Less accumulated depreciation
and amortization (149,850) (149,988)
--------- ---------
Property, Plant & Equipment, net $ 103,674 $ 102,298
========= =========
Includes assets under capital leases
(primarily buildings) of:
Cost $ 15,343 $ 15,393
Accumulated amortization (14,877) (14,463)
22
- -------------------------------------------------------------------
Year-end amounts, 2000 1999
- -------------------------------------------------------------------
INTANGIBLE ASSETS:
- ------------------
Goodwill $ 63,886 $ 65,477
Less accumulated amortization (20,509) (19,479)
-------- --------
Net goodwill 43,377 45,998
-------- --------
Other identifiable intangibles 52,722 40,229
Less accumulated amortization (27,879) (26,020)
-------- --------
Net other identifiable intangibles 24,843 14,209
-------- --------
Net intangible assets $ 68,220 $ 60,207
======== ========
ACCRUED EXPENSES:
- -----------------
Salaries and employee benefits $ 39,095 $ 49,114
Provision for facilities shut-down 4,654 5,188
Income taxes - 8,847
Other accrued expenses 37,697 41,115
-------- --------
Total accrued expenses $ 81,446 $104,264
======== ========
NOTE 5. LEASES:
Certain machinery and equipment are leased under operating leases having
remaining terms ranging up to 6 years. Rent expense under all operating
leases for the nine months ended January 31, 2000 totaled $21,412
($26,959 for the year ended April 30, 1999 and $23,802 for 1998).
The future minimum lease payments under capital and operating leases at
January 31, 2000 were as follows:
- ------------------------------------------------------------------
Years ending January 31, Capital Operating
- ------------------------------------------------------------------
2001 $ 992 $17,021
2002 350 14,515
2003 296 11,033
2004 296 8,569
2005 44 7,345
Later years 0 10,889
------ -------
Total minimum lease payments 1,978 $69,372
=======
Less amount representing interest (146)
------
Present value of net minimum lease payments $1,832
======
Minimum lease payments were not reduced for future minimum sublease
rentals of $3,393.
NOTE 6. NOTES PAYABLE AND LONG-TERM DEBT:
NOTES PAYABLE: On August 31, 1999 the Company executed a $350,000
Senior Credit Facility with Bank of America and other participating
banks (the "Credit Agreement"). In connection with the execution of the
Credit Agreement the Company paid various fees and costs totaling
approximately $750. Facility fees range from .15% to .20% of the
committed amount. The Credit Agreement comprises a $100,000 364 day
revolving credit facility and a $250,000 three-year revolving credit
facility. The $250,000 three-year revolving credit facility can also be
used for letters of credit. Borrowings under the Credit Agreement will
bear interest at a spread of approximately .6% over LIBOR. At
January 31, 2000, outstanding short-term loans and letters of credit
under the agreement were $0 and $136,841, respectively. Covenants are
less restrictive than those currently existing for Kellwood's notes due
insurance companies.
The Company maintains informal, uncommitted lines of credit with several
banks, which totaled $140,000 at January 31, 2000. Borrowings under
these uncommitted lines totaled $0 at January 31, 2000.
During the nine months ended January 31, 2000, the highest level of
borrowings under all lines was $98,243 ($196,500 for the year ended
April 30, 1999). The average daily short-term borrowings for the nine
months ended January 31, 2000 were $20,594 ($153,913 for fiscal 1999)
and the weighted average interest rate was 5.8% (5.8% for 1999).
23
LONG-TERM DEBT:
- ------------------------------------------------------------------
Year-end amounts, 2000 1999
- ------------------------------------------------------------------
7.625% Debentures due October 15, 2017 $137,626 $148,455
7.875% Debentures due July 15, 2009 139,725 -
Notes due insurance companies, 6.90% - 10.77% 77,883 92,291
Capital lease obligations, 4.9% - 10.2% 1,832 2,487
Other 405 930
-------- --------
357,471 244,163
Less current maturities (10,992) (16,504)
-------- --------
$346,479 $227,659
======== ========
Aggregate maturities on long-term debt for the next five years are as
follows: 2001 - $10,992; 2002 - $15,407; 2003 - $19,067; 2004 - $26,307;
2005 - $6,126; 2006 & thereafter - $279,572.
The Company issued $150,000 of 20 year senior unsecured debentures in a
public debt offering on October 27, 1997. The debentures, due October
15, 2017, have a coupon rate of 7.625% payable semi-annually. The
Company issued $150,000 of 10 year senior unsecured debentures in a
public debt offering on July 26, 1999. The debentures, due July 15,
2009, have a coupon rate of 7.875% payable semi-annually. Restrictive
covenants of these debentures are less restrictive than the covenants
associated with the notes due insurance companies discussed below.
In January 2000 the Company entered into an interest rate swap agreement
with a bank to convert the interest rate on $150,000 of 7.875%
debentures from fixed to variable. In connection with this transaction,
the Company also entered into an option agreement, which entitles the
bank to effectively cancel this interest rate swap agreement on January
15, 2001. As consideration for these agreements the Company received a
payment of $3,257 which is recorded as a deferred option premium at
January 31, 2000; these agreements are being marked to market and did
not have a material impact on the results of operations of the company
from the date of execution through January 31, 2000. The company
expects the bank to exercise its option to cancel the swap if fixed swap
rates are lower on the cancellation date than 7.32%. If the option is
not exercised on January 15, 2001, the interest rate swap will remain in
effect, and the Company will continue to pay interest on the $150,000
notional amount of the swap at variable rates based on LIBOR through
July 15, 2009. If the option is not exercised, the swap would have the
effect of converting $150,000 of debentures to variable rates at 56
basis points above six-month LIBOR. In this case, excluding the impact
of any acquisitions during the upcoming year, the company would have
approximately 45% of debt at floating interest rates at January 31, 2001
as compared to the Company's objective of approximately 50%.
Notes payable to insurance companies are due in quarterly and semiannual
installments from June 1998 through September 2005. Restrictive
covenants of these notes include the maintenance of minimum working
capital and certain key ratios as well as a limitation on the payment of
dividends and the repurchase of Company stock. Under the most
restrictive covenants, future dividends and purchases of Company stock
are limited to $29,929 plus 45% of net earnings after January 31, 2000,
excluding gains and losses on the disposal of capital assets.
NOTE 7. RETIREMENT BENEFITS:
Various contributory and noncontributory retirement plans cover
substantially all domestic and certain foreign employees. Total
retirement benefits expense included the following:
- ------------------------------------------------------------------------------
Fiscal period (Note 1) ended in, 2000 1999 1998
- ------------------------------------------------------------------------------
Single-employer defined benefit plans $(4,037) $(4,443) $(7,756)
Multi-employer plan 233 585 1,426
Defined contribution plans 2,612 3,731 4,153
------- ------- -------
Total retirement benefits expense/(credit) (1,192) (127) (2,177)
------- ------- -------
24
SINGLE-EMPLOYER DEFINED BENEFIT PLANS. Summarized information on the
Company's single-employer defined benefit plans is as follows:
- ------------------------------------------------------------------------------------------
Fiscal period (Note 1) ended in, 2000 1999 1998
- ------------------------------------------------------------------------------------------
Components of Net Periodic Pension Credit:
Current Service Cost $ 2,019 $ 2,649 $ 2,085
Interest cost on projected benefit obligation 3,510 4,591 4,456
Assumed return on assets (9,578) (11,637) (10,576)
Amortization of transition asset and
prior service costs 12 (46) (3,721)
------- -------- --------
Net pension (credit) $(4,037) $ (4,443) $ (7,756)
======= ======== ========
Weighted average key actuarial assumptions:
Discount rate 7.5% 7.5% 8.0%
Long-term rate of return on plan assets 8.0% 8.0% 8.0%
Compensation increases 4.5% 4.5% 5.0%
- ------------------------------------------------------------------------------------------
Year-end amounts 2000 1999
- ------------------------------------------------------------------------------------------
Reconciliation of funded status to prepaid pension cost:
Funded Status - Plan assets in excess of
projected benefit obligation $138,275 $113,729
Unamortized prior service costs 568 (15)
Unrecognized actuarial gains (49,342) (29,303)
-------- --------
Prepaid pension costs included in other assets $ 89,501 $ 84,411
======== ========
Change in Projected Benefit Obligation:
Projected benefit obligation, beginning of year $ 63,879 $62,612
Service cost 2,019 2,649
Interest cost 3,510 4,591
Employee contributions (302) (356)
Plan amendments 595 -
Actuarial gain / (loss) (170) (259)
Benefits paid (3,720) (5,358)
-------- --------
Projected benefit obligation, end of year $ 65,811 $ 63,879
======== ========
Change in Plan Assets:
Fair market value, beginning of year $177,607 $170,256
Actual return on plan assets 29,447 12,286
Employer contributions 450 67
Employee contributions 302 356
Benefits paid (3,720) (5,358)
-------- --------
Fair market value, end of year $204,086 $177,607
======== ========
Plan assets consist primarily of marketable equity securities, U.S.
Government obligations, corporate debt obligations and short-term
marketable debt securities.
MULTI-EMPLOYER DEFINED BENEFIT PLAN. One of the Company's subsidiaries
makes contributions to a multi-employer defined benefit plan on behalf
of certain employees. The plan administrator estimates that if the
Company were to withdraw from the plan, its potential liability for
unfunded plan benefits would be approximately $3.2 million as of
December 31, 1998, the date of the most recent actuarial valuation
report.
OTHER. The Company provides health care insurance benefits to certain
employees upon retirement, with the majority of the cost paid by
employee contributions. The annual costs of these benefits in the
Transition Period, 1999 and 1998 and the accrued benefits at January 31,
2000 and April 30, 1999 were not significant.
