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 the following 16 domestic companies.
These 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 fiscal year 1999, compared to 50% in fiscal year 1985.
(b) The information required by this Item is set forth in the Company's 1999 Annual Report to Shareowners, at page 30 under the caption "Industry Segment and Geographic Area Information," which information is incorporated herein by reference.
(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.
(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) No customer accounts for more than 10% of the Company's revenues. The Company's management believes that the relationships with its customers will continue into the foreseeable future.
(viii) At the end of fiscal 1999, backlog was approximately $856 million, compared with a backlog of $884 million at the end of fiscal 1998. The company does not believe that backlog is a meaningful 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 $248,000, $359,000 and $740,000 were spent on research and development activities during fiscal years 1999, 1998 and 1997, 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 fiscal 1999, there were approximately 19,200 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 the Company's 1999 Annual Report to Shareowners at page 30 under the caption "Industry Segment and Geographic Area Information" in the Notes to Consolidated Financial Statements, which note is incorporated herein by reference. 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.
Item 2.
Item 2. Properties
At April 30, 1999, the Company operated 30 production plants and various distribution facilities. Domestic business operated:
. 13 plants in 7 states,
. two plants in the Dominican Republic,
. two plants in Honduras,
. one plant in El Salvador, and
. three plants in Canada.
These domestically managed plants aggregated to approximately 2.2 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 incorporated herein by reference) which aggregate to approximately 700,000 square feet and are operating at approximately 64% of capacity at April 30, 1999. The remaining 16 plants aggregate 1.5 million square feet and were operating at an estimated 75% of capacity at April 30, 1999.
The Company's Smart Shirts subsidiaries operated nine plants which aggregated to approximately 798,000 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. During fiscal 1999 major milestones were achieved in the Warehousing and Distribution initiative, one of Kellwood's Vision 2000 programs, including:
. The Kellwood Western Region Distribution Center in the Los Angeles area became fully operational. This facility serves as the headquarters for five divisions in a multi-tiered 630,000 square foot facility.
. A 294,000 square foot facility in Brockton, Massachusetts was renovated and is shared by two divisions.
. A 240,000 square foot facility in Roanoke, Virginia was renovated and converted to a distribution center.
. A multi-tiered 880,000 square foot warehouse and distribution center was built in Trenton, Tennessee.
Combined, these efforts are expected to generate 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.
Item 3.
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 such litigation should have no material adverse effect on the Company's financial position or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the stockholders of Kellwood Company was held on April 27, 1999 to consider and vote upon a proposal to approve the issuance of 5,241,000 shares of Kellwood common stock under the Agreement and Plan of Merger, dated December 1, 1998, between Kellwood Company and Koret, Inc. The Agreement and Plan of Merger provided for each outstanding share of Koret to be converted into .6025391 shares of Kellwood common stock and for Koret to become a wholly-owned subsidiary of Kellwood. Stockholders of record at the close of business on March 5, 1999 were given notice by a joint proxy statement/prospectus dated March 25, 1999, which document is incorporated herein by reference. The stockholders approved the proposal, with 18,542,137 votes cast for the proposal, 182,362 votes against it, and 56,046 votes abstaining,
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
The information required by this Item is set forth in the Company's 1999 Annual Report to Shareowners, at page 1 under the caption "Common Stock Data," which information is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
The information required by this Item is set forth in the Company's 1999 Annual Report to Shareowners, at page 31 under the caption "Supplemental Selected Financial Data," which information is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this Item is set forth below and in the Company's 1999 Annual Report to Shareowners, at pages 32 thru 37 under the caption "Management's Discussion and Analysis," which information is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated May 26, 1999, appearing at pages 18 to 31 of the Company's 1999 Annual Report to Shareowners, are incorporated herein by reference.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
(a) The information required by this Item regarding directors is set forth in the Company's Proxy Statement for the 1999 Annual Meeting of Shareowners, at pages 5 thru 7 under the captions "Nominees for Election to Serve Until 2001" and "Directors Continuing to Serve Until 2000," which information is incorporated herein by reference.
(b) EXECUTIVE OFFICERS OF THE REGISTRANT AS OF JULY 2, 1999.
(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 nor understandings between any named officer and any other person pursuant to which such person was selected as an officer.
(e) Each of the officers named in Item 10(b) above was elected to serve in the office indicated until the first meeting of the Board of Directors following the Annual Meeting of Shareowners in August 1999 and until his successor is elected and qualified.
(f) There are no legal proceedings involving directors, nominees for directors, or officers.
The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is set forth in the Company's Proxy Statement for the 1999 Annual Meeting of Shareowners at page 23 under the caption "Compliance with Section 16(a) of the Exchange Act," which information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information required by this Item is set forth in the Company's Proxy Statement for the 1999 Annual Meeting of Shareowners, at pages 12 through 23 under the captions "Compensation of Executive Officers," "Retirement Program," and "Other Officer Agreements," which information is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in the Company's Proxy Statement for the 1999 Annual Meeting of Shareowners, at pages 3, 4 and 11 under the captions "Security Ownership of Certain Beneficial Owners" and "Management Ownership of the Company's Stock," which information is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in the Company's Proxy Statement for the 1999 Annual Meeting of Shareowners, at page 21 under the caption "Compensation Committee Interlocks and Insider Participation," which information is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated May 26, 1999, appearing at pages 18 to 31 of the 1999 Annual Report to Shareowners are incorporated by reference in this Form 10-K. With the exception of the aforementioned information and information incorporated in Items 1, 5, 6, 7 and 8, the 1999 Annual Report to Shareowners is not to be deemed filed as part of this Form 10-K. The following financial statement schedule should also be read in conjunction with the financial statements in such 1999 Annual Report to Shareowners. Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Separate financial statements of 50% or less owned persons accounted for by the equity method which are not shown herein have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary.
(i) Financial Statements:
Report of Independent Accountants
Consolidated Statement of Earnings, Years Ended April 30, 1999, 1998 and
Consolidated Balance Sheet, April 30, 1999 and 1998
Consolidated Statement of Cash Flows, Years Ended April 30, 1999, 1998 and 1997
Consolidated Statement of Shareowners' Equity, Years Ended April 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(ii) Report of Independent Accountants on Financial Statement Schedule:
Financial Statement Schedule for the Years Ended April 30, 1999, 1998 and 1997:
Valuation and Qualifying Accounts (Schedule VIII)
Consent of Independent Accountants
(iii) Exhibits:
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.
- -------- * 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:
One report was filed on Form 8-K during the three months ended April 30, 1999 as follows:
. Current Report on Form 8-K dated February 23, 1999.
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: July 15, 1999 /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.
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 May 26, 1999 appearing at page 18 of the 1999 Annual Report to Shareowners of Kellwood Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents 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 May 26, 1999
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 May 26, 1999 relating to the financial statements which appear in the 1999 Annual Report to Shareowners which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated May 26, 1999 relating to the Financial Statement Schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
St. Louis, Missouri July 12, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-36559) of Kellwood Company of our report dated May 26, 1999 relating to the financial statements which appear in the 1999 Annual Report to Shareowners which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated May 26, 1999 relating to the Financial Statement Schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
St. Louis, Missouri July 12, 1999
KELLWOOD COMPANY AND SUBSIDIARIES SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
- -------- (A) Write-off bad debts (recoveries), net
EXHIBIT INDEX
* 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.