25
NOTE 8. STOCK PLANS:
The amended Restricted Stock Compensation Plan of 1969 and the Corporate
Development Incentive Plan of 1986 provide for the granting of common
stock to key employees as performance and incentive bonuses. The shares
granted may not be transferred, sold, pledged or otherwise disposed of
prior to the lapse of certain restrictions. Under the plans, $700 was
charged to earnings for the Transition Period ($1,400 for 1999, and
$2,129 for 1998). At January 31, 2000 there were 213,096 shares
available to be granted under these plans to qualified employees.
Options to purchase common stock have been granted to key employees
under various plans at option prices not less than the fair market value
on the date of the grant. At January 31, 2000, 178 officers and other
key employees held options to purchase shares. The options expire 10
years after grant on dates ranging from June 2000 to August 2009 and are
exercisable in cumulative installments only after stated intervals of
time and are conditional upon active employment, except for periods
following disability or retirement.
The Company uses the intrinsic value method in accounting for its stock
option plans. Had compensation cost for the Company's stock options
been recognized based upon the fair value on the grant date under the
methodology prescribed by SFAS 123, "Accounting for Stock-based
Compensation," the Company's net earnings and earnings per share for the
nine months ended January 31, 2000 and the years ended April 30, 1999,
and 1998 would have been impacted as follows:
- ------------------------------------------------------------------------------
Fiscal period (Note 1) ended in, 2000 1999 1998
- ------------------------------------------------------------------------------
Reported net earnings $41,000 $1,953 $50,134
Pro forma net earnings $39,250 $ 613 $49,219
Reported diluted earnings per share $ 1.48 $ .07 $ 1.85
Pro forma diluted earnings per share $ 1.42 $ .02 $ 1.82
The fair value of options granted (which is recorded as expense over the
option vesting period in determining the pro forma impact), is estimated
on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
- ------------------------------------------------------------------------------
Fiscal period (Note 1) ended in, 2000 1999 1998
- ------------------------------------------------------------------------------
Expected option life 5 YEARS 5 years 5 years
Risk-free interest rate 5.6% 5.1% 5.8%
to 5.8% to 5.6% to 6.6%
Expected volatility of
Kellwood stock 36% 34% 35%
Expected dividend yield
on Kellwood stock 2.7% 2.0% 2.5%
The weighted-average grant date fair value of options granted was $6.93
to $7.32 for the Transition Period, $8.33 to $10.82 for 1999, and $8.42
to $11.36 for 1998. The pro forma effect on net earnings for the
Transition Period, 1999 and 1998 is not representative of the pro forma
effect on net earnings in future years because it does not take into
consideration pro forma compensation related to grants made prior to
1996. Presented below is a summary of stock option plans' activity for
the years and as of the dates shown:
- ---------------------------------------------------------------------------------------------------------------------
Fiscal period ended in, 2000 1999 1998
------------------------ ------------------------ ------------------------
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ---------------------------------------------------------------------------------------------------------------------
Beginning Balance 1,982,132 $22.34 1,796,911 $19.57 1,931,765 $16.59
Granted 533,604 $23.66 339,950 $32.18 377,800 $26.40
Exercised (107,834) $ 9.07 (151,829) $11.69 (429,755) $14.45
Canceled (28,210) $25.87 (2,900) $22.26 (82,899) $ 7.80
--------- --------- ---------
Ending Balance 2,379,692 $22.63 1,982,132 $22.34 1,796,911 $19.57
========= --------- ---------
26
Options outstanding and exercisable at January 31, 2000 include the
following:
- ------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options exercisable
--------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Number Exercise Number Exercise
Prices Life (000's) Price (000's) Price
- ------------------------------------------------------------------------------------------------------------------------
$ 6.04 - 9.92 1 years 15.9 $ 7.39 15.9 $ 7.39
$12.29 - 12.75 1 years 46.0 $12.35 46.0 $12.35
$16.13 - 19.96 5 years 635.3 $17.78 483.1 $18.30
$20.31 - 27.44 7 years 1,312.9 $22.75 589.0 $21.49
$32.28 - 36.00 8 years 369.6 $32.51 87.5 $32.85
------- -------
$ 6.04 - 36.00 7 years 2,379.7 $22.63 1,221.5 $20.51
======= =======
NOTE 9. CAPITAL STOCK:
The reported outstanding shares of common stock have been reduced by
treasury stock totaling 5,300,655 shares at January 31, 2000 (3,589,395
at April 30, 1999, and 3,575,572 at April 30, 1998).
Warrants for the right to purchase Koret common stock equivalent to
approximately 364,000 shares of Kellwood Company common stock were
issued on June 30, 1992. These warrants were exercised in April 1999 at
an aggregate price of $550.
Authorized capital includes 500,000 shares of preferred stock, none of
which have been issued. Nonvoting share purchase rights, exercisable
only upon satisfaction of certain conditions, entitle the holder to
purchase Series A Junior Preferred Stock (160,000 shares reserved) or,
under certain conditions, common shares at prices specified in the
rights agreement. None of the rights were exercisable as of January 31,
2000.
On November 23, 1999 the Board of Directors authorized the Company to
repurchase up to ten percent of the outstanding shares of its Common
Stock (up to approximately 2.8 million shares) in the open market or
through privately negotiated transactions at management's discretion and
depending on market conditions. Pursuant to this authorization, on
December 9, 1999 the Company purchased 1.68 million shares through a
privately negotiated transaction with an institutional holder at $18.00
per share, which was below the market price. Additionally, during
February 2000 the Company purchased 1.11 million shares in open market
transactions at an average price of $16.32 per share.
On March 2, 2000 the Board of Directors authorized the Company to
repurchase up to ten percent of the outstanding shares of its Common
Stock (up to approximately 2.5 million shares) in the open market or
through privately negotiated transactions at management's discretion and
depending on market conditions. Purchases will be financed out of the
Company's cash resources. As of March 28, 2000, the Company had
purchased 1.17 million shares pursuant to this authorization at an
average cost of $17.07 per share. As discussed in Note 6, certain debt
covenants may limit purchases under this authorization.
NOTE 10. INCOME TAXES:
The provision for income taxes consisted of:
- ------------------------------------------------------------------------------
Fiscal period (Note 1) ended in, 2000 1999 1998
- ------------------------------------------------------------------------------
Current:
Domestic:
Federal $13,708 $33,508 $31,144
State 2,184 6,873 5,677
Foreign 1,378 1,609 2,710
------- ------- -------
17,270 41,990 39,531
Deferred (primarily federal) 10,330 (4,790) (2,031)
------- ------- -------
$27,600 $37,200 $37,500
======= ======= =======
27
Current income taxes are the amounts payable under the respective tax
regulations on each year's earnings and on foreign earnings remitted
during the year. A reconciliation of the federal statutory income tax
rate to the effective tax rate (provision for taxes) was as follows:
- -------------------------------------------------------------------------------
Fiscal period (Note 1) ended in, 2000 1999 1998
- -------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Foreign tax differences 1.7 (1.7) (1.8)
Amortization of intangible assets 1.4 3.6 3.9
State tax 2.3 5.0 4.0
Unusual items - 53.9 -
Other (0.2) (0.8) 1.7
---- ---- ----
40.2% 95.0% 42.8%
==== ==== ====
Deferred income tax liabilities and assets consisted of the following:
- -------------------------------------------------------------------------------
Fiscal period (Note 1) ended in, 2000 1999 1998
- -------------------------------------------------------------------------------
Employee related costs $ 26,837 $ 24,629 $ 22,976
Depreciation and amortization 6,828 7,016 7,955
Allowance for asset valuations (18,391) (21,600) (20,754)
Other (1,357) (6,458) (1,800)
-------- -------- --------
$ 13,917 $ 3,587 $ 8,377
======== ======== ========
Included in:
(Prepaid taxes and expenses) $(28,344) $(35,563) $(31,308)
Deferred income taxes and other 42,261 39,150 39,685
-------- -------- --------
$ 13,917 $ 3,587 $ 8,377
======== ======== ========
Earnings before income taxes included $15,809, $15,368 and $10,773 of
Smart Shirts, Ltd. earnings in the Transition Period, 1999 and 1998
respectively.
Federal income taxes are provided on earnings of foreign subsidiaries
except to the extent that such earnings are expected to be indefinitely
reinvested abroad. Undistributed foreign earnings considered to be
indefinitely reinvested abroad totaled $45,000 through January 31, 2000.
NOTE 11. EARNINGS PER SHARE
A reconciliation of basic earnings per common share and diluted earnings
per common share follows:
- ---------------------------------------------------------------------------------------
Basic Earnings Per Share Computation 2000 1999 1998
- ---------------------------------------------------------------------------------------
Numerator:
Net earnings $41,000 $ 1,953 $50,134
Denominator (000's):
Average common
shares outstanding 27,505 26,765 26,096
------- ------- -------
Basic Earnings Per Share $ 1.49 $ .07 $ 1.92
======= ======= =======
28
- ----------------------------------------------------------------------------------
Diluted Earnings Per Share Computation 2000 1999 1998
- ----------------------------------------------------------------------------------
Numerator:
Net earnings $41,000 $ 1,953 $50,134
Impact of assumed conversions:
debenture interest after-tax 14 27 37
------- ------- -------
$41,014 $ 1,980 $50,171
------- ------- -------
Denominator (000's):
Average common
shares outstanding 27,505 26,765 26,096
Impact of debenture conversions 43 75 93
Impact of stock options 200 765 926
------- ------- -------
27,748 27,605 27,115
------- ------- -------
Diluted Earnings Per Share $ 1.48 $ .07 $ 1.85
======= ======= =======
- Nine-month transition period (see Note 1).
- 1999 Net earnings and Earnings per share are net of unusual
charges for merger costs, facilities shut-down, and goodwill impairment
totaling $62,338 (pretax)
NOTE 12. SIGNIFICANT CUSTOMERS:
During the nine-month period ended January 31, 2000 one customer (J. C.
Penney Company, Inc.) accounted for 11.2% of the Company's consolidated
net sales (as compared to 10.1% in the comparable period in the prior
year). Accounts receivable included $33,548 due from this customer at
January 31, 2000. No single customer provided 10% or more of
consolidated net sales in either of the fiscal years ended April 30,
1999 or April 30, 1998.
NOTE 13. COMMITMENTS AND CONTINGENCIES:
There are various lawsuits and other legal proceedings against the
Company. Management and general counsel are of the opinion that the
ultimate disposition of such litigation will have no material adverse
effect on the Company's financial position or results of operations.
NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
- ------------------------------------------------------------------------------------------------------
Quarter ended July October January April
- ------------------------------------------------------------------------------------------------------
TRANSITION PERIOD:
Net sales $470,575 $633,456 $461,230
Gross profit 100,716 137,799 89,063
Net earnings 9,557 26,066 5,377
Earnings per share - Basic .34 .94 .20
Earnings per share - Diluted .34 .93 .20
FISCAL 1999:
Net sales $483,283 $600,540 $438,880 $628,444
Gross profit 98,462 132,542 91,369 143,493
Net earnings 8,652 22,352 1,960 (31,011)
Earnings per share - Basic .33 .83 .07 (1.13)
Earnings per share - Diluted .32 .82 .07 (1.13)
Other income for the year and for the quarter ended January 31,
2000 included $1,968 (pretax; $1,181 after-tax) of unusual non-
recurring financial items including a gain on the sale of a
building.
January quarter 1999 Net earnings include the impact of Merger
costs (pretax) of $1,112.
April quarter 1999 Net earnings include the impact of Merger costs
(pretax) of $5,289, as well as provisions for facilities shut-down
of $6.8 million and goodwill impairment of $48.9 million,
respectively.
29
NOTE 15. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION:
The Company and its subsidiaries are principally engaged in the apparel
and related soft goods industry. The Company's business units are
organized by product line. For purposes of SFAS 131, these have been
aggregated into the following five reportable segments:
* WOMEN'S BRANDED SPORTSWEAR: POPULAR-TO-MODERATE, which
includes blazers, dresses, sweaters, blouses, vests, other
tops, skirts, pants, skorts, and other bottoms with "out the
door" prices below $50.
* WOMEN'S BRANDED SPORTSWEAR: BETTER-TO-BRIDGE, which includes
upper price point women's sportswear sold principally to
small specialty stores, regional department stores and
catalog houses.
* PRIVATE LABEL APPAREL, which covers a broad range of product
from intimate apparel and loungewear to outerwear,
activewear, pants and jeans, workwear and sweaters. The
Private Label business partners with retailers in the design
and delivery of floor ready merchandise and programs to meet
targeted price points.
* SMART SHIRTS, which is a leading manufacturer of woven dress
and sport shirts in Hong Kong and China, with additional
capacity in Sri Lanka, Maldives, Indonesia and Singapore.
* RECREATION PRODUCTS. American Recreation Products is a
leading company in the camping products industry. Major
products include tents, sleeping bags, backpacks and
technical apparel and accessories under the Wenzel(R),
ROKK(R), Slumberjack(R), Kelty(R) and Sierra Designs(R)
brands.
Management evaluates the performance of its operating segments
separately to individually monitor the different factors affecting
financial performance. Segment Operating Earnings includes
substantially all of the segment's costs of production (on a FIFO
basis), distribution and administration. Kellwood manages the following
expenses at the corporate level. Accordingly, they are not allocated to
the Segments:
* Corporate general and administrative expenses,
* Amortization of intangible assets,
* Merger and acquisition costs, including costs of the Koret
merger,
* Provisions for facilities shut-down (primarily plants
serving the Private Label segment),
* Provision for goodwill impairment (which pertained to the
goodwill of businesses in the Better-to-bridge (70%) and
Popular-to-moderate (30%) segments, and
* Interest income and expense, and Income taxes.
Segment net assets measures net working capital, net fixed assets and
other noncurrent operating assets and liabilities of the segment.
Depreciation and amortization excludes amortization of intangible assets
accounted for at the corporate level. Debt is not allocated to the
segments. Capital expenditures exclude the cost of long lived assets
included in acquisitions accounted for under purchase accounting.
- ------------------------------------------------------------------------------------
Fiscal period (Note 1) ended in: 2000 1999 1998
- ------------------------------------------------------------------------------------
Net Sales:
Popular-to-Moderate $ 992,893 $1,381,688 $1,296,100
Better-to-Bridge 104,246 167,279 197,991
Private Label Apparel 203,728 255,939 289,199
Smart Shirts 168,620 202,662 173,284
Recreation Products 95,774 143,579 137,815
---------- ---------- ----------
Kellwood total $1,565,261 $2,151,147 $2,094,389
========== ========== ==========
Operating earnings:
Popular-to-Moderate $ 70,797 $ 123,197 $ 105,202
Better-to-Bridge (1,442) 4,485 5,381
Private Label Apparel 17,582 28,129 34,244
Smart Shirts 18,249 16,634 14,759
Recreation Products 4,835 11,504 10,515
---------- ---------- ----------
Total segments 110,021 183,949 170,101
Amortization of Intangible assets (4,865) (15,855) (16,562)
Interest expense (22,654) (33,883) (35,142)
Impairment, restructuring, & merger - (62,338) --
General corporate and other (13,902) (32,720) (30,763)
---------- ---------- ----------
Earnings before income taxes $ 68,600 $ 39,153 $ 87,634
========== ========== ==========
30
- ------------------------------------------------------------------------------
Fiscal period (Note 1) ended in: 2000 1999 1998
- ------------------------------------------------------------------------------
Net Assets at end of year:
Popular-to-Moderate $438,605 $485,615 $510,368
Better-to-Bridge 36,811 51,843 82,572
Private Label Apparel 126,646 106,910 96,303
Smart Shirts 71,396 66,152 75,541
Recreation Products 53,663 51,364 54,266
Corporate and Other 80,303 22,429 24,307
-------- -------- --------
Kellwood total $807,424 $784,314 $843,357
======== ======== ========
Capital expenditures:
Popular-to-Moderate $ 4,270 $ 13,008 $ 8,407
Better-to-Bridge 1,050 4,803 1,343
Private Label Apparel 4,111 21,659 7,361
Smart Shirts 3,571 2,829 3,314
Recreation Products 524 666 431
Corporate and Other 9,293 8,507 784
-------- -------- --------
Kellwood total $ 22,819 $ 51,472 $ 21,640
======== ======== ========
Depreciation expense:
Popular-to-Moderate $ 4,804 $ 5,699 $ 5,169
Better-to-Bridge 1,283 1,769 2,190
Private Label Apparel 4,958 4,822 4,492
Smart Shirts 2,028 3,350 3,117
Recreation Products 508 612 604
Corporate and Other 660 1,251 1,593
-------- -------- --------
Kellwood total $ 14,241 $ 17,503 $ 17,165
======== ======== ========
Substantially all sales are to U.S. customers. Sales and transfers
between segments were not significant. Substantially all of the assets
of Smart Shirts are located in Asia.
NOTE 16. COMPARATIVE RESULTS (UNAUDITED):
In August 1999 the Company changed its fiscal year-end from April 30 to
January 31. This change resulted in a short fiscal year covering the
nine month transition period from May 1, 1999 to January 31, 2000. The
following unaudited consolidated financial information for the nine
months ended January 31, 1999 is presented to provide comparative
interim results to those for the nine months ended January 31, 2000
which are included in the accompanying Consolidated Statement of
Earnings:
- ------------------------------------------------------------------
Nine months ended January 31, 2000 1999
AUDITED Unaudited
- ------------------------------------------------------------------
Net Sales $1,565,261 $1,522,703
Gross Profit 327,578 322,373
Earnings before income taxes 68,600 56,673
Income taxes 27,600 23,709
---------- ----------
Net Income $ 41,000 $ 32,964
========== ----------
Earnings per share - diluted $ 1.48 $ 1.20
========== ----------
31
KELLWOOD COMPANY AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
(Dollars in thousands except per share data)
- -------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Period ended or as of 1/31/2000 4/30/1999 4/30/1998 4/30/1997 4/30/1996
Net sales $1,565,261 $2,151,147 $2,094,389 $1,787,530 $1,741,799
Net earnings 41,000 1,953 50,134 34,558 31,857
Earnings per share:
Basic 1.49 .07 1.92 1.34 1.24
Diluted 1.48 .07 1.85 1.29 1.20
Cash dividends declared
per share .48 .64 .64 .60 .60
Working capital 576,120 465,535 454,625 279,036 278,710
Total assets 1,097,853 1,054,212 1,103,890 956,368 886,690
Long-term debt 346,479 227,659 252,508 122,980 149,328
Total debt 361,554 338,126 413,697 303,096 302,168
Shareowners' Equity 445,870 446,188 429,660 386,257 366,722
Equity per Share 17.04 16.09 16.32 15.00 14.19
- Nine Months.
- 1999 Net earnings and earnings per share are net of unusual
charges for merger costs, facilities shut-down, and goodwill impairment
totaling $62,338 (pretax)
All data have been adjusted to reflect the 1999 merger with Koret, Inc
which was accounted for as a pooling of interests.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS OF THE REGISTRANT AS OF JANUARY 31, 2000
Raymond F. Bentele, Age 63
- --------------------------
Director of the Company since 1993. Director, Mallinckrodt Inc.
(manufacturer of medical products), since 1990. Director, IMC Global,
Inc. (food crop mineral nutrients), since 1994. Director, Leggett &
Platt, Inc. (manufacturer of engineered products for the home and
commercial furnishings industry), since 1995.
Edward S. Bottum, Age 66
- ------------------------
Director of the Company since 1981. Managing Director, Chase Franklin
Corporation (broker dealer), since 1991. Trustee, The Time Horizon
Funds (mutual funds family), 1995 to 1999. Chairman, Learning Insights,
Inc. (publisher of interactive multimedia training products), since
1996. Trustee, Pacific Innovations Trust (mutual fund for variable
annuities), 1996 to 2000. Director, CNA Income Shares, Inc. (closed end
fixed income fund), since 1999. Director, Alleghany Asset Management,
Inc. (asset manager), since 1999. Director, PetMed Express.com, Inc.
(catalog and web distributor of pet pharmaceuticals and accessories),
since 1999. Director, Pacific Horizon Fund (mutual fund family), 1998
to 1999. Senior Advisor, American International Group (AIG) (commercial
insurance), since 1994.
Kitty G. Dickerson, Ph.D., Age 59
- ---------------------------------
Director of the Company since 1991. Professor and Chair of the
Department of Textile and Apparel Management, University of Missouri,
Columbia, Missouri from 1986 to Present. President, International
Textile and Apparel Association, 1990-1991.
Leonard A. Genovese, Age 65
- ---------------------------
Director of the Company since 1995. President, Genovese Drug Stores,
Inc. 1974 to 1999. Chairman of the Board of Genovese Drug Stores, Inc.
(retail chain drug stores), 1978 to 1999. Director of Eckerd Drug Corp.
since 1999. Director, TR Financial Corp. (banking), 1993 to 1999.
Director, Aid Auto Stores, Inc. (automotive parts supply), 1995 to 1998.
Director, The Stephan Company (hair care), since 1997. Director, Roslyn
Bancorp Inc. (banking), since February, 1999.
Martin J. Granoff, Age 63
- -------------------------
Director of the Company since 1999. Chairman of Val d'or Inc. (men's
and women's knitwear), since 1959. Chairman and Chief Executive Officer
of Koret, Inc., 1997 to 1999. Chairman of the American Apparel
Manufacturer's Association, 1998 to 1999. Director, National Textiles
(spinning and knitting), since 1997. Director, Manive Investment, LLC
(biotechnology), since 1998.
Jerry M. Hunter, Age 47
- -----------------------
Director of the Company since 1994. Partner at Bryan Cave (law firm)
from December 1993 to present.
James C. Jacobsen, Age 64
- -------------------------
Director of the Company since 1975. Vice Chairman since 1994.
33
James S. Marcus, Age 70
- -----------------------
Director of the Company since 1965. Limited Partner, The Goldman Sachs
Group, L.P. (investment bankers), 1989 to 1999. Director of American
Biltrite, Inc. (industrial flooring products and fashion jewelry).
Director, Insight Communications Company, since 1999.
William J. McKenna, Age 72
- --------------------------
Director of the Company since 1982. Chairman Emeritus of the Company
since 1999. Chairman of the Board of the Company, 1991 to 1999.
Chairman and Chief Executive Officer from 1994 to 1997. Chairman,
President and Chief Executive Officer from 1991 to 1994. Chief Executive
Officer since 1984. President from 1982 to 1994. Director of Genovese
Drug Stores, Inc. from 1979 to 1999. Director of United Missouri
Bancshares, Inc. since 1984.
Hal J. Upbin, Age 61
- --------------------
Director of the Company since 1995. Chairman of the Board, President
and Chief Executive Officer since 1999. Chief Executive Officer of the
Company since 1997. President and Chief Operating Officer of the
Company from 1994 to 1997.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT AS OF JANUARY 31, 2000
Name of Officer Age Office and Employment During the Last Five Fiscal Years
- --------------- --- ---------------------------------------------------------
Hal J. Upbin 61 Chairman of the Board, President and Chief Executive
Officer since 1999; President and Chief Executive Officer
(1997-1999); President and Chief Operating Officer
(1994-1997)
James C. Jacobsen 64 Vice Chairman since 1994;
Enoch Harding, Jr. 68 Executive Vice President Operations since 1995;
W. Lee Capps III 52 Vice President Corporate Development since 1998;
Director of Corporate Development (1996-1998);
Chief Financial Officer of American Recreation Products,
Inc. (subsidiary) (1987-1996).
Gerald M. Chaney 53 Vice President Finance and Chief Financial Officer since
1998; Executive Vice President of Administration and
Chief Financial Officer, Petrie Retail, Inc. (1996-1998);
Executive Vice President and Chief Operating Officer,
Canadians Corp. (1995-1996); Executive Vice President
Operations and Chief Financial Officer, Crystal Brands
(1985-1995)
John R. Henderson 51 Vice President Merchandising since 1995;
Director of Merchandising (1993-1995);
Lawrence E. Hummel 57 Vice President Controller since 1992;
Roger D. Joseph 58 Vice President Treasurer since 1992;
Leon M. McWhite 57 Vice President Human Resources since 1995;
Vice President (1994-1995)
Thomas H. Pollihan 50 Vice President, Secretary and General Counsel since 1993
John A. Turnage 54 Vice President Manufacturing since 1997;
Vice President Manufacturing and Sourcing (1989-1997)
34
(c) The information called for with respect to the identification of
certain significant employees is not applicable to the registrant.
(d) There are no family relationships between the directors and
executive officers listed above. There are no arrangements or
understandings between any named officer and any other person
pursuant to which such person was selected as an officer.
(e) Provided in (a) and (b) above.
(f) There are no legal proceedings involving directors, nominees for
directors, or officers.
(g) The information called for with respect to this item is not
applicable to the registrant.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Securities Exchange Act of 1934 requires all executive officers
and directors to report any changes in the ownership of common stock of
the Company to the Securities and Exchange Commission, the New York Stock
Exchange and the Company.
Based solely upon a review of these reports and written
representations that no additional reports were required to be filed
in the Transition Period, the Company believes that all reports were
filed on a timely basis, with the exception of Fred W. Wenzel,
Advisory Director and Chairman Emeritus, who filed a Form 4 subsequent
to the deadline.
35
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows the amount of all compensation earned for
services in all capacities to the Company for the last three fiscal
years for (i) the Chief Executive Officer, (ii) the other four most
highly paid executive officers, and (iii) an additional individual for
whom disclosure would have been provided but for the fact that the
individual was not serving as an executive officer at the end of the
fiscal year (the "Named Officers") at January 31, 2000.
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
------------------------------------- ------------------------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Annual Restricted All Other
Principal Compensation Stock Options LTIP Compensation
Position Year Salary ($) Bonus ($) ($) Award(s) ($) (#) Payouts ($) ($)
-------- ---- ---------- --------- --- ---------------- --- ------------ --------
Hal J. Upbin
Chairman, President
And Chief Executive
Officer 2000 $662,500 0 0 0 47,000 0 $2,290
1999 725,000 $500,000 0 278,662 50,000 0 4,608
1998 570,833 400,000 0 343,332 79,000 0 4,608
William J. McKenna
Director 2000 $525,000 0 0 0 47,000 0 10,762
1999 900,000 $590,000 0 $229,345 61,900 0 $17,482
1998 900,000 450,000 0 582,384 76,000 0 969,478
Enoch Harding, Jr.
Executive
Vice President
Operations 2000 $301,333 0 0 0 13,000 0 $2,835
1999 360,000 $375,000 0 $113,248 13,600 0 4,550
1998 327,000 350,000 0 144,804 16,000 0 4,992
James C. Jacobsen
Vice Chairman
and Director 2000 $288,750 0 0 0 20,000 0 $2,693
1999 370,000 $188,100 0 $128,223 18,200 0 4,608
1998 370,000 175,000 0 198,660 23,000 0 4,474
Gerald M. Chaney
Vice President Finance
And Chief Financial
Officer 2000 $232,500 0 0 0 11,000 0 $5,575
1999 110,385 67,800 0 0 0 0 0
John R. Henderson
Vice President
Merchandising 2000 $195,133 0 0 0 0 $3,458
1999 250,000 $104,300 0 $46,875 9,800 0 4,762
1998 240,000 60,000 0 64,020 10,000 0 4,963
- ------------------
This refers to the Transition Period of May 1, 1999 through January 31,
2000.
The Corporate Development Incentive Plan which provides a restricted stock
award contingent on the achievement of predetermined performance criteria
based on the Company's fiscal year performance, vests over a three-year
period. Dividends are paid on the restricted stock. The amounts shown in
the table represent the dollar value based on the stock price at the award
date. The restricted awards attributable to the Named Executives for
prior fiscal years and in escrow as of January 31, 2000, which are still
subject to restrictions under the Corporate Development Incentive Plan,
valued at the closing price of $17.625 on January 31, 2000, are as
follows: H. J. Upbin, 16,930 shares at $298,391; E. Harding, Jr., 7,354
shares at $129,614; J. C. Jacobsen, 9,425 shares at $166,116, and J. R.
Henderson, 3,200 shares at $56,400. William J. McKenna and Gerald M.
Chaney did not hold any shares in escrow as of January 31, 2000.
Excludes income accrued for Executive Deferred Compensation Plan because
at prime plus 1% it is not above market rate.
H. J. Upbin has a contract of employment through January 31, 2004.
Effective December 1, 1999, his salary was increased to $1,000,000.
Employer matching 401(k) plan contribution.
36
W. J. McKenna was also Chairman until November 30, 1999. He has a
consulting contract to serve in an advisory capacity through November 30,
2001.
W. J. McKenna retired from Kellwood Company on November 30, 1999 and
received his final payment from the Kellwood Company Pension Plan.
W.J. McKenna received a lump sum payment under the required minimum
distribution rules of the Kellwood Company Pension Plan for his 16.9 years
of service. This number includes $12,874 lump sum payable April 1, 1999
and $4,608 employer matching 401(k) plan contribution.
At the age of 70-1/2, W. J. McKenna was eligible for a lump sum payment
under the required minimum distribution rules of the Kellwood Company
Pension Plan for his 15.9 years of service. This number includes $964,870
lump sum payable April 1, 1998 and $4,608 employer matching 401(k) plan
contribution.
By agreement with the Company, E. Harding will be paid a deferred
compensation benefit under a straight-life annuity of $1,032 per month
upon retirement, continuing during his lifetime.
G.M. Chaney became employed by the Company on December 21, 1998.
37
The following two tables contain information covering stock options
granted during the transitional fiscal year ended January 31, 2000, to
the Named Officers and the number and value of unexercised stock options
held by those officers at the end of the last fiscal year. No SARs were
granted in conjunction with the options.
OPTION GRANTS TABLE
OPTION GRANTS DURING TRANSITIONAL 2000 FISCAL YEAR
Individual Grants
----------------- Potential Realizable Value
at Assumed Annual Rates of
% of Total Stock Price Appreciation
Options for Option Term
Granted to Exercise or ---------------
Options Employees in Base Price
Name Granted (#) Fiscal Year ($/Share) Expiration Date 5% ($) 10% ($)
---- ----------- --------------- --------- --------------- ------ -------
William J. McKenna 47,000 8.91 $23.68 05/27/09 $699,935 $1,773,772
Hal J. Upbin 43,500 8.25 23.68 05/27/09 647,812 1,641,683
3,500 .66 23.68 05/27/09 52,123 132,089
------ ---- -------- ----------
47,000 8.91 699,935 1,773,772
====== ==== ======== ==========
Enoch Harding, Jr. 8,000 1.52 23.68 05/27/09 119,138 301,919
5,000 .95 23.68 05/27/09 74,461 188,699
------ ---- -------- ----------
13,000 2.47 193,599 490,618
====== ==== ======== ==========
James C. Jacobsen 15,600 2.96 23.68 05/27/09 232,319 588,741
4,400 .83 23.68 05/27/09 65,526 166,055
------ ---- -------- ----------
20,000 3.79 297,845 754,796
====== ==== ======== ==========
John R. Henderson 4,500 .85 23.68 05/27/09 67,015 169,829
1,500 .29 23.68 05/27/09 22,338 56,610
------ ---- -------- ----------
6,000 1.14 89,353 226,439
====== ==== ======== ==========
Gerald M. Chaney 7,000 1.33 23.68 05/27/09 104,246 264,179
4,000 .76 23.68 05/27/09 59,569 150,959
------ ---- -------- ----------
11,000 2.09 163,815 415,138
====== ==== ======== ==========
- -------------------
Total options granted during transitional fiscal year 2000 were 527,604
shares to the Named Officers and all other employees.
38
OPTION EXERCISES IN TRANSITIONAL 2000 FISCAL YEAR
AND FY-END 1/31/00 VALUE TABLE
(a) (b) (c) (d) (e)
Value of Unexercised
Number of In-the-Money
Options Options
at FY-End (#) at FY-End ($)
01/31/00 01/31/00
Shares Acquired on
Name Exercise (#) Value Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ------------------ ------------------------- -------------------------
William J. McKenna 0 0 351,181 / 203,766 74,755 / 76,827
Hal J. Upbin 0 0 137,036 / 157,024 45,134 / 30,089
Enoch Harding, Jr. 0 0 20,920 / 44,880 7,602 / 15,204
James C. Jacobsen 0 0 1,590 / 67,660 36,110 / 24,073
John R. Henderson 0 0 26,560 / 26,240 10,860 / 7,240
Gerald M. Chaney 0 0 0 / 11,000 0 / 0
RETIREMENT PROGRAM
PENSION PLAN
The Kellwood Company Pension Plan is a defined benefit plan
covering a substantial number of all domestic employees of the Company
and its subsidiaries. The basic annual pension benefit under the Plan
for service after April 30, 1989 is equal to 12 times 0.5% of average
monthly earnings times credited service after April 30, 1989, plus 12
times 0.5% of average monthly earnings, in excess of covered
compensation, multiplied by years of credited service commencing on or
after May 1, 1989 up to 35 years. Covered compensation is defined as
the average social security wage base for the 35 years before an
employee reaches social security retirement age. Average monthly
earnings under the Plan is the average of an employee's monthly earnings
defined under the Plan paid during the highest five consecutive full
calendar years within an employee's credited service. The amount of
final benefits is not and cannot readily be calculated for each
individual by the Plan's regular actuaries.
Plan participants as of April 30, 1989, who continued as employees
after April 30, 1989, will receive their accrued benefits as of April
30, 1989 plus benefits earned after that date. For employees earning
$150,000 per year or more, an amended accrued monthly benefit as of
April 30, 1994 was calculated. The amended accrued monthly benefits at
April 30, 1994 for the persons listed in the Summary Compensation Table
other than W. J. McKenna were as follows: H. J. Upbin, President and
Chief Operating Officer, $615.06; E. Harding, Jr., Executive Vice
President Operations, $1,766.95; J. C. Jacobsen, Vice Chairman,
$5,560.28; and John R. Henderson, Vice President Merchandising, $245.79.
Upon retirement, Mr. Harding will also be paid during his lifetime a
deferred compensation benefit under a straight-life annuity of $1,032
per month in recognition of his previous employment between 1972 and
1977. As of April 30, 1999, of the officers listed in the Summary
Compensation Table, Mr. Upbin, Mr. Harding, Mr. Jacobsen and Mr.
Henderson have approximately five years of credited service subsequent
to May 1, 1994. The table below is indicative of annual benefits for
service after April 30, 1989, using covered compensation for employees
retiring at normal retirement age in calendar 2000. Benefits for
employees who retire in subsequent years will be lower reflecting
increases in the average social security wage base.
39
PENSION PLAN TABLE
Years of Service
--------------------------------------------------------------------
Remuneration 5 10 15 20 30
------------ --- ---- ---- ---- ----
$ 50,000 $ 1,623 $ 3,245 $ 4,868 $ 6,490 $ 9,735
100,000 4,123 8,245 12,368 16,490 24,735
125,000 5,373 10,745 16,118 21,490 32,235
150,000 6,623 13,245 19,868 26,490 39,735
170,000 7,623 15,245 22,868 30,490 45,735
200,000 7,267 14,535 21,802 29,070 43,604
250,000 7,267 14,535 21,802 29,070 43,604
350,000 7,267 14,535 21,802 29,070 43,604
500,000 7,267 14,535 21,802 29,070 43,604
750,000 7,267 14,535 21,802 29,070 43,604
1,000,000 7,267 14,535 21,802 29,070 43,604
1,300,000 7,267 14,535 21,802 29,070 43,604
Section 401(a)(17) of the Internal Revenue Code limits annual
earnings for purposes of calculating benefits under Kellwood's pension
plan to $170,000. Section 415 of the Internal Revenue Code limits
annual benefits payable from the plan at age 65 to $130,000. However,
benefits accrued prior to the enactment of these limitations were not
reduced accordingly.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation
for their services as directors. Non-employee directors were
compensated for their services as the rate of $23,000 per annum. In
addition, each non-employee director receives $1,000 for each Board
Meeting and $1,000 for each Committee meeting attended, not to exceed
$2,000 for any one day, and is reimbursed for expenses incurred in
attending those meetings.
Under the 1995 Stock Option Plan for Nonemployee Directors, each
person who remains or becomes a Nonemployee Director of the Company is
granted an option to purchase 1,000 shares of Common Stock on the first
business day after the date of the first annual meeting to which the
person was elected or remained a Nonemployee Director. The option price
for each share granted to a Nonemployee Director is 100% of the fair
market value of the shares subject to option on the date of the option
grant. The option price may be paid by check or by the delivery of
shares of Common Stock then owned by the participant. On May 28, 1998,
the Board of Directors approved a grant of 100 shares of restricted
common stock to each Nonemployee Director to be issued out of shares
held in its treasury effective immediately following the Annual Meeting
each year.
Mr. William McKenna retired as an employee on November 30, 1999.
A Consulting Agreement engages his services through November 30, 2001,
in a consulting and advisory capacity at the annual rate of $200,000.
Mr. McKenna continues to serve as a Director of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no interlocks or insider participation with any
executive officers of the Company or with the members of the Committee.
The Company's Board of Directors has established a three member
Compensation and Stock Option Committee (the "Committee"). Each member
of the Committee is a non-employee director. The Committee's
responsibilities include approving salaries of executives of the
Company, administering and interpreting compensation plans, and granting
cash bonuses, stock bonuses and other benefits under such plans. The
Compensation and Stock Option Committee met two times during the the
Transition Period. The members of the Compensation and Stock Option
Committee were J.S. Marcus, Chairman, R.F. Bentele and L.A. Genovese.
40
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE ON
EXECUTIVE COMPENSATION
This Report and the following Performance Graph shall not be
deemed to be incorporated by reference by any general statement which
incorporates by reference this Form 10-K into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, and they
shall not otherwise be deemed filed under such Acts.
OVERVIEW
The Securities and Exchange Commission has adopted rules that are
designed to enhance disclosure of the policies of companies regulated by
the Commission in regard to executive compensation. In response to
these rules the Committee has prepared a report, as outlined below, on
the Company's policies and practices with respect to executive
compensation.
The Company's executive officer compensation program consists of
base salary, annual cash incentive compensation, long-term incentive
compensation in the form of stock options and stock awards, and various
benefits including medical, pension, and 401(k) savings plans generally
available to employees of the Company.
COMPENSATION POLICIES
The Committee's executive compensation policies are designed to
provide competitive levels of compensation which integrate pay with the
Company's annual and longer term performance goals, reward above average
performance, recognize individual initiative and achievements, assist
the Company in attracting and retaining qualified executives and build
the ownership of Company stock by key managers. The Committee is of the
view that stock ownership by management and stock-based performance
compensation arrangements are beneficial in aligning the interests of
management with the interests of the Company's shareowners which
ultimately enhances shareowner value. The Committee further believes
that bonus and other forms of incentive-based compensation encourage
management to attain preset commercial goals for the Company.
BASE SALARY
The Committee reviews each executive officer's salary annually
(usually in May) and considers recommendations submitted by the Chief
Executive Officer. In determining appropriate salary levels, the
Committee considers a variety of sources, including industry surveys,
proxy statements, and outside consultants. The Committee also considers
the level and scope of responsibility, experience, Company and
individual performance, and internal equity. The Committee uses its
discretion to set executive compensation where in its judgment external,
internal, or an individual's circumstances warrant. By design, the
Committee strives to set executives' salaries at competitive market
levels. Increases are based on comparable companies' practices, the
Company's achievement of its financial plan, and the individual's
performance. The salary increases in the Transition Period were based
on the Committee's review of the return on equity, net earnings as a
percent of sales and earnings per share growth over the prior five
years.
ANNUAL CASH INCENTIVES
A Performance Management and Incentive Compensation Plan is
extended to executives, managers and professionals whose positions have
a significant impact on the Company's operating results. Annual cash
incentive compensation awards are made to participants to recognize and
reward corporate, business unit and individual performance. Goals for
Company, business unit and individual executive's performance are set at
the beginning of each fiscal year. In determining whether to award cash
bonuses, the Committee compares the Company's financial performance
against its annual financial plan, considers business unit and
individual performance, and Company performance against that of peer
companies. The amount of any award is determined by the combined
financial results of the Company and the business unit, and the
achievement of the individual's personal objectives. In considering
bonuses for executives other than Mr. Upbin, the Committee considers
bonus recommendations submitted by the Chief Executive Officer. The
Committee also receives an assessment of the performance of each
executive from Mr. Upbin and discusses the assessments with him. When
assessing the performance of Mr. Upbin, the Committee meets privately.
Cash bonuses were awarded within the policy guidelines of the annual
cash bonus program. See column (d) of the Summary Compensation Table.
41
ANNUAL STOCK INCENTIVES
The Committee administers the Company's Restricted Stock
Compensation Plan and the Corporate Development Incentive Plan, both of
which award shares of the Company's common stock. Under the Restricted
Stock Compensation Plan, restricted shares are granted to qualified
employees and are released from restrictions ratably over five years.
Awards are limited to an aggregate of 25,000 shares for any Plan year.
No awards were made to any executive officers during the Transition
Period.
The Committee selects key executives to be participants in the
Corporate Development Incentive Plan based upon its judgment of the
executive's ability to significantly affect major decisions and actions
which influence the continued profitable growth and development of the
Company, the value of the executive's continuing service and the
probable detriment of his or her employment by competitors. The
Committee selects participants and sets the performance goals, which
must be achieved during the measurement period. The measures and
objectives may be based on earnings per share, earnings before tax and
gains on sale of assets and before adjustments for non-recurring and
extraordinary items, or other criteria, which the Committee establishes.
Payment of awards under the Plan are made in common stock. An award, if
any, is made to a participant by the Company at the time the Committee
determines that performance goals have been met. Restrictions on the
shares lapse and shares are transferred to the participants in
installments over approximately three years, provided the shares have
not been forfeited. Awards granted to qualified employees under the
Plan are limited to an aggregate of 157,500 shares for any Plan year.
The shares covered by the awards may not be transferred, sold, pledged
or otherwise disposed of prior to the lapse of restrictions. A target
award level is established for each executive officer based on his or
her level of responsibility. Based on Company earnings, a participant
may have the opportunity to earn awards in excess of the targeted
amounts for the Company's outstanding performance. Threshold standards
required to be met before any stock bonus award is made are also
established. No awards were made to any executive officers during the
Transition Period. See column (f) of the Summary Compensation Table.
STOCK OPTIONS
The Committee administers the Company's 1995 Omnibus Incentive
Stock Plan that provides for awards of incentive stock options, non-
qualified stock options and stock appreciation rights. These awards
directly relate the amounts earned by the executives to the amount of
appreciation realized by the Company's shareowners over comparable
periods. Stock options also provide executives with the opportunity to
acquire and build a meaningful ownership interest in the Company. While
the Company encourages stock ownership by executives, it has not
established any target levels for executive stock holdings. Awards are
generally made at a level calculated to be competitive. See the Option
Grants During Transitional 2000 Fiscal Year Table.
The Committee considers stock option awards on an annual basis.
These are normally awarded in May. In determining the amount of options
awarded, the Committee generally establishes a level of award based on
the position held by the individual and his or her level of
responsibility, both of which reflect the executive's ability to
influence the Company's long-term performance. The number of options
previously awarded to and held by executives are also reviewed but are
not an important factor in determining the size of the current award.
The number of options actually awarded in any year is based on an
evaluation of the individual's performance.
OTHER BENEFIT PROGRAMS
The Company has adopted an unfunded, unqualified deferred
compensation plan known as the Executive Deferred Compensation Plan (the
"Plan") to provide deferred compensation for a select group of
management or highly-compensated employees. The Plan allows employees
to voluntarily defer compensation until termination or retirement.
Under the Plan, any employee whose base salary exceeds a level set by
the Plan Administrator may enroll in the Plan. The Plan is administered
by the Retirement Savings Plan Committee.
For any calendar year, a Participant may defer up to $84,000 in
salary as well as up to $84,000 in cash bonus. The Employer shall
credit the deferred amount to a separate bookkeeping account (the
"Account") maintained by the Plan Administrator in the name of the
Participant. The Account shall be increased monthly by an amount equal
to one-twelfth of the sum of the prime rate plus 1%.
The executive officers participate in various health, life and
disability insurance programs, pension plan and a retirement savings
401(k) plan, that are generally made available to all salaried
employees. Executive officers also receive certain traditional
perquisites that are customary for their positions.
42
The Committee believes that the overall program it has adopted,
with its emphasis on long term compensation, serves to focus the efforts
of the Company's executives on the attainment of a sustained high rate
of Company growth and profitability for the benefit of the Company and
its stockholders.
COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
H. J. Upbin has an Employment Agreement with the Company for a
term extending to January 31, 2004 and effective December 1, 1999, his
salary was increased to $1,000,000.
In approving the salary increase for fiscal year ending January
31, 2000, the Committee took into account the level and scope of his
responsibilities and contributions to the Company.
COMPANY POLICY ON QUALIFYING COMPENSATION
Internal Revenue Code Section 162(m), adopted in 1993, provides
that publicly-held companies may not deduct in any taxable year
compensation in excess of $1,000,000 paid to the CEO and other executive
officers which is not "performance based" as defined in Section 162(m).
The Committee will continue to monitor the effect of this new provision
on the Company's existing compensation plans and will take appropriate
action if warranted in the future to maintain the deductibility of
payments under the plan.
COMMITTEE COMPOSITION
This Report is submitted by the members of the Committee as of
January 31, 2000.
Raymond F. Bentele
Leonard A. Genovese
James S. Marcus, Chairman
OTHER OFFICER AGREEMENTS
The Company has agreements with Messrs. Upbin, Jacobsen, Harding,
and several of the other officers providing for compensation in
connection with termination of employment following a Change in Control,
as well as if all or substantially all of the Company's assets are sold
by the Company, or the Company is liquidated or ceases to function as a
going concern. These agreements provide for the payment of a lump sum
within five days of the date of termination equal to the sum of (a) two
times the officer's highest base salary in effect during the fiscal year
in which the date of termination occurs, (b) two times the officer's
average annual incentive awards during the last three full fiscal years,
(c) the incentive award which, pursuant to any benefit plan of the
Company, had accrued or would have accrued to the officer during the
last full fiscal year, and (d) the last bonus award earned by the
officer under the Company's annual bonus program.
43
PERFORMANCE GRAPH
The following graph compares the performance of Kellwood common
shares with that of the S&P 500 and S&P Apparel Indices. The graph plots
the growth in value of an initial $100 investment over the indicated
time periods, with dividends reinvested.
FIVE YEAR TOTAL RETURN COMPARISON
[GRAPH]
------------------------------------------------------------------------------------------------------------
4/95 4/96 4/97 4/98 4/99 1/00
------------------------------------------------------------------------------------------------------------
Kellwood Co. $100 $94 $142 $195 $161 $112
S&P 500 Index $100 $130 $163 $230 $280 $295
S&P Apparel Index $100 $122 $157 $192 $147 $91
------------------------------------------------------------------------------------------------------------
Note: Total return assumes reinvestment of dividends
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
At the close of business on January 31, 2000 (the "transitional fiscal
year end"), the Company had 26,173,218 shares outstanding. The table
listed below contains information concerning each person who is known by
the Company to be the beneficial owner of more than five percent of the
Company's common stock. To the best of the Company's knowledge, no
other persons are beneficial owners of five percent or more of the
Company's shares.
Name Amount
and Address and Nature
Title of of Beneficial of Beneficial Percent
Class Owner Ownership of Class
----- ----- --------- --------
Common Stock The Prudential Insurance
Company of America
751 Broad Street
Newark, NJ 07102-3777 1,791,011 6.83%
[FN]
- --------------------------
As reported on their Schedule 13G dated January 31, 2000, The
Prudential Insurance Company of America, a registered insurance company
and investment advisor, was the beneficial owner of 1,791,011 shares
representing 6.83% of the total shares outstanding on that day, and The
Prudential Insurance Company of America has sole voting power for
110,700 shares, shared voting power for 1,791,011 shares, sole
dispositive power for 110,700 shares, and shared dispositive power for
1,791,011 shares.
45
MANAGEMENT OWNERSHIP
OF THE COMPANY'S STOCK
Under regulations of the Securities and Exchange Commission,
persons who have power to vote or to dispose of shares of the Company,
either alone or jointly with others, are deemed to be beneficial owners
of those shares. The following table shows, as of January 31, 2000, the
beneficial ownership of each present director and each nominee for
director, and of all present directors and executive officers as a
group, of shares of the Company's common stock. This information has
been furnished to the Company by the individuals named. As shown in the
last column, in some cases a significant number of the shares indicated
in the center column as being beneficially owned are actually unissued
shares attributable to unexpired options for the Company's common stock
which are presently exercisable or first become exercisable within 60
days after January 31, 2000. With the exception of Mr. Granoff who owns
approximately 2.9% and Mr. McKenna who owns approximately 1.6% of the
outstanding common stock of the Company, no nominee or present director
owns more than 1% thereof. All executive officers and directors as a
group own approximately 7.1% of the outstanding common stock.
Number of Shares
Number of Included in Previous
Shares Column Attributable
Name of Individual Beneficially to Unexpired
or Number in Group Owned Options to Purchase
- ------------------ ------------ -------------------
R. F. Bentele 5,950 5,000
E. S. Bottum 8,350 5,000
G.M. Chaney 0 0
K. G. Dickerson 5,600 4,500
L. A. Genovese 7,177 4,000
M. J. Granoff 758,382 0
E. Harding, Jr. 36,585 20,920
J. R. Henderson 31,887 26,560
J. M. Hunter 5,200 5,000
J. C. Jacobsen 145,591 81,590
J. S. Marcus 6,100 5,000
W. J. McKenna 427,157 351,181
H. J. Upbin 179,889 137,036
All directors and 1,857,051 821,707
executive officers as a group
(19 persons including those named)
[FN]
- -------------------
Does not include 60,253 shares owned by Mr. Granoff's wife, 30,126
shares held in trust for the benefit of his daughter, and 30,126 shares
held in trust for the benefit of his son. Mr. Granoff disclaims
beneficial ownership of these shares.
Does not include 202 shares owned by Mr. McKenna's wife, 3,317
shares owned by his daughter, and 3,317 shares owned by his son. Mr.
McKenna disclaims beneficial ownership of these shares.
46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
James M. Marcus has been a director of the Company since 1965.
Mr. Marcus was a Limited Partner of the Goldman Sachs Group, L.P. during
1999. On December 9, 1999, the Company repurchased 1.68 million shares
through a privately negotiated transaction with Goldman Sachs at $18.00
per share, which was below the market price. Mr. Marcus was not
involved in the negotiations or execution of this transaction, and did
not have any material or monetary interest in the transaction.
Jerry M. Hunter was elected a director at the Annual Meeting of
Shareowners held on August 25, 1994. Mr. Hunter is a partner in the law
firm of Bryan Cave in St. Louis, Missouri. The services of the law firm
have been retained during the last fiscal year and during the current
fiscal year. Fees paid by the Company to Bryan Cave did not exceed five
percent of the law firm's gross revenues for that firm's last fiscal
year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1) Financial Statements:
Report of Independent Accountants
Consolidated Statement of Earnings
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareowners' Equity
Notes to Consolidated Financial Statements
2) Report of Independent Accountants on Financial Statement Schedule:
Financial Statement Schedule for the fiscal years ended
January 31, 2000, April 30, 1999 and 1998:
Valuation and Qualifying Accounts (Schedule VIII)
3) Exhibits filed as part of this report are listed below. Certain
exhibits have been previously filed with the Commission and are
incorporated herein by reference.
S.E.C. EXHIBIT
REFERENCE NO. DESCRIPTION
- -------------- -----------
2.1 - Agreement and Plan of Merger, dated December 1, 1998, as
amended among Kellwood Company and Koret, Inc., incorporated
herein by reference to Form S-4 dated March 25, 1999,
SEC File No. 333-74967.
3.1 - Restated Certificate of Incorporation of Kellwood Company,
as amended, incorporated herein by reference to Form
10-Q for the quarter ended July 31, 1987, SEC File
No. 1-7340.
3.2 - By-Laws, as amended November 23, 1999, filed herewith.
[FN]
Denotes management contract or compensatory plan.
Pursuant to the Securities Exchange Act of 1934, Rule 24b-2,
confidential portions of Exhibit 10.6 have been deleted and filed
separately with the Commission pursuant to a request for confidential
treatment.
47
S.E.C. EXHIBIT
REFERENCE NO. DESCRIPTION
- -------------- -----------
4.1 - Note Purchase Agreement dated December 29, 1986, with
exhibits, incorporated herein by reference to Form
10-Q for the quarter ended January 31, 1987, SEC File
No. 1-7340.
4.2 - Indenture between the Registrant and Centerre Trust
Company of St. Louis, and the 9% Convertible
Subordinated Debentures due 1999, incorporated herein
by reference to Registration Statement on Form S-2,
Registration No. 2-93522, effective October 18, 1984.
4.3 - Note Agreement dated July 1, 1993, incorporated herein
by reference to Form 10-Q for the quarter ended July
31, 1993, SEC File No. 1-7340.
4.4 - Rights to Acquire Series A Junior Preferred Stock,
pursuant to a Rights Agreement between the registrant
and Centerre Trust Company of St. Louis, incorporated
herein by reference to Registration Statement on Form
8-A, effective June 24, 1986 and Amendment dated
August 21, 1990, incorporated herein by reference to
Form 10-Q for the quarter ended October 31, 1990, and
Amendment dated May 31, 1996 incorporated herein by
reference to Form 8-A/A effective June 3, 1996, SEC
File No. 1-7340.
4.5 - Note Purchase Agreement dated December 1, 1987, with
exhibits, incorporated herein by reference to Form
10-Q for the quarter ended January 31, 1988, SEC File
No. 1-7340.
4.6 - Note Purchase Agreement dated December 15, 1989, with
exhibits, incorporated herein by reference to the Form
10-Q for the quarter ended January 31, 1990, SEC File
No. 1-7340.
4.7 - Credit Agreement dated as of May 31, 1996 among
Kellwood Company, certain commercial lending
institutions, and The Bank of Nova Scotia, as
Administrative Agent and Syndication Agent, and Bank
of America National Trust and Savings Association, as
documentation Agent, incorporated herein by reference
to Form 10-K for the fiscal year ended April 30, 1996,
SEC File No. 1-7340.
10.3 - Form of Employment Agreement dated November 30, 1984,
between Kellwood Company and executive officers,
incorporated herein by reference to Form 10-K for the
fiscal year ended April 30, 1985, SEC File No. 1-7340.
10.4 - 1995 Stock Option Plan For Nonemployee Directors and
1995 Omnibus Incentive Stock Option Plan, incorporated
herein by reference to Appendixes A & B to the
Company's definitive Proxy Statement dated July 13,
1995, SEC File No. 1-7340.
10.5 - Executive Deferred Compensation Plan, adopted and
effective as of January 1, 1997; and Executive
Deferred Compensation Plan Amendment, adopted March
18, 1997, incorporated herein by reference to Form
10-K for the fiscal year ended April 30, 1997, SEC
File No. 1-7340.
10.6 - Agreement for Services Between Kellwood Company and
Electronic Data Systems Corporation, dated June 21,
1996; and Amendment Regarding Use of Kellwood Purchase
Card by EDS Employees, dated April 29, 1997,
incorporated herein by reference to Form 10-K for the
fiscal year ended April 30, 1997, SEC File No. 1-7340.
[FN]
Denotes management contract or compensatory plan.
Pursuant to the Securities Exchange Act of 1934, Rule 24b-2,
confidential portions of Exhibit 10.6 have been deleted and filed
separately with the Commission pursuant to a request for confidential
treatment.
48
S.E.C. EXHIBIT
REFERENCE NO. DESCRIPTION
- -------------- -----------
10.7 - Corporate Development Incentive Plan of 1986 (As
Amended), formerly the Key Executive Long-Term
Incentive Plan of 1983, incorporated herein by
reference to Form 10-K for the fiscal year ended April
30, 1994, SEC File No. 1-7340; and Amendment dated May
29, 1997, incorporated herein by reference to Exhibit
A to the Company's definitive Proxy Statement dated
July 17, 1997, SEC File No. 1-7340.
10.8 - Employment Agreement dated December 1, 1999, between
Kellwood Company and Hal J. Upbin, filed herewith.
10.9 Consulting Agreement dated December 1, 1999, between
Kellwood Company and William J. McKenna, filed
herewith.
21 - Subsidiaries of the Company, appearing at page 53 of
this report.
22 - Joint Proxy Statement/Prospectus dated March 25, 1999,
incorporated herein by reference to Form S-4 dated
March 25, 1999, SEC File No. 333-74967.
23 - Consent of Independent Accountants, appearing at page
51 of this report.
24 - Powers of Attorney: Ms. Dickerson and Messrs.
Bentele, Bottum, Genovese, Granoff, Hunter, Jacobsen,
Marcus and McKenna; filed herewith.
27 - Financial Data Schedule, filed herewith.
[FN]
Denotes management contract or compensatory plan.
Pursuant to the Securities Exchange Act of 1934, Rule 24b-2,
confidential portions of Exhibit 10.6 have been deleted and filed
separately with the Commission pursuant to a request for confidential
treatment.
(b) REPORTS ON FORM 8-K:
* No reports were filed on Form 8-K during the three months
ended January 31, 2000.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
KELLWOOD COMPANY
Dated: April 13, 2000 /s/ Thomas H. Pollihan
-----------------------------
Thomas H. Pollihan
Vice President, Secretary and
General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following on behalf of Kellwood
Company and in the capacities and on the dates indicated.
Signature Title Date
- ---------- ----- ----
/s/ Hal J. Upbin Director, Chairman of the Board, April 13, 2000
- --------------------- President and Chief Executive Officer
Hal J. Upbin
/s/ Gerald M. Chaney Vice President Finance and April 13, 2000
- --------------------- Chief Financial Officer
Gerald M. Chaney (principal financial and accounting officer)
James C. Jacobsen Director, Vice Chairman
Raymond F. Bentele Director
/s/ Thomas H. Pollihan
Edward S. Bottum Director ------------------------
Thomas H. Pollihan
Kitty G. Dickerson Director Attorney-in-fact
April 13, 2000
Leonard A. Genovese Director
Martin J. Granoff Director
Jerry M. Hunter Director
James S. Marcus Director
William J. McKenna Director
50
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Kellwood Company
Our audits of the consolidated financial statements referred to in our
report dated March 1, 2000 which appears in this Form 10-K also included
an audit of the financial statement schedules listed in Item 14(a)(2) of
this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 1, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 033-64847) of Kellwood Company of our report
dated March 1, 2000 relating to the financial statements which appears
in this Form 10-K. We also consent to the incorporation by reference of
our report dated March 1, 2000 relating to the financial statement
schedules which appears in this Form 10-K.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 1, 2000
51
KELLWOOD COMPANY AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
- -------- -------- --------------------------- -------- --------
Additions
---------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of period expenses accounts Deductions of period
----------- --------- ---------- ---------- ---------- ----------
TRANSITION PERIOD
ENDED JANUARY 31, 2000:
Allowance for
doubtful accounts $11,281 $5,119 -- $(4,258) $12,142
YEAR ENDED APRIL 30, 1999:
Allowance for
doubtful accounts 11,803 3,868 -- (4,390) 11,281
YEAR ENDED APRIL 30, 1998:
Allowance for
doubtful accounts 6,191 3,751 -- 1,861 11,803
/recoveries of bad debts, net.
52
EXHIBIT 21
PARENTS AND SUBSIDIARIES
The Company and its subsidiaries as of January 31, 2000 are as follows:
State (Country) of Percentage of Voting
Name of Company Incorporation Securities Owned
- ------------------ -------------------- ----------------
Kellwood Company Delaware Parent
American Recreation Products, Inc. Delaware 100%
Kellwood Asia Limited Hong Kong 100%
Smart Shirts Limited Hong Kong 100%
South Asia Garment Limited Hong Kong 100%
KWD Holdings, Inc. Delaware 100%
Robert Scott & David Brooks
Outlet Stores, Inc. Delaware 100%
Tri-W Corporation North Carolina 100%
Halmode Apparel, Inc. Delaware 100%
Fritzi California, Inc. Delaware 100%
Koret, Inc. Delaware 100%
Biflex International, Inc. New York 100%
Kellwood Financial Resources, Inc. Tennessee 100%
Kellwood Shared Services, Inc. Delaware 100%
[FN]
Some of the above subsidiaries also have subsidiaries that are not
listed because, in the aggregate, they are not considered to be
significant.
53
EXHIBIT INDEX
-------------
S.E.C. EXHIBIT
REFERENCE NO. DESCRIPTION
- -------------- -----------
2.1 - Agreement and Plan of Merger, dated December 1, 1998, as
amended among Kellwood Company and Koret, Inc., incorporated
herein by reference to Form S-4 dated March 25, 1999, SEC
File No. 333-74967.
3.1 - Restated Certificate of Incorporation of Kellwood Company, as
amended, incorporated herein by reference to Form 10-Q for the
quarter ended July 31, 1987, SEC File No. 1-7340.
3.2 - By-Laws, as amended through November 21, 1995, incorporated
herein by reference to Form 10-K for the fiscal year ended
April 30, 1996, SEC File No. 1-7340; and Amendment dated
November 23, 1999, filed herewith.
4.1 - Note Purchase Agreement dated December 29, 1986, with exhibits,
incorporated herein by reference to Form 10-Q for the quarter
ended January 31, 1987, SEC File No. 1-7340.
4.2 - Indenture between the Registrant and Centerre Trust Company of
St. Louis, and the 9% Convertible Subordinated Debentures due
1999, incorporated herein by reference to Registration
Statement on Form S-2, Registration No. 2-93522, effective
October 18, 1984.
4.3 - Note Agreement dated July 1, 1993, incorporated herein by
reference to Form 10-Q for the quarter ended July 31, 1993,
SEC File No. 1-7340.
4.4 - Rights to Acquire Series A Junior Preferred Stock, pursuant to
a Rights Agreement between the registrant and Centerre Trust
Company of St. Louis, incorporated herein by reference to
Registration Statement on Form 8-A, effective June 24, 1986
and Amendment dated August 21, 1990, incorporated herein by
reference to Form 10-Q for the quarter ended October 31, 1990,
and Amendment dated May 31, 1996 incorporated herein by
reference to Form 8-A/A effective June 3, 1996, SEC File
No. 1-7340.
4.5 - Note Purchase Agreement dated December 1, 1987, with exhibits,
incorporated herein by reference to Form 10-Q for the quarter
ended January 31, 1988, SEC File No. 1-7340.
4.6 - Note Purchase Agreement dated December 15, 1989, with exhibits,
incorporated herein by reference to the Form 10-Q for the
quarter ended January 31, 1990, SEC File No. 1-7340.
4.7 - Credit Agreement dated as of May 31, 1996 among Kellwood
Company, certain commercial lending institutions, and The Bank
of Nova Scotia, as Administrative Agent and Syndication Agent,
and Bank of America National Trust and Savings Association,
as documentation Agent, incorporated herein by reference to
Form 10-K for the fiscal year ended April 30, 1996, SEC File
No. 1-7340.
10.3 - Form of Employment Agreement dated November 30, 1984, between
Kellwood Company and executive officers, incorporated herein
by reference to Form 10-K for the fiscal year ended
April 30, 1985, SEC File No. 1-7340.
10.4 - 1995 Stock Option Plan For Nonemployee Directors and 1995
Omnibus Incentive Stock Option Plan, incorporated herein by
reference to Appendixes A & B to the Company's definitive
Proxy Statement dated July 13, 1995, SEC File No. 1-7340.
[FN]
Denotes management contract or compensatory plan.
Pursuant to the Securities Exchange Act of 1934, Rule 24b-2,
confidential portions of Exhibit 10.6 have been deleted and filed separately
with the Commission pursuant to a request for confidential treatment.
54
S.E.C. EXHIBIT
REFERENCE NO. DESCRIPTION
- -------------- -----------
10.5 - Executive Deferred Compensation Plan, adopted and effective
as of January 1, 1997; and Executive Deferred Compensation
Plan Amendment, adopted March 18, 1997, incorporated herein
by reference to Form 10-K for the fiscal year ended
April 30, 1997, SEC File No. 1-7340.
10.6 - Agreement for Services Between Kellwood Company and
Electronic Data Systems Corporation, dated June 21, 1996;
and Amendment Regarding Use of Kellwood Purchase Card by
EDS Employees, dated April 29, 1997, incorporated herein by
reference to Form 10-K for the fiscal year ended
April 30, 1997, SEC File No. 1-7340.
10.7 - Corporate Development Incentive Plan of 1986 (As Amended),
formerly the Key Executive Long-Term Incentive Plan of 1983,
incorporated herein by reference to Form 10-K for the fiscal
year ended April 30, 1994, SEC File No. 1-7340; and Amendment
dated May 29, 1997, incorporated herein by reference to
Exhibit A to the Company's definitive Proxy Statement dated
July 17, 1997, SEC File No. 1-7340.
10.8 - Employment Agreement dated December 1, 1999, between
Kellwood Company and Hal J. Upbin, filed herewith.
10.9 - Consulting Agreement dated December 1, 1999, between
Kellwood Company and William J. McKenna, filed herewith.
21 - Subsidiaries of the Company, appearing at page 53 of this
report.
22 - Joint Proxy Statement/Prospectus dated March 25, 1999,
incorporated herein by reference to Form S-4 dated
March 25, 1999, SEC File No. 333-74967.
23 - Consent of Independent Accountants, appearing at page 51 of
this report.
24 - Powers of Attorney: Ms. Dickerson and Messrs. Bentele,
Bottum, Genovese, Granoff, Hunter, Jacobsen, Marcus and
McKenna; filed herewith.
27 - Financial Data Schedule, filed herewith.
[FN]
Denotes management contract or compensatory plan.
Pursuant to the Securities Exchange Act of 1934, Rule 24b-2,
confidential portions of Exhibit 10.6 have been deleted and filed separately
with the Commission pursuant to a request for confidential treatment.
55